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In his Autumn Statement on Thursday, chancellor of the exchequer Jeremy Hunt has said the state pension will go up in line with the highest level of inflation seen in four decades, along with pension credit. He has resisted extending a freeze on the lifetime allowance or making other pensions tax tweaks but remained silent on auto-enrolment reforms.
The state pension and pension credit will rise by 10.1%, the increase of the consumer prices index in the 12 months to September, as the government has decided to maintain the so-called ‘triple lock’. It means an £870 increase next year on average, its biggest ever. The full basic state pension will increase from £141.85 to £156.20, and the new state pension from £185.15 to £203.85. Nearly 12m pensioners will benefit from this increase.
‘Pensioners are disproportionately impacted by higher energy costs’
In his speech to the House of Commons, Hunt said he would “protect pensioner savings”.
“Because we have taken difficult decisions elsewhere in this statement, I can today announce that we will fulfil our pledge to the country to protect the pensions triple lock,” he said. “To the millions of pensioners who will benefit from this measure I say – now and always, this government is on your side.”
The triple lock policy ensures state pensions go up with the highest of inflation, earnings or 2.5% and was introduced by the coalition government in 2010 to address pensioner poverty while avoiding means-testing. It was suspended for this year, as it would have meant increasing pensions in line with an artificial earnings bounce following nationwide lockdowns.
Pension credit, claimed by 1.4m pensioners, is also going up with inflation, and pensioners will receive a £300 cost-of-living payment in 2023-24, part of a £26bn support package to help vulnerable groups deal with high energy bills. Those on non-means-tested disability benefits will receive a further £150 Disability Cost of Living Payment.
“Pensioners are disproportionately impacted by higher energy costs, many are unable to increase their income through work, and many low-income pensioner households do not claim the means tested benefits they are entitled to, so offering universal support for this group is the right thing to do,” the Treasury said.
A review of the state pension age is underway, with Hunt saying this will be published in early 2023. The age from which the state pension can be claimed will go up to 67 by 2028 and could go up further depending on the outcome of the review.
Hunt has made substantial spending pledges on energy support, benefits and health while deciding to increase taxes considerably. The threshold at which higher earners start to pay the 45p rate will be reduced from £150,000 to £125,140, while income tax, national insurance and inheritance tax thresholds will be frozen for a further two years until April 2028. They were previously frozen until 2026 when Prime Minister Rishi Sunak was chancellor, even as a general election is due to take place by January 2025.
Recent figures showed that the number of economically inactive working age adults, including among young people, has increased considerably, which could pose a problem for economic growth and future tax-take. Hunt said the Department for Work and Pensions will “thoroughly review issues holding back workforce participation, due to conclude early in the new year”.
Markets react to bleak economic forecasts
Hunt already reversed many of the measures of the disastrous Mini-Budget by former prime minister Liz Truss and her chancellor Kwasi Kwarteng, which led to global investors ditching UK gilts and sterling, when the new government took over. The reversals led to a recovery in both.
However, Thursday’s announcements did not add to this trend. Bond yields initially moved higher, and sterling sold off again as the Office for Budget Responsibility revised the UK’s growth forecast down to –1.4%, from previously 1.8% and predicted the biggest fall in household incomes in generations.
“The broad take is that both gilts and the pound have staged a meaningful recovery in the first few weeks of the Sunak government. Today’s announcement of the Autumn Statement, which is fiscally prudent but nevertheless paints a bleak picture of the state of the UK economy, gives markets an excuse to take a little bit off the table,” observedMike Owens, a senior sales trader at trading platform Saxo UK.
‘Much needed respite’ for pensioners before the general election
The pensions industry has broadly welcomed the government’s decision to maintain the triple lock.
“The UK state pension remains one of the lowest in the OECD. As we said in our recent ‘Five Steps to Better Pensions’ report, the State Pension should be set at a sufficient level so as to protect everyone from poverty,” said Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association.
Joanne Segars, trustee chair of master trust Now Pensions, said the increase will bring much-needed respite to retirees who rely heavily on income from the state pension to get by.
“Without today’s action, there was a possibility pensions would have just risen in line with average earnings, which rose by only 5.7% in the year to September, excluding bonuses. This would have left pensioners at a significant financial disadvantage," she said.
Support for pensioners was needed, agreed Steven Cameron, pensions director at provider Aegon, but he added: “The government will no doubt have weighed up the reaction of pensioner voters if they scrapped the triple lock for a second consecutive year in the run-up to the next general election.”
It is unclear if the triple lock can continue beyond that. For Cameron there is “a huge question mark” over whether any party would in their manifesto recommit to paying the highest of inflation, earnings or 2.5% year on year.
“In volatile times, using an average over three years or even paying out the average of inflation and earnings increases each year might be more sustainable for government and predictable for pensioners,” he argued. Affordability considerations also need to flow into the ongoing review of the state pension age, he added.
Some have criticised that despite the help offered, pensioners will still have to spend £83 more per month on energy from April.
Former pensions minister Sir Steve Webb, now a partner at consultancy LCP, said millions of pensioners not on means-tested benefits face higher energy bills from April, because monthly payments of £66 to all households will stop in March and the energy price cap will rise from £2,500 to £3,000. The latter could add £500 to annual bills, higher than the £300 cost-of-living payment pensioners are set to receive.
“Taken together, this ‘double hit’ means that pensioners will have to find an extra £83 per month towards their energy bills, which will make next year’s pension increase look much less like a windfall,” Sir Steve said.
No further LTA freeze but several missed opportunities
The government’s freeze of the main tax allowances will move large numbers of people into higher rate tax brackets as their earnings go up. Colin Clarke, who heads up product policy strategy, workplace savings at provider Legal & General, noted that although more people will pay higher rates, “maintaining pension contribution tax relief will lift at least some of the burden on them”.
But the chancellor has missed several opportunities to help people save for retirement, Clarke argued. “We should review auto-enrolment and pension freedoms to check that they really do raise savers’ retirement incomes. Let’s finally make long-promised changes like age limit reduction. And we should help people save properly by boosting engagement levels,” he said.
Regulated personalised guidance should be introduced, he added, to close the stubborn advice gap.
Clarke also wants to see the lifetime allowance, currently frozen at £1,073,100 until April 2026, abolished for defined contribution schemes.
“Now that people live and work for longer, and the onus is on the individual to fund these longer later lives, it can penalise them for making good long-term investment choices,” he said.
The lifetime allowance is a thorn in the side of the pensions industry as much as high earners. President of the Pensions Management Institute Sara Cook said the PMI was “hugely encouraged” that the allowance has not been frozen for longer. Freezing it has raised an estimated £382m for the Treasury, and many therefore expected this freeze to be extended, she said.
“Ignoring the demands of short-term pressures to safeguard the longer-term interests of the nation’s citizens shows both courage and pragmatism,” said Cook.
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