“Triple Lock Plus” to Exempt 750,000 Pensioners from Tax, Says IFS

Abrdn, a leading City investment firm, has issued a stark warning, urging the government to double the minimum contribution rate in pension pots to avert a looming retirement crisis.

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).

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 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.”

According to the IFS, this £2.4 billion initiative would partially counteract the government’s previous policy of freezing tax thresholds. 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%. Going forward, about half of this proposed tax cut is simply not following through with plans for tax rises penciled in for the next three years.”

Had the government aligned the personal tax allowance with inflation, 350,000 retirees would have already been exempt from taxation. The IFS likened Mr Sunak’s proposal to “taking £100 off someone, giving them £200, and expecting them to think they are £200 better off.”

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. Pensioners previously had significantly higher tax-free allowances until changes by the Coalition Government reduced these benefits.

In the past, pensioners enjoyed a personal allowance of at least £9,490, whereas those of working age had an allowance of £6,475. Since then, allowances for those under pension age have risen by 30% in real terms, while pensions have decreased by 10%.

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.

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. Many older women, in particular, currently receive pensions well below the threshold.