State pension likely to rise by 4.7% next year

People drawing their new state pension from April are likely to see a rise of more than £500 a year, latest wages data suggests.

Under the “triple lock” policy, the state pension goes up each year by either 2.5%, inflation, or average earnings growth – whichever is the highest figure.

The Office for National Statistics (ONS) revealed total pay including bonuses for the three months to July was 4.7%, which is likely to be the figure used for the annual increase.

The triple lock formula was introduced under the Coalition government in 2011.

Almost 13 million people currently receive the state pension.

The latest wage figures from the ONS likely means:

• The new flat-rate state pension – for those who reached state pension age after April 2016 – is expected to increase to £241.05 a week. That will take it to £12,534.60 a year, a rise of £561.60 compared with now.
• The old basic state pension – for those who reached state pension age before April 2016 – is expected to go up to £184.75 a week. That will take it to £9,607 a year, a rise of £431.60 compared with now.

Sir Steve Webb, partner at pension consultants LCP and former pensions minister, said the standard rate of the new state pension was “creeping ever closer to the frozen personal tax allowance”, which currently stands at £12,570.

The standard personal allowance is the amount of income permitted each year without paying tax.

Sir Steve said that someone with no other income aside from the new state pension is set to be a taxpayer come April 2027.

“It is already the case that nearly three quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds coupled with steady rises in the pension will drag more and more into the tax net,” he added.

Not all pensioners get the full amount, because it depends on years of qualifying contributions through the National Insurance system.

For many retired people, the state pension is not their only source of income as they will also receive money from workplace or private pensions.

The state pension is the second-largest item in the government budget after health spending.

The Conservative-Liberal Democrat coalition designed the triple lock to ensure the value of the state pension was not overtaken by the increase in the cost of living or the incomes of working people.

But there has been intense debate over the cost of the triple lock and whether it is justified, with Chancellor Rachel Reeves previously pledging that the Labour government would keep it in place until the end of the current parliament.

In July, the government’s official forecaster said the cost of the triple lock guarantee was set to be three times higher by the end of the decade than was originally anticipated when it began.