The proposed “Triple Lock Plus” plan is set to relieve 750,000 pensioners from income tax and provide a financial boost for millions of retirees. This new initiative could significantly alter the landscape for elderly people relying on state pensions.
The Institute for Fiscal Studies (IFS) has provided an in-depth analysis of the potential impact and cost of this proposal. The recent announcement aligns with the Prime Minister’s pledge to keep state pensions untaxed under the current government.
Impact on Pensioners
The IFS stated that this policy would not only relieve 6% of pensioners from tax obligations but also enhance the incomes of approximately two-thirds of retirees, benefitting around 7.5 million people in total. This initiative aims to provide financial relief to pensioners who are often on fixed incomes.
Current projections indicate that pension payments, currently standing at £11,500 per year, are expected to surpass the £12,570 income tax threshold by 2027. Mr Sunak’s plan involves raising this threshold annually for pensioners, while keeping it frozen for other taxpayers until at least 2028.
Transformation of the Triple Lock
This adjustment would transform the existing triple lock—which increases state pensions based on the highest of wage growth, inflation, or a baseline 2.5%—into a so-called “triple lock plus.”
According to the IFS, this £2.4 billion initiative would partially counteract the government’s previous policy of freezing tax thresholds.
The proposal would effectively revert some of the tax changes implemented since 2010, aiming to restore pensioners’ tax allowances to more favourable levels.
Government’s Stance and Rationale
Paul Johnson, Director of the IFS, remarked, “The proposal to ‘triple lock’ the income tax allowance for pensioners is another example of Conservatives proposing to undo their own tax policies.”
He added, “Pensioners used to have a higher tax allowance than working-age people, but since 2010, the tax allowance for pensioners has been cut by more than 10% while that for working-age people has risen by 30%.”
Had the government aligned the personal tax allowance with inflation, 350,000 retirees would have already been exempt from taxation.
Historical Context
The election promise comes amidst a backdrop of increasing taxation for retirees over the past few decades. Currently, 62% of people aged 65 and over pay income tax, compared to half in 2010-11 and just over a third in 1990-91.
In the past, pensioners enjoyed significantly higher tax-free allowances until changes by the Coalition Government reduced these benefits.
Current Financial Burdens and Future Projections
The IFS also warned that adding another layer to the triple lock would impose “considerable and costly uncertainty” on future governments.
The Treasury currently spends £11 billion more annually on state pensions due to the triple lock, compared to if pensions had been uprated in line with earnings since 2010.
The cost could exceed £2.4 billion annually if inflation and wages remain unpredictable.
Economic Factors and Projections
Many economists anticipate that inflation and wages will continue to be volatile due to ageing demographics, labour shortages, and significant investments required for achieving net zero and higher defence spending.
Over time, a greater proportion of retirees would benefit from the reform, increasing its cost, particularly as younger generations are more likely to receive a full new state pension of £11,542.
Broader Implications
Many older women, in particular, currently receive pensions well below the threshold, which highlights the uneven financial burdens experienced by different groups of retirees.
The proposed “Triple Lock Plus” plan aims to provide significant financial relief to pensioners, potentially exempting 750,000 from tax. This initiative could improve the incomes of millions, although it also brings financial uncertainties and challenges for future governments.
The broader implications suggest a need for careful consideration of the economic and social impacts, ensuring that vulnerable groups, such as older women, benefit fairly from these reforms.