Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Inflation is back below the Bank of England’s 2% target and, unless the Chancellor makes a shock triple lock change at the Budget, we now know the state pension will rise by an inflation-busting 4.1% next spring in line with average earnings. This means that next year’s full new state pension is set to reach £11,975.60 annually, an increase of £473. This will come as welcome news to many, however there are possible tax implications for pensioners. The Personal Allowance, which is the amount of income you can receive before paying tax, has been frozen since at £12,570 since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full new state pension payment has grown from 70% of the allowance in 2019/20 to a likely 95% next year, leaving pensioners with only £594.40 of headroom before they begin paying income tax.
“While the state pension is on the up, it’s worth remembering that it still falls short of the £14,400 a single pensioner needs for a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association (PLSA). For our younger generations, one way to future proof their retirement saving is to a look at workplace or private pension provision and make sure to check it matches with their retirement expectations – there are a number of online tools and calculators that can help with this.”
Steven Cameron, Pensions Director at Aegon comments:“After many losing out on the winter fuel allowance, state pensioners can take some comfort in knowing that a 4.1% increase in their State Pension is expected next April. This is more than double the inflation figure of 1.7% announced today. This rise is due to the Triple Lock formula, under which pensions increase each April by the highest of three measures – earnings growth (the year-on-year rise in average earnings for the period May to July), price inflation for the year to September (which was announced this morning as 1.7%) or 2.5%. As the average earnings growth - which was recalculated as 4.1% rather than 4% - is the highest of the three, then subject to official confirmation, this should see the State Pension increase by 4.1% for 2025/26.
“For someone on the full new State Pension of £221.20 a week, this would equate to an increase of £9.10 to £230.30 a week, or £11,975.60 a year. For those who reached State Pension age before 6 April 2016 and who are on the full basic State Pension of £169.50, the increase could be around £6.95, bringing them to £176.45 a week - £9,175.40 a year. A little-known rule is that any earnings-related element of the State Pension, relating to the pre-April 2016 rules, and top ups, are only increased in line with the rate of inflation and not the triple lock. Therefore, some may find their overall State Pension increase lags behind the 4.1% figure.
Stephen Lowe, group communications director at retirement specialist Just Group, said: “Many pensioners will see today’s news as bittersweet. Around 10 million have lost winter fuel payments of £200-£300 due to the government’s decision to restrict the benefit to lower income pensioners receiving Pension Credit. Taking that into account the 4.1% rise doesn’t look so generous, especially as energy costs have recently risen. Large numbers of pensioners are heavily reliant on State Pension. Even a full New State Pension next year will only make up about 83% of the £14,400 income needed to achieve the Pensions and Lifetime Savings Association’s ‘minimum’ Retirement Living Standard.
“Those pensioners who are struggling on low incomes should ensure they are claiming all the benefits they are entitled to, particularly Pension Credit which tops up income and is the gateway to other cash help that can total thousands of pounds. Recent government figures suggest that up to 760,000 pensioner households could be missing out on around £1,900 a year each by failing to claim, with take up lower among couples and those aged over 75. It only takes a few minutes to check. The government website has links to useful third-party calculators (https://www.gov.uk/benefits-calculators) while other good sources are Citizens Advice, local councils and charities.”
David Brooks, Head of Policy at leading independent consultancy Broadstone, said: “Today’s CPI data shows that inflation is now below target and at its lowest annual rate for three years following the cost of living crisis. It means that the revised earnings growth figure of 4.1% released yesterday is likely to trigger around a £473 a year inflation-busting boost to the State Pension from April 2025. Given the loss of Winter Fuel Payments for those not claiming in Pension Credit, this will be a welcome financial boost for many pensioners. It must be noted that not everyone will benefit from the full £473 a year rise, as that will only be the increase for those claiming the full amount of new State Pension.
“Many of those with Defined Benefit pensions will also see their annual income uprated in line with inflation which will deliver another boost to their regular income. The slowdown in inflation compared to the past couple of years is also positive for those whose DB pensions are not index-linked but instead fixed or capped, typically at 2.5% or 5%, and is likely to take some of the heat out of vociferous calls for discretionary increases that we have seen over the past couple of years.”
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