The Government will honour the pensions triple lock for 2023/24, meaning pensioners will see their state pension go up by inflation in April next year, but the promise is being seen as “increasingly unsustainable” and a fairer means of calculating an income rise for pensions necessary.
There had been growing speculation that Chancellor Jeremy Hunt would break the party promise in his Autumn Budget on Thursday amid growing economic difficulty. However, Hunt confirmed that the state pension will rise by 10.1% in April, in line with September’s Consumer Prices Index.
The triple lock guarantees that pensioners will receive a rise to their state pension in line with whichever is highest out of inflation, the average wage increase or 2.5%.
Pensioners will see the full new state pension rise from £185.15 per week to £203.85 and the basic state pension rise from £141.85 to £156.20 per week.
Steven Cameron, pensions director at Aegon, said pensioners can “breathe a huge sigh of relief” at the news, following a series of government u-turns and growing economic uncertainty.
However, he warned that next year’s increase could be the last, with the current formula looking “increasingly unsustainable.”
Cameron said: “Financially, it won’t have been an easy decision for the government looking to fill a £50 billion fiscal black hole – every 1% increase in the state pension costs around £0.9 billion a year and this isn’t paid for out of some fund built up in the past but from the National Insurance paid for by today’s workers.
“Honouring this Manifesto commitment after ditching it last time around will provide much needed support for pensioners, many of whom are on low and fixed incomes and particularly vulnerable to rampant inflation. The government will no doubt have weighed up the reaction of pensioner voters if they scrapped the triple lock for a second consecutive year in the run-up to the next general election. But there’s a huge question mark over whether any party would recommit in a future election manifesto.”
Cameron said that in volatile times, using an average over three years or paying out the average of inflation and earnings increases each year could be more sustainable for the government and predictable for pensioners.
Jon Greer, head of retirement policy at Quilter, said: “While the government has confirmed the triple lock has been reinstated for now, there is still a chance we could come across the same issue next year. The Bank of England has predicted inflation may drop to 7.9% by Q3 next year, so keeping the triple lock in place may prove less expensive from 2024. However, given the turbulence in government decision making we have seen in recent times, we know there are no real guarantees that the triple lock will go untouched for a second year.
“Reinstating the triple lock this year was ultimately the right move and it will go a long way towards supporting pensioners through these challenging times. However, the triple lock does not work for everyone, and perhaps it is time the government assessed whether there is a fairer way to raise the state pension going forward, while preventing more people slipping into the poverty net and having to choose between heating or eating.”
However, David Robbins, senior consultant at WTW, pointed out that if the triple lock survives the New State Pension could use up nearly all of the personal allowance by 2027/28.
“When the New State Pension was introduced for people reaching State Pension age from April 2016, the full NSP consumed 74% of a pensioner’s personal tax allowance. Next year, it will use up 84% of the personal allowance, and that will rise to 97% in 2027/28 if the tax allowance remains frozen while the NSP rises with the Triple Lock as forecast by the Office for Budget Responsibility.
“This reduces the end-to-end tax advantage from pension saving, especially as some individuals’ State Pension entitlements exceed the full NSP; beyond the 25% lump sum, many retirees will have little if any scope to draw tax-free income from their private pensions.”
Lifetime allowance
The government refrained from extending the pensions lifetime allowance freeze, despite mounting rumours that the Chancellor would look to change the goalposts.
The allowance is already frozen for five years at £1,073,100 until April 2026.
Aegon’s Cameron said: “Ten years ago, in 2012, the pensions lifetime allowance sat at £1.8m and this would have been much higher now if increased each year in line with inflation. So while few would have expected the lifetime allowance to be unfrozen right now, there’s a glimmer of hope in the Chancellor resisting freezing it for a further two years.”
