State pension increase branded a 'double-edged sword' for pensioners

Industry experts have warned that changes to the state pension could be a “double-edged sword” for some pensioners, with concerns that some could be pushed into a tax-paying bracket for the first time, or end up paying more in tax.

Under the triple lock, the new state pension is set to increase to £11,502 from 6 April, while the basic state pension will reach £8,814 per year, thanks to the 8.5 per cent wage growth recorded in July 2023.

This marks "one of the largest ever cash increases to the state pension", after Chancellor Jeremy Hunt, confirmed that the government would stand by the full state pension triple lock, despite concerns over the rising cost.

However, industry experts have pointed out that, with the personal allowance currently frozen until 2028, the state pension is increasingly close to the personal allowance limit.

Indeed, analysis from Standard Life showed that while the new state pension was equivalent to 74 per cent of the personal allowance when it was frozen in 2021/22, it is now 92 per cent, meaning that pensioners will need just £1,068 of income before they start paying income tax.

Given this, Royal London pensions expert, Clara Moffat, warned that the state pension increase could be a “double-edged sword”.

“Around 12 million pensioners will receive more in their state pension from this weekend (6 April), but the extra monthly income may come with a sting in the tail for many," she stated.

“Retirees in a defined contribution pension and in drawdown can minimise the amount of tax payable. That's because the income level can be altered to keep drawdown income below the threshold.

“Those in defined benefit schemes, where a fixed amount of pension is paid every month, like public sector schemes, will often increase in April too. This, alongside the state pension rise, will push more income into taxable territory.”

Adding to this, Standard Life managing director for retail, Dean Butler, emphasised the need for pensioners to be aware of the potential tax implications, pointing out that "there are a few steps people with modest private savings whose annual income is likely to be around the personal allowance limit can take".

Butler also noted that “there are of course many well off pensioners too”, admitting that the latest increases will “undoubtedly reignite debate around the long-term affordability of the state pension, and the sustainability of the triple lock”.

Indeed, the government has faced growing pressure over the rising cost of maintaining the state pension triple lock, however, with research from the Institute for Fiscal Studies (IFS) revealing that the triple lock has already raised state pension spending by around £11bn a year since 2010.

Furthermore, it found that maintaining the triple lock could increase spending by anywhere between a further £5bn and £45bn per year by 2050.

But a lack of certainty on the state pension has also been hitting Brits' retirement confidence, as research from PensionBee found that distrust in the government was one of the top three reasons for negative pension sentiment among over 55s.

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