Rachel Reeves has used her first Budget speech to confirm that more than 12 million pensioners will receive a 4.1% uplift to their state pension in April.
This is due to the state pension triple lock, which the government says will be maintained for the duration of this parliament.
The 4.1% boost applies to the basic and new state pension. Someone receiving the full new state pension will gain an extra £470 a year from April, giving a total of £11,973.
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Mike Ambery, retirement savings director at Standard Life, comments: “Pensioners across the country will be relieved to see no state pension shocks in the Budget as the chancellor confirms that the state pension will rise by 4.1% to match the average earnings element of the triple lock.”
The triple lock guarantees that the state pension will rise each April by whichever number is highest out of inflation, average earnings growth, or 2.5%.
There was no mention of the Winter Fuel Payment in the Labour Budget. Critics of the decision to means-test the benefit had been hoping for a U-turn. It means the increase in the state pension will be offset by the removal of the Winter Fuel Payment for millions of pensioners, worth up to £300 this winter.
Reeves also announced that Pension Credit would rise next April, and that she will end the freeze on income tax bands in 2028 - which should help lift pensioners out of paying income tax.
We have all the details about what was announced, and what it means for your retirement finances.
What’s happening to the state pension?
As widely expected, the state pension will rise by 4.1% next year. The full new state pension will go up from £221.20 to £230.25 a week, providing an additional £470 a year. The full basic state pension will increase from £169.50 to £176.45 per week, worth an extra £360 annually.
It’s a smaller hike than the one seen in April this year, when the state pension jumped by 8.5%.
However, it is higher than the increase to working-age benefits like Universal Credit. Working-age benefits - and also the additional state pension - will rise by 1.7% in April 2025, in line with inflation.
What about Pension Credit?
The Pension Credit standard minimum guarantee will increase by 4.1% from April 2025. This means an annual increase of £465 in 2025-26 in the single pensioner guarantee and £710 in the couple guarantee.
The Treasury also announced that the administration of Pension Credit and Housing Benefit will be brought together for new claimants from 2026. “This is two years earlier than previously planned, and will support more people to receive the benefits that they are entitled to,” it said.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says it’s vital to claim Pension Credit if you’re entitled to it, as it will unlock access to the Winter Fuel Payment plus other benefits.
She comments: “It is an important, but hugely underclaimed benefit that acts as a gateway to other help such as support with council tax and a free TV licence for the over 75s. However, recent government data shows only about two-thirds of people who could benefit from Pension Credit are claiming it so the government has an uphill struggle on its hands to boost awareness.”
Will retirees have to pay a pension tax?
Due to the increases to the state pension and a freeze on the income tax threshold, some pensioners are slowly being dragged into paying tax on their retirement income.
Former prime minister Rishi Sunak previously warned that Labour would introduce a retirement tax as the full state pension (currently £11,502 a year) will soon be higher than the tax-free personal allowance (£12,570). However, Reeves announced today that the income tax bands will start to be uprated in line with inflation from April 2028.
Ambery notes: “One of the biggest tax-raising measures of recent years hasn’t resulted from a tax hike but instead the decision to freeze income tax bands at 2021/22 levels. The bands had been frozen until the end of 2027/28 tax year and it is has been confirmed that they will now rise with inflation beyond this.
“As the personal allowance will now rise beyond £12,570, many lower income pensioners will be relieved to see their state pension income less likely to fall into scope. From next April, the state pension alone will be 95% of the personal allowance, leaving pensioners with only £594.40 of headroom before they begin paying income tax.”
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