The Conservatives are aiming to secure the support of older voters ahead of the next election by introducing a new ‘triple lock plus’ policy to boost pensioner incomes.
The new scheme will see the tax-free pension allowance adjusted each year in line with the triple lock mechanism. This means that it will increase in line with average earnings, inflation or 2.5%, whichever is higher.
Currently, the tax-free allowance for pensioners and workers has been frozen at £12,570 since 2021 and is not due to increase until 2028. Prior to this freeze, the allowance was adjusted annually to keep pace with inflation.
Prime Minister Rishi Sunak noted the government's commitment to pensioners, saying the policy was aimed at providing ‘peace of mind and security in retirement’.
Triple Lock Plus' Immediate Impact and Future Projections
For those who rely solely on the state pension, the immediate benefits of this policy may not be felt. The state pension, which rose by 8.5% in April, currently stands at £11,502 a year, keeping it below the tax threshold.
However, the Office for Budget Responsibility (OBR) predicts that the state pension will exceed the level of the frozen personal allowance by 2027.
In this scenario, millions more pensioners would be subject to income tax at a rate of 20% on income above the allowance.
If the ‘triple lock plus’ had been implemented in April 2024, the tax-free allowance for pensions would have been increased to £13,638.45, in line with the triple lock guarantee.
Labour Party Opposition
Labour has rejected the plan as ‘not credible’ and has pledged not to adopt it if it wins the election. Shadow Paymaster General Jonathan Ashworth has criticised the Conservatives, questioning their credibility on taxation given the current heavy tax burden.
Paul Johnson, director of the Institute for Fiscal Studies, described the ‘triple lock plus’ as a retraction of previous policy rather than a new initiative. He pointed out that the proposal essentially reversed a planned tax increase by allowing the allowance to rise with inflation.
‘This is simply the reversal of a tax increase proposed by the Conservatives,’ he pointed out. ‘Half the cost is simply not imposing the previously planned tax increase.
However, Prime Minister Sunak went on to highlight the benefits of the Triple Lock, noting that pensions have increased by £900 this year, and that the proposed policy is expected to reduce taxes by around £100 next year.
He presented the policy as a stark contrast to Labour's approach, which he said would subject recipients of a full state pension to income tax for the first time in history.
Understanding the Triple Lock Mechanism
The ‘triple lock’ guarantee, introduced in 2011, ensures that the state pension increases each year by the highest of the following three measures: inflation (based on the Consumer Price Index (CPI) for the previous September), the average pay rise or 2.5%.
In September 2023, the average salary increase of 8.5% will exceed the CPI increase of 6.7%, resulting in a higher increase.
In the previous year, the state pension increased by 10.1%, the highest rate on record, following the September inflation spike.
This mechanism is designed to protect pensioners from the erosion of their purchasing power due to inflation and the rising cost of living.
Yet, despite its benefits, the triple lock has been criticised for its potentially unsustainable cost. For the 2023/24 tax year, it is estimated that pension payments will cost the government £124.3 billion.