Rise in state pension by £560 anticipated for next year, potentially causing pensioner tax to be triggered for the first time in 2027.
The Pensions Commission has been revived to tackle the pension under-saving crisis that is expected to affect those retiring in the mid-century. One of the key areas of focus for the Commission will be the balance between all types of pensions, potentially including a review of the state pension.
The state pension is a crucial aspect of retirement income for many individuals. The annual basic state pension for the 2025/26 financial year currently stands at £9,175.40, set to increase to £9,607.00 for the 2026/27 financial year, marking an increase of £431.60. The new state pension, on the other hand, is projected to reach £12,534 per year in April 2022, and is expected to increase by over £560 next April, rising to £12,534.60 for the 2026/27 financial year.
The increases in the state pension are determined by the 'triple lock' rule, a government policy mechanism that guarantees a minimum annual increase in the state pension based on whichever is highest among inflation, average earnings growth, or a fixed percentage (usually 2.5%). The Bank of England recently estimated that CPI would not go above 4% this year, while average wage growth in the three months to July 2025 was 4.7%. The September figure for inflation, which feeds into the triple lock, will be published in mid October.
It is worth noting that the full new state pension is projected to exceed the basic rate income tax threshold by 2027. This means that individuals receiving the full new state pension will no longer be subject to income tax on their state pension income.
The state pension age is another important factor to consider. It will gradually increase to age 67 between 2026 and 2028, and is due to rise to 68 in the mid-2040s. Rachel Vahey, head of public policy at AJ Bell, has suggested that the state pension age may be increased to the late 2030s to save future governments' money.
In conclusion, the Pensions Commission's review of pensions will likely focus on the state pension, with the 'triple lock' rule determining the state pension rise by the highest of average earnings growth, CPI inflation, or a floor of 2.5%. The state pension age is also set to increase in the coming years, and the full new state pension is projected to exceed the basic rate income tax threshold by 2027.
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