At­ten­tion! Your state pen­sion is about to re­ceive a wel­come boost

There is some pleas­ing news for peo­ple in re­tire­ment

Shares - - MONEY MATTERS -

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 ‘triple­lock’. 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 fla­trate 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 and in­fla­tion.

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.

Tom Selby, se­nior an­a­lyst, AJ Bell

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