Pension experts have been looking over the latest inflation figures
The state pension increases each year in line with the triple lock(Image: Getty)
State pensioners could be in for a £500 boost to their payments from next April. The triple lock system ensures that pensions increase each year in line with either inflation, average earnings growth, or 2.5 per cent – whichever is highest.
With the latest inflation figures coming in at 3.8 per cent for the year to July, it seems likely the earnings metric is still on track to be the deciding number for next year’s state pension increase. Steven Cameron, pensions director at wealth firm Aegon, has been keeping a close eye on the trends over recent months.
He said: “The rate of inflation has been rising over the last three months, now sitting at 3.8 per cent, compared to 3.4 per cent and 3.6 per cent in the last two periods. At the same time, the rate of increase in average earnings has been slowing in recent months, with the latest figure sitting at 4.6 per cent, down from 5.4 per cent and 5.0 per cent for the last two periods.”
The inflation figure used for the triple lock for the following year is based on the figures for the year to September, while the earnings growth figure used is for the period from May to July.
If current trends continue, with inflation climbing up while wage growth declines, this could mean payments going up by 4.2 per cent next year.
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Mr Cameron said: “There’s a good chance the triple lock could produce an increase of 4.2 per cent or more. This would mean those on the full new state pension would see it increase from £11,973 this year to £12,475 next year.”
The full new state pension currently provides £230.25 weekly, while the full basic state pension delivers £176.45 per week. One worry regarding the increasing payments is that the full new state pension might soon attract a tax bill.
The standard personal allowance allows you to earn up to £12,570 annually without paying income tax, meaning a 4.2 per cent increase in payments would leave those receiving the full new amount barely £100 short of paying tax on their state pension.
State pension payments go up in line with the triple lock(Image: Getty)
Mr Cameron explained: “The personal allowance for income tax purposes has been frozen at £12,570 until April 2028, with speculation the freeze might be extended in the Autumn Budget.
“While someone whose sole income is the full new state pension will be below the threshold next year and escape paying income tax, that will change the following year.
“With the triple lock paying a minimum of 2.5 per cent, the full new state pension is certain to be above the personal allowance for the 2027/28 tax year, creating an income tax liability for those even with no other income.”
The expert suggested the Government may need to take action given this looming issue.
He said: “While the tax due will be very small, this will cause concern to many pensioners and an admin nightmare for HMRC.
“It may be that the Government will introduce some form of exemption specific to affected state pensioners, although this could be seen as unfair if it didn’t apply to those of working age too.”