Increase in State Pension Expected by £560 for Year Ahead, Potentially Triggering Pensioner Tax in 2027 for the First Time
The UK government has announced several changes to the state pension system, with adjustments to the state pension age, increases in payments, and a renewed focus on addressing pension under-saving.
Firstly, the state pension age will gradually increase. By 2028, it will reach 67, and it's projected to rise to 68 in the mid-2040s. This change is part of a long-term plan to ensure the sustainability of the state pension system.
The state pension is set to receive another inflation-beating boost. For the 2025/26 financial year, the basic state pension stands at £176.45 per week, and it's expected to increase to £184.75 per week for the 2026/27 financial year, an increase of £8.30. Similarly, the new state pension for the same years is £230.25 and £241.05 per week, respectively, with an increase of £10.85.
The debate over the future of the 'Triple Lock', means-testing, or alternative funding, such as via the introduction of a national insurance contribution, is likely to intensify. The Triple Lock is a government policy ensuring that state pensions increase every year by the highest of three measures: inflation, 2.5%, or average earnings growth, a policy that was introduced in 2010.
Average wage growth, including bonuses, in the three months to July 2025 was 4.7%. With a 4.7% increase in April 2026 and a 2.5% increase the following year, the full new state pension could reach at least £12,850 in April 2027.
However, for pensioners who rely solely on the state pension, there's a change on the horizon. For the first time, anyone relying just on the state pension in retirement will have to pay income tax from 2027. This means that the full new state pension, which is currently less than a pound a week short of the basic rate income tax threshold, will push many pensioners into the tax bracket.
The government has also revived the Pensions Commission as part of a long-term plan to address the pension under-saving crisis of those due to retire in the mid-century. The Pensions Commission will look at the relative success of automatic enrolment, contribution rates among employers and workers, and solutions for the self-employed. The Commission also promises to look at the balance between all types of pensions, which could mean a review of the state pension.
The latest inflation data showed inflation held at 3.8% in August. The September figure for CPI inflation, which feeds into the Triple Lock, will be published in mid-October, and it will determine the exact increase for the state pension in April 2026.
For pensioners who receive the additional state pension, the increase will be in line with the CPI figure for the year to September. With these changes, it's essential for pensioners and those approaching retirement to stay informed and plan accordingly.
