As the Conservative Party pledged to raise the tax free pension allowance with the introduction of a “Triple Lock Plus” if they win the general election in July, constant increases in the state pension have risked pushing pensioners’ income over tax thresholds.
Quilter has called for the next government to create a more “predictable and sustainable” long term pension system, that goes beyond raising the tax free allowance.
The state pension is currently £221.20 a week, or £11,502.40 per year, leaving just over £1000 of the personal allowance. This will result in a considerable number of pensioners who have additional retirement income dragged into paying tax, says Quilter.
Kirsty Anderson, retirement specialist at Quilter, said: “With this in mind, both parties must act. Our previous analysis found that pensioners could need to pay back a proportion of their state pension in income tax in just two years’ time. Simply from an administrative point of view, this would prove difficult for HMRC so it seems unlikely that if Labour were to get in they would not be forced to act in some way.”
However, Quilter warned that while raising thresholds for pensioners may be popular with that cohort, the rest of the population constrained by frozen tax thresholds may feel that beneficial rules for pensioners “further increases generational inequality.”
Moreover, Quilter said the issue of a triple lock guarantee continues to be a political hot potato, with changes having the potential to alienate voters.
Anderson said that rather than constant tinkering, the government should link pensions more closely with earnings.
She explained: “This would represent a good alternative as it would create a more predictable and sustainable pension system. This approach would mitigate the financial unpredictability associated with the triple lock, creating an easier way to effectively budget and ensure that pension increases do not disproportionately benefit one demographic at the expense of another.”
Anderson said that by linking pensions to average earnings, the conversation moves beyond the immediate financial implications to touch on the broader principles of fairness and sustainability.
However, she added: “The truth is, given older generations vote in much larger numbers than their younger peers it would be too politically damaging for either party to take a more long-term view of the triple lock.”
