Pensioners will be rejoicing at the prospect of an inflation-busting rise to the state pension from April next year as a result of the triple lock guarantee, with the latest Office for National Statistics (ONS) earnings growth figure coming in at 4.7% for the period between May and July of this year.
The triple lock guarantee means that the state pension will rise by the highest of either the average earnings growth in May to July, September’s inflation figure or 2.5%. Provided inflation doesn’t spike above 4.7% in September, all stars point to these latest earnings figures boosting the new state pension to £12,534.60 from April 2026 – putting it above £12,000 for the first time ever and perilously close to the frozen personal allowance. Currently, the state pension starts at £11,973 per year.
The state pension and personal allowance
This poses a significant conundrum for Rachel Reeves and the Treasury, since the state pension counts towards an individual’s personal allowance. If, as is likely, the triple lock sees the state pension increase above the personal allowance of £12,570 in April 2027 for the first time, then the government will come under increasing pressure. It will have to consider altering the personal allowance or whether it can sustain the triple lock as it has promised at least to the end of this Parliament.
Removing the freeze on the personal allowance would come at significant cost to the Treasury at a time when the chancellor’s fiscal tax headroom is already strained at best, while an overhaul of the triple lock would come with huge political risk before the next general election. Needless to say, it’s a headache Starmer and Reeves could do without ahead of a crucial Budget in November and economic and political pressure already beginning to swell both within the Labour Party and outside of it.
With the 4.7% increase anticipated for next year, there will be less than £40 of personal allowance not eaten up by the state pension.
The Pensions Commission and the future of the triple lock
In July, the government revived the Pensions Commission as part of a long-term plan to address the pension under-saving crisis of those due to retire in the mid-century. As part of this, the Commission will look at the relative success of automatic enrolment, contribution rates among employers and workers and solutions for the self-employed.
But the Commission also promises to look at the balance between all types of pensions, and that could mean a review of the state pension as well, at the same time as the government launches its formal review of the state pension age.
The state pension age will gradually increase to age 67 between 2026 and 2028. It’s also due to rise to 68 in the mid-2040s. It’s entirely possible – if not likely – this latest state pension age review will advocate bringing forward that increase to the late 2030s to save future governments’ money.
Pensions minister Torsten Bell recently ruled out scrapping the triple lock guarantee, but as the state pension grows ever closer to the frozen personal allowance threshold it could be that the government is finally forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
