Prime minister Rishi Sunak has proposed an upgrade to the pensions system, changing the current ‘triple lock’ to a ‘quadruple lock’ or ‘triple-lock plus’, which would increase the personal allowance for those over the state pension age by either average earnings growth, inflation or 2.5% (whichever is higher).
This proposal would increase the amount people can earn before they pay tax but would not apply to those under the age of 65, potentially creating a tax gap between older and younger people.
Currently, the state pension is £221.20 per week or £11,502.40 per year, leaving around £1,000 of the personal allowance spare for other incomes.
Kirsty Anderson, retirement specialist at Quilter, said the present situation will “no doubt see a considerable number of pensioners who have additional retirement income dragged into paying tax”.
Indeed, the most recent set of figures from HMRC showed there were 6.7 million taxpayers of state pension age for the 2021/22 tax year, a rise of 4.3% compared to the year before, she noted.
“With this in mind both parties must act and while the Conservatives are dressing up their action as ‘triple-lock plus’, if Labour plans to maintain the triple lock they too will need to raise the personal allowance,” said Anderson.
The current system means the state pension already rises in line with the higher of inflation, the average wage growth or by 2.5%. In April it was upped by some 8.5%. The latest addition would mean pensioners can keep more of their earnings tax free.
Tom Selby, director of public policy at AJ Bell, said the policy was a “fairly naked grab for pensioner votes” by the Conservative party, which remains far behind Labour in the polls.
But he warned the policy would “drive a wedge between generations via the tax system”, adding that it was “hard to think of a good reason to increase the personal allowance for pensioners alone” other than “election tactics”.
Data from AJ Bell suggested the move would polarise the population. In a survey of 2,000 people, two-thirds of those aged 65 or older were less likely to vote for a party that proposed ditching the triple lock.
This flips for younger voters. Some 37% of those aged between 18 and 35 were more likely to vote for a party that proposed scrapping the triple lock.
“Older voters continue to hold the keys to Downing Street, so we should perhaps not be surprised that Sunak has moved to super-charge the triple-lock to win them over. However, there is a serious generational divide when it comes to the policy, with older people attracted to the pledge and younger voters much less keen,” said Selby.
“This likely reflects the vested interests of both cohorts, with those in receipt of the state pension keen to keep bolstering their incomes, while younger people are perhaps fearful of the impact hiking the state pension today could have on their future state pension entitlement or other areas of public spending.”
Anderson also noted the growing divide the policy could create. She highlighted frozen thresholds as causing an “ever-bigger tax burden” for people and said the latest proposal “further increases intergenerational inequality”.
One solution could be to link pensions more closely to average earnings, which would “create a more predictable and sustainable pension system”, she said.
“This approach would mitigate the financial unpredictability associated with the triple lock, creating an easier way to effectively budget and ensure that pension increases do not disproportionately benefit one demographic at the expense of another.
“However, the truth is, given older generations vote in much larger numbers than their younger peers it would be too politically damaging for either party to take a more long-term view of the triple lock.”