A Boon for Retirees, but a Burden for Future Governments?

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A Boon for Retirees, but a Burden for Future Governments?

A Closer Look

Rishi Sunak's proposed "triple lock plus" for state pensions is set to exempt 750,000 retirees from paying income tax over the next five years, according to the Institute for Fiscal Studies (IFS). 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 announcement follows the Prime Minister's pledge that state pensions will remain untaxed under the Conservative government. 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. 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."

However, the IFS has raised concerns about the proposal. They argue that it is essentially undoing previous tax policies that increased the tax burden on pensioners. Additionally, they warn that adding another layer to the triple lock could 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.

The IFS also points out that the proposal disproportionately benefits younger generations who are more likely to receive a full new state pension of £11,542. Many older women, in particular, currently receive pensions well below the threshold.

Overall, while the "triple lock plus" may provide some tax relief for pensioners in the short term, it raises concerns about the long-term sustainability of the state pension system and its potential impact on intergenerational fairness.