What is the state triple lock plus pension plan and how would it work?

The Conservatives have promised that the state pension will never be taxed under plans they call “triple lock plus”.

The personal allowance, the amount that can be earned without paying income tax, will be increased at a special higher rate for pensioners.

This means it will never fall below the full state pension, the party has promised.

The personal allowance of £12,570 has been frozen since 2021, meaning many more pensioners are now paying income tax if they receive the full state pension of £11,500 a year plus some private pension income.

The triple lock commitment means state pensions rise each year up to the highest level of inflation, average income growth or 2.5 per cent.

The Conservatives say the new policy will save eight million pensioners £100 a year to start, and will see them improve by £275 a year by 2030.

They have cost £2.4bn a year until 2029/30, which will be funded by existing plans to crack down on tax avoidance.

We look at how it would work and the response from pension experts.

What does the ‘triple lock plus’ plan mean for pensioners?

Under this policy, the personal allowance of £12,570 will be increased in line with the triple lock to keep it above the full state pension.

However, 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.

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.

This has a precedent, because there used to be a higher personal allowance for pensioners, but the Coalition Government removed it.

Because they receive private pensions and many have savings subject to interest tax, millions of older people will have to continue paying income taxes regardless of the Conservatives’ new plan.

However, the policy avoids the anomalous situation where in future the Department for Work and Pensions could end up paying millions of pensioners a full state pension, some of which will then be recovered by the Treasury in income tax.

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.

The triple blockade drags more pensioners into the tax system

“The combination of rising wages and high inflation means the triple lock has been extremely valuable in recent years,” says Mike Ambery, director of retirement savings at Standard Life.

‘So much so that it is rapidly approaching the tax-free personal allowance limit which has been frozen at £12,570 since 2021.

‘The impact of this has been to drag more and more pensioners into the tax system and the proposal on the table is designed to ensure that a gap is always maintained between the state pension and the personal benefit so that this income remains tax-free .

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‘There is precedent for different allowances for pensioners as they are currently exempt from National Insurance payments on their income, but this would be an added advantage.

“The question that probably hangs over this approach is that of intergenerational justice, as while there is a large group of pensioners struggling to survive, there are also many who are comparatively well off and it appears that the policy would apply to both groups.”

Conservatives are undoing their own tax policies

“The proposal to ‘triple lock’ income tax relief for pensioners is another example of how the Conservatives are proposing to undo their own tax policies,” says Paul Johnson, director of the Institute for Fiscal Studies.

‘Pensioners used to have higher tax relief than people of working age, but since 2010 the tax relief for pensioners has been reduced by more than 10 per cent, while that for people of working age has increased by 30 percent.

“Looking ahead, about half of this proposed tax cut simply does not meet the planned tax increases over the next three years.”

A new commitment will reignite the debate on intergenerational justice

“The triple lock plus is a tax relief bonanza for voters over state pension age,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

‘They have not benefited from National Insurance cuts and have been hit by frozen income tax thresholds.

‘There was growing concern that the state pension itself would be subject to tax if it exceeded the personal allowance. This change gives them a VIP invitation to the tax cut party, which will apparently save them £275 each by 2030, at a cost of £2.4bn a year.

‘However, the compromise will reignite the debate on intergenerational justice. There is already a significant income advantage from the triple lock, and this will push pensioners forward even further.

‘It’s fair to say that not all pensioners rely solely on the state pension; Those who have saved into a pension or SIPP for their retirement will still be hit by income tax.

‘Anyone of working age will continue to face the threat posed by frozen tax thresholds, including personal allowance. It has dragged an additional 2.6 million people under 65 into paying taxes from the 2020/21 tax year and will remain in place until April 2028.

“There will be many new working-age taxpayers who will wonder why they should pay a higher tax rate simply because of their age.”

A fairly naked appropriation of pensioners’ votes

“The next government should really review the triple lock on state pensions and set a clear target for the policy,” says Tom Selby, director of public policy at AJ Bell.

‘Instead, Rishi Sunak has doubled down by promising not only to keep the commitment but also to extend it to personal allowance for those over state pension age.

“This is a pretty obvious capture of pensioner votes which the Conservatives know will be crucial if they are to regain Labour’s huge lead in the polls.

‘The fact that Sunak has not promised to increase the personal allowance for younger voters at the same time means he would effectively be driving a generation gap through the tax system.

‘Creating a separate tax threshold for seniors would also add unwanted complexity to the income tax framework.

“Beyond pure electoral tactics, it is difficult to find a good reason to only increase the personal allowance for pensioners.”

Workers would also be forced to act based on their personal assignments

“It has taken an election for the Conservative Party to address the perverse situation in which many pensioners will soon be forced to pay back part of their state pension,” says Quilter retirement specialist Kirsty Anderson.

‘With this in mind, both parties must act and while the Conservatives disguise their action as “triple lock plus”, if Labor plans to maintain the triple lock, they too will need to increase the personal allowance.

‘Our previous analysis found that pensioners could have to pay back some of their state pension in income tax in just two years.

‘Simply from an administrative point of view, this would prove difficult for HMRC, so it seems unlikely that if Labor were to come in, they would not be forced to act in some way.

‘Frozen thresholds continue to increase tax revenue through the back door due to fiscal drag. Unless the thresholds are changed significantly, the entire nation will suffer an increasing tax burden.

“Increasing the personal allowance just for pensioners may be popular with pensioners, but the rest of the tax-paying public may feel that separate, more beneficial rules for pensioners further increase intergenerational inequality.”