"The reality is that the amounts which pensioners receive vary hugely, from a few pounds a week to hundreds of pounds a week."
- Steve Webb, former pensions minister and partner at LCP
The tax treatment of pensions and pensioners has become an issue of increasing focus in recent years. Cuts to the real value of income tax allowances and big increases in the value of the state pension has led to an increase of more than two thirds in the number of over 65s paying income tax since 2010.
In response to this, the Conservative manifesto contains a commitment to a ‘triple lock plus’ – a policy which would ensure that the personal allowance for income tax would rise in future in line with increases in the main rate of the new state pension.
As the standard rate of the new state pension (around £11,500 per year) is currently below the standard personal allowance (£12,750 per year), this policy would ensure that pensioners whose taxable income consisted exclusively of a new state pension, paid at the standard rate, would have no income tax liability.
A statement on the Conservative manifesto states: “If you vote to stick with the plan, Rishi Sunak and the Conservatives will not only guarantee the Triple Lock — we’ll introduce the Triple Lock Plus. This means the personal allowance for pensioners will rise every year — ensuring they NEVER pay tax on their state pension”.
However, new research from LCP shows that there is huge diversity in the amount of state pension which people receive, and an excessive focus on the single figure of the standard new state pension may miss a significant group of pensioners who receive much more than the standard amounts.
There are currently two separate state pension systems in operation in the UK, and most pensioners are not on the new system; in 2023/24 there were 8.4m pensioners who reached state pension age before 6th April 2016 who come under the ‘old’ state pension system, and 3.2m who reached pension age after this date who come under the ‘new’ state pension.
The old state pension system was complex, combining a basic state pension for those who met certain National Insurance contribution tests with a highly variable additional state pension (often called SERPS) which could range between zero and over £200 per week; some of the largest state pensions in the UK are paid to those who come under the old system and have large SERPS pensions.
The new state pension system is designed around a standard rate, but a significant minority of new state pensioners may receive more than the standard figure because of transitional protection of accrued rights built up prior to 2016. In simple terms, those who had built up a pension under the old rules bigger than the new flat rate as at 2016 were allowed to retain this higher entitlement even when the new rules were introduced.
LCP analysis of DWP’s figures on state pension receipt suggests that a significant number of pensioners have a sufficiently large state pension – mostly built up under the old system - that they are over the existing income tax personal allowance purely on the basis of their state pension; these people would, for the most part, still be taxpayers even if a ‘triple lock plus’ policy were to be introduced.
The LCP found that around 2.5m pensioners, or just over 1 in 5 of all pensioners resident in Great Britain, have state pensions above the income tax threshold.
Of these, the large majority – 2.1m – are older pensioners on the ‘old’ state pension system; this group splits fairly evenly between men and women.
In addition, around a third of a million pensioners on the new state pension are receiving pensions above the income tax allowance; these are overwhelmingly men.
The ‘triple lock plus’ policy will deliver a lower tax bill for millions of pensioners than a policy of continuing to freeze personal allowances. However, for around 1 in 5 pensioners it will not deliver the stated objective of ensuring that their state pension is completely free of income tax.
Steve Webb, former pensions minister and partner at LCP, said: “With record numbers of pensioners now paying income tax, there is an understandable focus on pensions and tax. But much of the discussion has assumed that pensioners typically receive a standard rate of pension such as the new flat rate of around £11,500 per year. The reality is that the amounts which pensioners receive vary hugely, from a few pounds a week to hundreds of pounds a week. We estimate that around 2.5m pensioners, or more than 1 in 5 of all pensioners, have state pensions in excess of the income tax threshold. These pensioners would overwhelmingly continue to be taxpayers even if future policy linked the income tax allowance to increases in the headline rate of state pension."
