State pension likely to top £13,000 a year as UK wage growth slows to 3.9%

The state pension is expected to top £13,000 a year, reigniting the debate about its long-term affordability and generational fairness.

The full, flat-rate state pension is expected to rise by £488 a year in April, based on the latest official earnings figure released on Tuesday.

The so-called triple lock pension policy guarantees that the state pension will increase by either average wage growth, inflation or 2.5% - whichever is highest.

Labour made a manifesto pledge to keep the triple lock until 2029, however economists have warned about the cost of the policy ahead of the Budget although pensioner groups say many people still face poverty in old age.

'Substantial' cost

The triple lock was designed to ensure the value of the state pension was not overtaken by the increase in the cost of living or the incomes of working people.

Although the state pension age is rising to 67, the cost to the government has risen considerably too. Forecasts suggest state pension spending, already at £154bn this year, could go up by a further £600m a year by 2029-30.

The policy is "crazy," Ruth Curtice, the chief executive of the Resolution Foundation think tank, told the BBC.

The triple lock is creating a "ratchet effect" where "pensioners' living standards grow even faster than just a typical worker," she added.

"Pensioners have seen living standards grow three times more than typical workers over the last 20 years."

Jonathan Cribb, deputy director of Institute for Fiscal Studies (IFS) think tank, said: "Each increase in spending builds upon the last and so the long-run cost is substantial but very uncertain."

How much could pensioners receive?

The state pension is expected to match wage growth in the next calculation and is likely to be higher than the rate of inflation.

Average wage growth, including bonuses, stood at 3.9% between May and July, according to the Office for National Statistics (ONS), external, down from 4.2% between April and June.

But it is higher than average pay growth, not including bonuses, which rose by 3.5%.

This means:

the flat-rate state pension - for those who reached state pension age after April 2016 – will likely be £250.70 a week, or £13,036.40 a year. That would be an increase of £488

the old basic state pension - for those who reached state pension age before April 2016 – will likely be £192.10 a week, or £9,989.20 a year, an increase of £374.40

Pensioner groups have said older people face significant cost of living pressures, such as high energy bills and the state pension itself remained relatively small compared with state provision across Europe.

Will pensioners pay tax?

Almost 13 million people receive the state pension in the UK. If it does rise by 3.9%, it would take the flat-rate state pension above the personal allowance of £12,570 and therefore be liable for income tax.

The Labour government - when Rachel Reeves was chancellor - promised that pensioners who rely solely on the state pension would not be required to complete a tax return, nor be chased to pay.

However, when asked by the BBC on Tuesday, Business Secretary Jonathan Reynolds refused to confirm that pensioners reliant on the state pension will be exempted from paying income tax.

He said: "The vast majority of people in Britain have their own private pension provision alongside the state pension so this wouldn't be a substantial change for them, they'd already certainly be receiving an income in that case above the personal allowance.

"Any changes to personal allowances, to tax rates, take place in the Budget, that's on 28 October."

He was repeatedly asked to confirm the previous pledge, but again pointed to the Budget.

Analysis by consultants LCP suggested that only one in 16 pensioners would benefit if the government kept to its previous pledge, saving about £91 each a year.

The majority of pensioners have additional pension income and so pay income tax already.

"The government's plans to address this point are a mess," said Sir Steve Webb, a partner at LCP and a former Liberal Democrat pensions minister.

Shadow chancellor Andrew Griffith said: "Unless [prime minister Andy] Burnham acts, Labour are about to tax pensioners.

"People living on nothing but their state pension are now facing a tax bill for the first time ever. Many will spend the last years of their lives filing tax returns or hanging on HMRC telephone helplines."

The ONS also published figures on the UK labour force.

While the unemployment rate was unchanged at 4.9%, the number of vacancies and employees on payrolls fell in recent months.