The State Pension has become an early battleground in the upcoming General Election, with the major parties diverging on their plans for the old age payment.
While both Labour and the Conservatives have pledged to keep the ‘Triple Lock’, the incumbent Conservative government has promised to add another protection to the State Pension by uprating the level at which Income Tax for pensioners becomes payable in line with the Triple Lock.
Dubbed the ‘Triple Lock Plus’, it would effectively guarantee that those living solely on the State Pension will not have to pay tax on the payment in the future.
What would a ‘Triple Lock Plus’ mean?
The Triple Lock is the promise to increase the State Pension by the highest of either inflation, wage rises or 2.5%. The policy has seen the State Pension rise rapidly in recent years – from £185.15 a week in 2022/23 to £221.20 today, a rise of more than 19% in two years. That was thanks first to sky-rocketing inflation, and then surging wages.
The Triple Lock Plus policy would ensure that the Personal Allowance for Income Tax – the amount you can earn before any Income Tax becomes payable – is also raised according to the Triple Lock, but only for those in receipt of the State Pension. The Personal Allowance currently stands at £12,570 a year, meaning that the whole of the current State Pension – worth £11,502.40 a year – falls within the Personal Allowance and can therefore be received without tax being due.
But the Personal Allowance is due to be frozen under current plans until April 2028. According to The Resolution Foundation, estimated rises in the State Pension would mean that the payment would exceed the Personal Allowance by 2028, meaning some of it is taxed1. The Triple Lock Plus would unfreeze the Personal Allowance for those receiving the State Pension, enabling the whole payment to fall within the tax-free band.
Putting a value on the State Pension – how much is it worth?
Whichever party wins the election, the State Pension is due to rise by the Triple Lock over the life of the next parliament. That will only add to its importance to the finances of retired people – and it is already very important.
That’s because the State Pension is extremely valuable income – and very expensive to replace.
How expensive? According to the latest market prices, replacing the current maximum State Pension (available to those retiring after 5 April 2016) would cost the equivalent of £223,434 in pension savings2. That’s based on buying a financial product – an annuity – to replace the income provided by the State Pension.
The reason it costs so much to replace is that the State Pension is both guaranteed and protected against inflation – two things that are precious and difficult to replicate any other way.
An annuity lets you to exchange money saved inside your pension for a guaranteed income. The rates on annuities fluctuate but right now the rate paid to a healthy 65-year-old is around 5.148%3. That’s with income payments escalating by 3% a year to combat rises in prices.
On the basis of that rate, it would require £223,434 of pension savings to replace the current full State Pension of £220.20 a week. Note that annuities are typically purchased using pension pot money after any tax-free cash has been taken.
Annuities are not the only way to get an income from retirement savings. Income drawdown allows you to leave your money in your pension pot and take income or lump sums from it as and when you want. A rule of thumb is that you can withdraw around 4% a year from a drawdown pot and still have a good chance that your savings last for 30 years.
Based on that, you would need £287,5604 of pension savings in drawdown to recreate State Pension income – more than an annuity and without the guarantee that income will last until you die, but with the benefit that the money remains yours.
Why the State Pension is so valuable
| Current full State Pension (weekly) | £221.20 |
| Cost of recreating at current annuity rates (5.148%) | £223,434 |
| Cost of recreating via drawdown (4% withdrawal) | £287,560 |
Source: Sharingpensions.co.uk, as at 30.5.24
How to get there
Saving those sorts of sums is no mean feat – but the job is made easier the earlier you start. For example, someone aged 30 and saving until their projected state pension age of 68 would have to set aside about £225 a month into a pension, assuming 5% investment growth after all fees, in order to achieve a pot worth the £287,560 needed to recreate an income to match the current state pension. This is purely illustrative – investment returns are not consistent, and the value of your money can fall.
And remember that the State Pension in the future is very likely to be significantly more than it is today in cash terms, so to truly match it with your pension would require you save significantly more. One way to achieve that is by escalating your contributions. In our example, a 30-year-old may begin by saving £225 a month but could increase this in line with their wages as their career progresses.
Maxing out your State and personal pensions
Given the high cost of getting it any other way, it makes sense to maximise the income you get from the State Pension. Your entitlement to the State Pension is based on your National Insurance (NI) contributions. To get the full State Pension you need to have made NI contributions for 35 complete years by the time you retire.
Those working as employees are likely to have NI taken automatically from their pay, while self-employed people with earnings above a certain level will pay their contributions via self-assessment.
The government has an online service that lets you check on your NI record for any gaps and to see whether you’ll get the full amount. If you have gaps in your record, you may be able to pay voluntary NI contributions to fill them, or else fill them with NI credits that apply in some circumstances.
For your personal pension saving, make sure you are making maximum use of any contributions your employer is willing to make on your behalf. If what you’re paying in is still likely to leave you short of achieving your goals, you can increase contributions either into a workplace scheme or via a SIPP – self-invested personal pension – where they will benefit from tax relief.
It can help to consolidate old workplace pension into a SIPP, where you’ll more easily be able to accurately monitor how much you have saved, check your investment returns and adjust mix of investments.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Source:
1 Resolution Foundation, 29.5.24
2. (£11,502.40 / 5.148) x 100 = £223,434.34
3 Sharing Pensions.co.uk, 22.5.24
4 (£11,502.40 / 4) x 100 = £287,560
