Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Attention! Your state pension is about to receive a welcome boost
The latest official inflation statistics confirm that savers will get more money from the state pension next year. Wealthier savers are also set to benefit as the lifetime allowance edges a little higher from April 2019.
STATE PENSION TRIPLE-LOCK
The state pension increases every year by the highest of Consumer Prices Index (CPI) inflation, average weekly earnings or 2.5%.
The reason the latest inflation figures are important is that the CPI figure for September is used for this so-called ‘triple-lock’. Rather confusingly, the Government compares this to July’s average earnings figure to decide by how much the state pension will increase in the following year.
Because inflation came in below expectations at 2.4%, the July average earnings figure of 2.6% will be used to raise the state pension for 2019/20.
In practice this will depend on your state pension entitlement. Anyone in receipt of the full flat-rate state pension will see their annual amount rise by £221 to £8,767.20 next year.
With inflation returning to the economy, the value of this protection against rising prices is not to be underestimated. It would be no surprise if a future government decides this promise is too generous and downgrades it, perhaps to a ‘double-lock’ with earnings
THE LIFETIME ALLOWANCE
The September CPI figure matters for savers with large pension pots too. This tax year saw the introduction of inflation-proofing for the lifetime allowance, meaning it rose from £1m in 2017/18 to £1,030,000 in 2018/19. This followed years of cuts to the figure which had seen it lowered from £1.8m in 2010.
The lifetime allowance is a limit on the value of payouts from your pension schemes that can be made without triggering an extra tax charge.
The continuation of inflation protection – assuming Chancellor Phillip Hammond doesn’t spring any nasty shocks in his Budget on 29 October – means the lifetime limit will rise to £1,054,800 in April 2019 (in a rare demonstration of generosity the Government rounds it up to the nearest £100).
It’s worth noting the lifetime allowance is mainly triggered when you turn your pension pot into an income. So, for example, if you have a £1.5m fund and use £300,000 of it to buy an annuity, you have used up £300,000 of your lifetime allowance. Another lifetime allowance test is applied at age 75 or upon death.
For those with defined benefit (DB) schemes, the lifetime allowance is simply calculated by multiplying your guaranteed pension income by 20. So someone with a £50,000 a year DB pension will not breach the lifetime allowance because £50,000 x 20 = £1m.
senior analyst, AJ Bell