How Rachel Reeves’ ‘painful’ Autumn Statement could affect your state pension
THE new government’s first Autumn Statement will be held on October 30 to set out plans for the country’s finances.
Chancellor Rachel Reeves has said there is a £22billion “black hole” in the public purse which the Labour government is looking to fill.
But the government has warned that in order to do this, “difficult decisions” need to be made and the Autumn Statement will be “painful” for many.
Changes to the state pension and tax rises are, as ever, on the table – but very little has been confirmed so far.
We’ve asked the experts what they think could be announced and got them to explain what any potential changes would be mean for your finances. Here’s what they said.
Triple lock tweaks
The “triple lock” is a mechanism which automatically increases the state pension each year by the highest out of the following: the average rate of inflation, average wage growth or 2.5%.
The guarantee was introduced by the Conservative Party in 2010 to ensure that the state pension will rise every year, no matter what.
The amount of state pension you get goes up in April each year and is currently worth up to £221.20 a week.
However, the triple lock is very expensive for the government to keep up.
It’s forecast to cost an extra £34billion a year by 2028 to 2029, the Office for Budget Responsibility estimates.
As a result, experts say removing this guarantee could be a way for the government to save a significant chunk of money.
The previous Conservative government said it would keep the triple lock in place if it won the election.
Labour then matched this promise, with Ms Reeves telling parliament in July: “I repeat today the commitment we gave that we will protect the triple lock.”
However, John Greer, head of retirement policy at Quilter, said it is unlikely that Labour will break this promise any time soon.
“Changes to the triple lock are unlikely to be announced at the Budget following the Chancellor’s commitment to maintaining it for the remainder of this parliament,” he said.
However, last month the government launched a pension review to boost investment, increase saver returns and tackle waste in the pensions system.
Mr Greer suggested this could “perhaps start the journey for change that removes the politics from the triple lock” down the line.
How to fill in your National Insurance gaps
THERE are several reasons why you may have gaps in your National Insurance record, including:
- If you were employed but had low earnings
- Were unemployed and were not claiming benefits
- Lived or worked outside the UK
- Were self employed but did not pay as you made a small profit
Gaps in your record can mean that you do not have enough qualifying years of National Insurance contributions to get a state pension or qualify for certain benefits.
You need 35 years of National Insurance contributions to get the full state pension, which is worth £11,502.40 a year.
One way to fill in any gaps in your record is to make voluntary contributions.
You can usually pay voluntary contributions for the past six years but you can sometimes pay for gaps from more than six years ago, depending on your age.
You have until April 5 each year to pay.
Another option is to claim specified adult childcare credits, which are also known as grandparent credits.
These credits can be claimed when a parent receiving child benefit is paying National Insurance and is able to work because another family member is looking after a child under 12.
You can check your National Insurance record at gov.uk/check-national-insurance-record or by calling the National Insurance Contributions Office on 0300 200 3500.
Tax thresholds
The government has promised not to increase tax rates for working people – but millions will still end up paying more tax than they did last year, including state pensioners.
This is because the income tax bands, which are used to calculate what tax rate you will pay, are frozen until 2028.
Workers who earn between £12,571 to £50,270 a year currently pay tax at a rate of 20%.
The first £12,570 is tax-free.
Meanwhile, those who bring home between £50,271 to £125,140 pay tax at 40% on income which falls between these thresholds.
Workers who earn over £125,140 are taxed at 45% on any earnings above this amount.
Frozen tax thresholds mean that as wages and the state pension rate rise, millions of people will be dragged into higher tax brackets.
Dennis Reed, director of campaign group Silver Voices, said frozen tax thresholds will draw more state pensioners into paying tax for the first time.
“The state pension as it stands is insufficient to provide life’s necessities, so every penny in tax on that pension is a hammer blow for the living standards of older people,” he said.
One in five pensioners are expected to be taxed at the higher or additional rate by 2028 due to these frozen thresholds, according to a freedom of information request sent by wealth firm Quilter to HMRC.
Around 2.7million people aged 60 and over will be brought into the higher rate of income tax between the tax years 2022/23 to 2027/28.
Meanwhile, nearly half a million will be brought into the top additional rate band.
It is unlikely the government will unfreeze these thresholds for now as it would cost them to do so.
Raising the state pension age
Raising the age at which people can start claiming state pension would be another way for the government to save a significant amount of money.
Men and women born between October 6, 1954 and April 5, 1960 currently start receiving their pension at the age of 66.
The state pension is set to rise to 67 between 2026 and 2028 before being upped to 68 between 2044 and 2046.
A report published by London School of Economics Centre for Economic Performance this week urged the chancellor to raise the state pension age to 68 “as soon as is possible” to save money.
However, experts suggest this would be “a difficult thing to do at this stage”.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “There’s only so far the government can push this as on average we only make it to around age 63 in good health,’ she said.
“If the state pension age rises much beyond this, there will be huge swathes of people who are too sick to work, five years before they qualify for a pension.”
Means testing the state pension
One of the most radical reforms to the pension system that Labour could consider is to “means-test” the state pension.
This would mean that wealthier retirees would receive less, or even are denied the benefit altogether.
Sir Edward Troup, one of four senior tax advisers appointed by Ms Reeves, last month suggested that the state pension should be means-tested in an interview with LBC.
This would be a hugely controversial move, but he said a debate “needs to be had”.
However Sarah Coles suggests that means testing is very unlikely and “remains a real outside chance”.
“Means testing the state pension could help shave billions off the pension bil,l but at the cost of the financial security of millions of people,” she said.
“The state pension is the foundation of most people’s retirement incomes, so people need certainty as to what they will get and when.”
Trade publication Citywire also recently reported that the government has “no plans” to means-test the state pension.
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