Chancellor has to find £100m extra in the Budget for state pension

The Government's state pension bill is set to swell by an extra £100million after a tweak to the key earnings figure that determines payments from next April.

Older people are now in line for a £475 boost in the headline flat rate state pension, to around £11,975 a year.

That is about £15 a year more than the state pension rise projected last month, but enough to cause an extra headache for Chancellor Rachel Reeves ahead of the Budget on 30 October.

It would push the weekly rate from the present £221.20 to an estimated £230.25 from next Spring for people retiring since April 2016 who qualify for the full state pension.

People who retired before April 2016 on the old basic rate state pension currently get £169.50 a week or around £8,800 a year.

The newly-tweaked rate for next year would put them on £176.45 a week, or around £9,175 a year.

Those on the lower basic rate also get hefty top-ups, called S2P or Serps, providing they were earned earlier in life. These are raised in line with inflation though, not the triple lock.

The triple lock means the state pension is increased every year by the highest of inflation, average wage growth or 2.5 per cent.

> What does Rachel Reeves say about the triple lock? Read her comments below 

The reason for the small but costly upward revision in next year's state pension is that earnings growth in the crunch period used in the triple lock calculation was originally estimated at 4 per cent.

However, this it has now been reassessed as 4.1 per cent by the Office for National Statistics in new data published this morning.

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The wage growth figure is as good as nailed on to be the one used to set the triple lock in the Spring.

That's because the relevant inflation figure, which is due out tomorrow, is expected to come in much lower. It was 2.2 per cent last month.

The new Government promised during the election to maintain the triple lock for the whole of the current parliament.

'A slightly higher rate of increase is welcome for pensioners, though will be an unwelcome £100million extra cost for the Chancellor as she prepares her Budget,' says Steve Webb, a former Pensions Minister and now This is Money's retirement columnist.

Webb, who is also a partner at pension consultant LCP, adds: 'The rate of the new state pension will now be close to £12,000 per year, very near to the £12,570 tax-free personal allowance.

'This is likely to put extra pressure on the Chancellor to take action on tax allowances in the coming years.'

The £12,570 personal allowance is the level at which income tax kicks in, and it has been frozen since 2021.

It creates an anomalous situation where the Department for Work and Pensions pays millions of people a state pension, some of which is then clawed back by the Treasury in income tax - potentially forcing an increasing number to file annual tax returns to HMRC.

Millions of pensioners already do this because they receive a state pension higher than £12,570.

This is because they reached state pension age under the old pre-2016 system, and earned enough second state pension, also known as Serps, to build up more generous payments in retirement.

Meanwhile, a rising number of pensioners who receive even a modest income from private pensions on top of the state pension also have to complete a tax return.

Chancellor Rachel Reeves responds

Before the election, we promised to maintain the Triple Lock to support our pensioners.

That is a promise I will keep.

The latest earnings figures show that because of my promise, the State Pension could rise by up to £470 from April.

But I recognise that I have had to make some difficult decisions to clean up the economic dereliction of duty we have inherited and to bring back the stability we need to get Britain growing.

Targeting Winter Fuel Payments at the poorest pensioners was a painful but necessary step to fix the foundations of our economy.

And I’m encouraged to see applications to Pension Credit up 152% since I announced this change, as we work alongside charities and councils to raise awareness.

This means thousands of low-income pensioners could not only be receiving the benefit, and a Winter Fuel Payment, but also an increase to their State Pension next year.

I know this will make a huge difference to older people.

We will continue to protect the Triple Lock, so pensioners have security in retirement.

We will target additional support to the pensioners who need it most through winter.

And we will set our economy on the road to future growth, securing stability and making people better off.

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