State pension set for £400 boost under triple lock next year

Inflation may hold at around three per cent by year's end if oil and gas prices remain high due to the war in Iran, the Office for Budget Responsibility has indicated.

Forecasters at Pantheon Macroeconomics predict inflation could reach 3.1 per cent by September, which would take the full new state pension to roughly £12,937 annually – just under £400.

Recent weeks have seen oil prices surge following disruption to critical shipping routes, including the Strait of Hormuz, which serves as a vital artery for global energy supplies.

Mike Ambery, retirement savings director at Standard Life, said: "The conflict in the Middle East has already pushed oil prices sharply higher, and the key question now is how far those increases feed into wider energy costs including the wholesale prices that shape the UK energy price cap and ultimately, inflation."

He cautioned that climbing energy costs could affect Government spending commitments, including state pension obligations under the triple lock.

Mr Ambery noted that while higher payments would benefit retirees, the mechanism creates difficulties for public finances at a time when the government faces pressure to balance its books without raising taxes.

"With the state pension already one of the largest areas of public expenditure, inflation coming in higher than expected would place additional pressure on the public finances and renew questions about the long-term sustainability of the state pension and the triple lock," he added.

Steve Webb, partner at pension consultants LCP, warned that despite potentially generous rises compared with workers' pay increases, pensioners may not actually find themselves better off.

"Although the state pension is likely to rise next year in line with inflation, which should cushion the blow, pensioner inflation is likely to be above the headline figure, leaving many pensioners out of pocket," he said.

Mr Webb highlighted that rising energy costs pose particular challenges for older people, given that home fuel bills typically represent a substantial portion of their household spending.

He added: "To compound this, the frozen tax threshold means that for many pensioners the whole of their pension rise will be subject to tax at least at 20 per cent, leaving them even further out of pocket."

The frozen personal allowance creates additional financial pressure for pensioners receiving state pension increases.

Derence Lee, Chief Finance Officer at Shepherds Friendly, said: "With the personal allowance frozen at £12,570 until 2031, each rise in the state pension increases the likelihood that more pensioners will be drawn into paying income tax for the first time."

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Should the full new state pension reach £12,937 as projected, it would exceed the tax-free threshold by more than £360 annually.

Mr Lee warned that even modest additional income sources could trigger tax liability: "Even relatively small amounts of additional income, such as a private pension or part-time earnings, could then push them over the threshold."

This means pensioners with any supplementary income beyond their state pension would face taxation on those earnings.

Those who do not currently receive the full state pension may have options to increase their entitlement.

Individuals typically require 35 qualifying years of National Insurance contributions for the maximum new state pension, with a minimum of 10 years needed to receive any payment at all.

Gaps in contribution records can be addressed by purchasing voluntary contributions for up to six years in the past, with costs varying depending on the specific tax year being topped up.

Some people may qualify to fill gaps without cost through NI credits, which can be obtained for activities such as caring responsibilities or receiving child benefit for a child under 12.

For those on lower incomes, pension credit provides a top-up to weekly income, reaching £227.10 for single claimants and £346.60 for couples in the 2025/26 tax year.