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Increases to the state pension and lifetime allowance

  • Fourth time the minimum uplift has been used to increase the Single Tier State Pension by 2.5% to at least £179.60 a week from April 2021 (currently £175.20 a week)1
  • For those who reached state pension age before April 2016, the basic State Pension will increase from £134.25 to £137.65
  • The Pensions lifetime allowance will go up by around2 £5,800 to a new limit of £1,078,900 (currently £1,073,100) from the new tax year

 

The latest data shows UK inflation (CPI) grew by 0.5% in September 20203. The reported change in inflation for September is important as a number of state benefits are uprated annually in line with this data. Because of the triple lock guarantee, the Single Tier State Pension will increase by the minimum uplift of 2.5% to £179.60 a week from April 2021. This is only the fourth time since the triple lock was introduced that the minimum uplift has been used.

 

Andrew Tully, Technical Director, Canada Life commented:

“The inflation busting increase to state pensions will be a welcome boost for the many retirees who are looking to balance household budgets during the coronavirus pandemic. It further highlights the value of the triple lock with pensioners getting an increase well above both earnings growth and inflation.

 

“Despite what many may consider to be a generous uplift in the State Pension, the UK system remains one of the least generous in the western world. Any future attempt to reduce the value of the uplift by moving to a double-lock or some other mechanic would risk a serious retirement rebellion from millions of voters and any Government would be foolish to ignore that.

 

Commenting on the increase in the lifetime allowance, Andrew said:

 

“Another small increase in the amount people can save into a pension before being hit by the lifetime allowance is helpful and will present new financial planning opportunities. However, it again highlights the complexity of having restrictions as people make pension contributions and restrictions when people take benefits. Simply scrapping the lifetime allowance and letting the annual allowance do its job would simplify the system and not penalise those people who benefit from good investment growth.”

 

History of the State Pension Triple Lock

Introduced by the Conservative led collation Government in 2011/12, the ‘triple lock’ guarantees to uprate the basic State Pension and Single Tier State Pension by the highest of earnings, prices (CPI) or 2.5%.

 

Since 2011/12, the following benchmarks have been used for the annual uprating in line with the triple lock guarantee.

 

2011-12

4.6% (RPI)*

2012-13

5.2% (CPI)

2013-14

2.5% (minimum uplift)

2014-15

2.7% (CPI)

2015-16

2.5% (minimum uplift)

2016-17

2.9% (earnings)

2017-18

2.5% (minimum uplift)

2018-19

3.0% (CPI)

2019-20

2.6% (earnings)

2020-21

4.0% (earnings)

2021-22

2.5% (minimum uplift)

*RPI subsequently changed to CPI in the following years

 

History of the Pensions Lifetime Allowance

The Lifetime Allowance was introduced in April 2006 as a measure to restrict the overall value of pension savings. It was set at £1.5m in tax year 2006/07 and increased annually to a high of £1.8m in 2010-2012. The allowance has been reduced over subsequent tax years to a current £1,073.100.  The latest HMRC data4 shows the total tax take from the Lifetime Allowance charge has increased by more than 1323% from £13m in 2006/07 to £185m in 2017/18. The number of charges levied has increased by 499% from 760 in 2006/07 to 4,550 in 2017/18 tax year.

 

  1. The State Pension is currently increased annually either by inflation (CPI), earnings or 2.5% ‘the triple lock’, whichever is the highest number. Average weekly earnings for the three months to July 2020 was -1%. Source:

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/kac3/lms/

  1. The increase will be around this figure and will depend on the actual formula applied by HMRC.
  2. Source: Statistics Consumer Price Index (September 2020) https://www.ons.gov.uk/economy/inflationandpriceindices
  3. Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/744154/PEN8.pdf