Retirees will lose thousands of pounds: why the benefit increase won't save them.

According to The Sun: Many retirees may find themselves in more difficult financial circumstances next year, despite a planned state pension increase of £562, experts warn.

According to the triple lock mechanism, the amount of the state pension increases based on the highest growth rate of wages in July, inflation in September, or a fixed increase of 2.5%.

Wages have risen by 4.7% from May to July, so this figure is likely to be used to determine the new level of the state pension.

Thus, the new state pension will likely increase from £11,973 per year to £12,535, adding an income of £562 for retirees.

The basic state pension will also rise: from £9,175 a year to £9,606, representing an increase of £431.

However, experts warn that rising living costs may absorb a larger share of this increase, meaning retirees are unlikely to feel an improvement in their financial situation.

Former pensions minister Baroness Ros Altmann noted: “There is no doubt that many retirees will be in a tougher position next year.”

She added: “Food prices, basic housing costs, energy, insurance, etc. are rising faster than other prices, and further price increases will hit low-income retirees the hardest.”

Rising household bills

Currently, inflation stands at 3.8% following a recent increase since May.

The increase in food and drink prices was the main cause of this rise; food prices have risen by 5.1% year-on-year up to August - the highest level since January 2024.

Energy bills are also expected to rise more than previously thought in October, when the energy price cap will increase from £1,720 to £1,755 - a rise of £35.

There is still no information regarding the energy price cap in April when the state pension increase will occur.

Charlene Young, senior pensions and savings expert at AJ Bell, warned that people on low incomes are already facing financial difficulties.

She said: “Low-income individuals are the most sensitive to food and energy price increases, as these expenses constitute a significant portion of their costs.”

On the other hand, Denis Reed, an activist with Silver Voices, emphasizes that many retirees are already living on the edge of poverty.

He stated: “Instead of helping retirees maintain their income levels, this year’s triple lock increase will be immediately absorbed by rising utility bills and tax increases.”

Rising tax bills

If the new state pension rises to £12,535 in April, it will be only £35 below the standard personal tax threshold, which is £12,570 - the amount of income that is not taxable.

Previously, tax thresholds were raised annually to ensure workers received about the same amount of money in real terms.

However, tax thresholds have been frozen since 2021 to increase government revenue.

This leads to more and more people finding themselves in higher tax brackets due to a phenomenon known as fiscal drag.

If tax bands remain unchanged, the new state pension should increase by less than 1% in 2027 to exceed the personal tax threshold.

This means that all retirees receiving the full new state pension will pay tax on it for the first time.

Some retirees are already feeling the impact of fiscal drag.

Among them are those who decided to postpone their state pension and now must pay taxes on their benefits for the first time.

Retirees who have other incomes in retirement may also face a situation where the increase in their state pensions is absorbed by taxes.

For example, a retiree paying higher taxes, in the case of a £562 increase in the state pension, means they lose £337 in taxes.

What can be done?

It is recommended to withdraw only the amount from your pension that is truly needed.

Now that the state pension consumes a larger part of your personal tax threshold, obtaining additional income from a private pension may lead to the obligation to pay taxes and faster depletion of savings.

By leaving money that you do not need in the pension, you allow it to grow without the fiscal burden.

You can usually withdraw up to 25% of your pension tax-free.

You do not have to do this all at once; you can take money as needed.

Before taking any action, it is advisable to consult a financial advisor to ensure you are on the right track.

Charlene Young added: “It is important for people to check all kinds of support they are entitled to.”

Use online calculators to see what you are entitled to and how much you can receive.

Turn2Us, Age UK, and GOV.UK have free calculators on their websites.

If you are struggling to pay bills, contact Age UK’s free helpline at 0800 169 65 65.

You can also join the Sun Money Chats and Tips group on Facebook to exchange tips and experiences.