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The triple lock: this means that state pensions increase each year at the highest inflation, average income growth or 2.5%.
Millions of older people pay income tax on their state pension and would continue to do so under a “triple lock plus” proposal, new research reveals.
It is estimated that 2.5 million pensioners, or just over one in five of everyone living in Britain, receive a state pension in excess of the personal allowance of £12,570.
This is the level at which income tax comes into force, and it has been frozen since 2021, prompting the Conservatives to offer a “triple lock plus” promise in their manifesto.
The party has promised that the state pension will never be taxed because it will always keep the headline rate, which is currently £11,500 a year, below the personal allowance.
But new research from pensions consultancy LCP shows there is huge diversity in the amount of state pensions people receive, and says focusing on the single new standard state pension figure misses a significant group of pensioners They receive more than that.
“The reality is that the amounts pensioners receive vary enormously, from a few pounds a week to hundreds of pounds a week,” says Steve Webb, partner at LCP and pensions columnist for This is Money.
“But much of the debate has assumed that pensioners normally receive a standard pension, such as the new flat rate of around £11,500 a year.”
What does the typical pensioner receive today?
The spike between £200 and £205 reflects the fact that the standard rate of the new state pension was £203.85 a week in 2023/24, LCP says. The graph shows the highly variable results of the basic and additional state pension under the old state pension system, in which the majority of pensioners are still in.
LCP analyzed government data and found that around 2.5 million pensioners currently have state pensions above the income tax threshold.
Of those, some 2.1 million reached state pension age under the old pre-2016 system and earned a second state pension, also known as SERPS, enough to build up more generous payments in retirement.
The rest retired under the post-2016 fixed rate system, but transitional arrangements to protect people from losing out mean they also receive larger payments.
In total, in 2023/24 there were 8.4 million pensioners who reached state pension age before 6 April 2016 in the “old” state pension system, and 3.2 million who reached pension age after of this date in the “new” state pension system.
Pensioners receiving the “old” state pension
Number of weekly pensions above or below £225 per week by sex, 2023/24. Many of the women with the biggest pensions will be older widows who inherited payments from their late husbands, says LCP
Pensioners receiving the ‘new’ state pension
Number of weekly pensions above or below £225 per week by sex, 2023/24. Around a third of a million receive amounts that would allow them to exceed the tax threshold in 2024/25, and the vast majority are men, says LCP
What is triple lock plus?
The Conservatives have promised the state pension will never be taxed under plans they called “triple lock plus”.
The triple lock commitment means state pensions will rise each year at the higher of inflation, average earnings growth or 2.5 per cent; Both the Conservatives and Labor have promised they will deliver on this during the next parliament.
But under the Conservatives’ ‘plus’ policy, the £12,570 personal allowance would also be increased in line with the triple lock to keep it above the full state pension.
The Conservatives only promise to do this for people over state pension age, effectively creating a new preferential level of personal allowance for the older generation.
STEVE WEBB ANSWERS YOUR QUESTIONS ABOUT PENSIONS
The working-age population will be left with a smaller share of their income because income tax will be applied at a lower personal allowance threshold for them.
For practical reasons, it is likely that, if elected, Labor will also have to address this issue in the coming years, to keep the overall state pension rate below the level of the personal allowance.
This is due to the anomalous situation where the Department for Work and Pensions pays millions of people a state pension, part of which is then recovered by the Treasury in income tax, which could force a number every increasingly submitting annual tax returns to HMRC.
Meanwhile, as millions of older people receive private pensions in addition to the state pension, and many have savings subject to interest tax, they would have to continue paying income tax anyway.
Around 2.5 million people have to pay income tax on their state pensions alone
Cuts to the real value of income tax relief and large increases in state pensions have led to an increase in the number of over-65s paying income tax since 2010 and this trend will continue depending on policy current, according to Steve Webb.
It says the ‘triple lock plus’ policy would result in a lower tax bill for millions of pensioners than if the Government continued to freeze their personal allowances.
But the figures above suggest that many would still not benefit from the stated aim of making the state pension completely free of income tax, he adds.
“We estimate that around 2.5 million pensioners, or more than one in five of all pensioners, have state pensions above the income tax threshold,” Webb says.
“These pensioners would continue to be overwhelmingly taxpayers even if future policy linked income tax relief to increases in the overall state pension rate.”
A Conservative Party spokesperson said: “Under the triple lock plus, the tax-free allowance for pensioners will increase by the same amount as prices, earnings or by 2.5 per cent, the same as the state pension.”
‘The fact that Labor opposes it means that a pensioner whose only income comes from the new state pension will be forced to pay income tax for the first time in our country’s history.
“Millions of pensioners will pay more tax under Labour’s retirement tax; the average pensioner will pay around £1,000 more in tax in the next Parliament under the Labor government than under the Conservative government.”
The Labor Party has been contacted for comment.
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