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The state pension will rise by nearly £500 next year in an inflation-beating move that will push up the real incomes of millions of pensioners.
The figure was confirmed on Wednesday after new inflation statistics were released by the ONS, providing the final piece of the puzzle in the triple lock.
With that number coming in at 3.5 per cent – and the third element being a 2.5 per cent minimum – it will be the wage growth figure of 3.9 per cent that determines the rise.
It means the new state pension will rise in April by £489 to £13,036, which is above the current threshold to start paying income tax of £12,570.
Pensioners do not pay income tax on the state pension if it is their only income because it has stayed under this figure, but would see a small tax charge from next year if the thresholds and rules stay the same.
It is likely however that the threshold will be bumped up slightly to avoid this scenario as governments have always implied the state pension would not be taxed as a sole income.
Claire Trott, head of advice at St. James’s Place, said: “While the uplift in income will be welcomed by many, it also marks a significant milestone, with the full new state pension exceeding the £12,570 personal allowance for the first time.
“Although those receiving only the state pension are not expected to face a tax bill, pensioners who draw on other sources of income, such as workplace or private pensions, savings or earnings from work may find themselves with a higher tax liability as a result,” she continued.
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“It’s therefore worth taking a closer look at your retirement income ahead of April to make sure you understand what the changes could mean for you and plan accordingly.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, added: “The state pension is, and will remain, a firm foundation on which to build your retirement income.
“However, the reality is it is only going to cover the basics no matter how it is increased. If you want to maintain the lifestyle you enjoyed while working, it’s important to make the most of your pension.
“Taking small steps, such as boosting personal pension contributions whenever you get a pay rise or promotion, can be really useful. If your employer will increase their contribution if you increase yours, then that can also really pay off long-term.”
While the size of the state pension rising is good news for those nearing retirement, people who are still several years out or more may find they have to wait longer to get any state pension at all.
Rachel Vahey, head of public policy at AJ Bell, said: “This isn’t the end of tough decisions on the state pension. Deciding when to bring forward the move in the state pension age from 67 to 68 is still hanging over this government.
“If the government wants to bring forward this change to the late 2030s, it will need to make the call soon to give people at least 10 years’ notice in line with convention for increasing the state pension age.
“This first step of grasping the nettle and acknowledging the triple lock simply cannot exist forever was probably the hardest.
“But Burnham and his government now need to seriously ask what the state pension should be worth, when people should receive it and how much this will cost.”
