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3 Mar 2021

Budget 2021: state pension to rise by 2.5%

Chancellor leaves triple lock untouched but freezes the pensions lifetime allowance

The state pension will rise by 2.5% in the 2021-22 tax year, equating to a boost of £228.80.

Meanwhile the Chancellor, Rishi Sunak, announced in today's Budget that the pensions lifetime allowance (LTA) - the total amount you can save into private pensions without incurring a hefty tax charge - will be frozen at £1,073,100 until April 2026.

He left the core pension tax relief system unchanged, despite considerable speculation that the government would make it less generous.

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State pension to get a 2.5% boost

The state pension will increase by 2.5% from 6 April 2021.

State pension recipients who are entitled to the full level of new single-tier state pension will get £179.60 a week from 6 April 2021, up from £175.20.

The change means pensioners will be up to £228.80 better off by the end of the 2021-22 tax year, taking their total state pension income to £9,339.20.

Those who reached state pension age before April 2016 receive the basic state pension. At its full level this is worth £134.25 a week, rising to £137.60 next year.

The increase equates to a £174.20 pay rise in 2021-22, taking the total over a year to £7,155.20.

Both old and new state pensioners can receive more than the full amount if they've previously built up additional state pension.

Our graph shows the amount of state pension you receive per week.

How the triple lock works

The 2021-22 rise is thanks to the triple lock guarantee, which states that the state pension must rise by either September's price inflation, average earnings growth or 2.5% - whichever is higher.

As September 2020's level of inflation (as measured by the Consumer Prices Index) was 0.5%, and average earnings growth was recorded at -1% due to the effects of furlough pay and reduced bonuses, the government used the 2.5% measure to increase state pension payments.

The government introduced a new Bill in September 2020 to ensure that state pension payments would rise in 2021 - previously, the triple lock had included a technical detail which said state pension payments could only rise if average earnings growth had risen.

This was the case during the pandemic and would have frozen state pension payments for this year. There has been plenty of speculation that the triple lock will be sacrificed going forward to cut costs and it may be that this is the last time that it will be applied

Listen:our experts discuss the Budget on the Which? Money Podcast.

Lifetime allowance frozen at £1.073m

The pensions lifetime allowance has been frozen at £1,073,100 until April 2026.

You can save as much as you want to in your pension during your working life - but if it exceeds a total amount (the lifetime allowance), you could be hit with a hefty tax charge when you come to access this money.

The lifetime allowance freeze will mean an estimated 10,000 pension savers will exceed the threshold and become liable for a charge of 25% (if accessing their money via an annuity or income drawdown) or 55% (if taking a lump sum).

The move is expected to generate a total of £990m for the Treasury.

Tom Selby, senior analyst at AJ Bell, said: 'The decision to scrap lifetime allowance inflation protection for the rest of this Parliament is likely less about the modest 0.5% rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years.

'If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards - and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net.'

Our graph below illustrates how the pension lifetime allowance has changed over recent years.