A “triple lock” guarantee will see the state pension rise by up to £460 a year (£8.80 a week) from April 6, 2025.
This triple lock guarantee increases each year in line with the highest inflation in the previous September, which is measured by the Consumer Prices Index (CPI), and the average increase in total wages for May to June of the previous year.
This means that 12.7 million state pensioners will see a £1,100 a year boost, finds a new analysis from Standard Life, which is part of Phoenix Group.
A triple lock for state pensions works by comparing the cost of a basket of household goods and services in the base year with its current cost to calculate the CPI, increasing the state pension by the highest of the three measures each April and ensuring that the pension increases beat inflation if inflation is below 2.5%.
The Daily Record reported it’s important to be aware that additional state pension elements and deferred State Pensions rise each year with the September CPI figure (1.7%).
Standard Life warns that as the full new state pension nears £12,000 it means more people in retirement will pay tax due to the freeze on the Personal Allowance.
The amount of income a person can receive before paying tax has been frozen at £12,570 known as the Personal Allowance.
This amount has been frozen since the 2021/22 financial year.
Standard Life has calculated that financial year, the new full state pension was equivalent to 74% of the allowance however as of now, it is 95%.
This equates to just £607.40 of additional income needed by pensioners before income tax needs to be paid.
The full New State Pension will see payments rise by £9.10 per week from £221.20 to £230.30 and as the payment is typically made every four weeks, this amounts to £921.20.
This will see annual payments rise by £473.60 from £11,502 to £11,975.60 over the 2025/26 financial year.
“Pensioners are set to see a healthy boost to their incomes next April as the State Pension nears £12,000 per year,” noted Dean Butler, Managing Director for Retail at Standard Life.
Butler added: “Despite high inflation over the past few years, recently this has come back down and is now at 1.7%, below the Bank of England’s target. So, the Triple Lock has led to a fairly significant boost above and beyond CPI.
“This will be hugely welcome news to pensioners who rely on the State Pension for a large portion of their retirement income, many of whom are among the most vulnerable people in the country.
“There are of course many well-off pensioners too, so increases will undoubtedly reignite debate around the long-term affordability of the State Pension, and the sustainability of the Triple Lock.”
It may not be all good news for pensioners, however, as while the state pension will rise, it will come too late to help pensioners with the Winter Fuel Payment, and with Personal Allowance remaining frozen, the annual increase could push more pensioners over the tax threshold.
“It’s important pensioners are aware of the potential tax implications, with the personal allowance set to be frozen until 2028,” added Butler.
“The personal allowance has remained flat in recent years and will gradually be bringing more and more people into the tax system as a result – including pensioners with only very low incomes above the State Pension.
“While 25 % of pension savings can be withdrawn tax free, the remainder can be taxed. For those incomes hovering around the Personal Allowance, it’s worth ensuring they’re not taking bigger lump sums on which they might pay tax if they can be avoided.
“If they do have any ISA savings these are not subject to income tax and could be a useful source of additional income.”