Inflation has dropped to 1.7 per cent, its lowest in three years and below target, which means the 4.1 per cent earnings growth will likely result in a £473 increase to the state pension starting April 2025.
The new state pension will increase to £11,973, while the basic state pension will rise by £361 to £9,175. The Labour government has committed to maintaining the ‘triple lock’ system, which raises pensions based on the highest of earnings growth, inflation, or 2.5 per cent.
Aegon pensions director Steven Cameron says: “After many losing out on the winter fuel allowance, state pensioners can take some comfort in knowing that a 4.1 per cent increase in their state pension is expected next April. This is more than double the inflation figure of 1.7 per cent announced today.
“This rise is due to the Triple Lock formula, under which pensions increase each April by the highest of three measures – earnings growth (the year-on-year rise in average earnings for the period May to July), price inflation for the year to September (which was announced this morning as 1.7 per cent) or 2.5 per cent. As the average earnings growth – which was recalculated as 4.1 per cent rather than 4 per cent – is the highest of the three, then subject to official confirmation, this should see the state pension increase by 4.1 per cent for 2025/26.
“For someone on the full new state pension of £221.20 a week, this would equate to an increase of £9.10 to £230.30 a week, or £11,975.60 a year. For those who reached state pension age before 6 April 2016 and who are on the full basic State Pension of £169.50, the increase could be around £6.95, bringing them to £176.45 a week – £9,175.40 a year. A little-known rule is that any earnings-related element of the state pension, relating to the pre-April 2016 rules, and top ups, are only increased in line with the rate of inflation and not the triple lock. Therefore, some may find their overall state pension increase lags behind the 4.1 per cent figure.”
Just Group group communications director at retirement specialist Stephen Lowe says: “Many pensioners will see today’s news as bittersweet. Around 10 million have lost winter fuel payments of £200-£300 due to the government’s decision to restrict the benefit to lower income pensioners receiving Pension Credit.
“Taking that into account the 4.1 per cent rise doesn’t look so generous, especially as energy costs have recently risen. Large numbers of pensioners are heavily reliant on State Pension. Even a full New State Pension next year will only make up about 83 per cent of the £14,400 income needed to achieve the Pensions and Lifetime Savings Association’s ‘minimum’ Retirement Living Standard.
“Those pensioners who are struggling on low incomes should ensure they are claiming all the benefits they are entitled to, particularly Pension Credit which tops up income and is the gateway to other cash help that can total thousands of pounds. Recent government figures suggest that up to 760,000 pensioner households could be missing out on around £1,900 a year each by failing to claim, with take up lower among couples and those aged over 75.”
Standard Life managing director for retail direct Dean Butler says: “Inflation is back below the Bank of England’s 2 per cent target and, unless the Chancellor makes a shock triple lock change at the Budget, we now know the state pension will rise by an inflation-busting 4.1 per cent next spring in line with average earnings. This means that next year’s full new state pension is set to reach £11,975.60 annually, an increase of £473.
“This will come as welcome news to many, however there are possible tax implications for pensioners. The Personal Allowance, which is the amount of income you can receive before paying tax, has been frozen since at £12,570 since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full new state pension payment has grown from 70 per cent of the allowance in 2019/20 to a likely 95 per cent next year, leaving pensioners with only £594.40 of headroom before they begin paying income tax.
“While the state pension is on the up, it’s worth remembering that it still falls short of the £14,400 a single pensioner needs for a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association (PLSA). For our younger generations, one way to future proof their retirement saving is to a look at workplace or private pension provision and make sure to check it matches with their retirement expectations – there are a number of online tools and calculators that can help with this.”
Broadstone head of policy David Brooks says: “Today’s CPI data shows that inflation is now below target and at its lowest annual rate for three years following the cost of living crisis. It means that the revised earnings growth figure of 4.1 per cent released yesterday is likely to trigger around a £473 a year inflation-busting boost to the State Pension from April 2025.
“Given the loss of Winter Fuel Payments for those not claiming in Pension Credit, this will be a welcome financial boost for many pensioners. It must be noted that not everyone will benefit from the full £473 a year rise, as that will only be the increase for those claiming the full amount of new State Pension.
“Many of those with Defined Benefit pensions will also see their annual income uprated in line with inflation which will deliver another boost to their regular income. The slowdown in inflation compared to the past couple of years is also positive for those whose DB pensions are not index-linked but instead fixed or capped, typically at 2.5 per cent or 5 per cent, and is likely to take some of the heat out of vociferous calls for discretionary increases that we have seen over the past couple of years.”
Fidelity International associate director Ed Monk says: “The dip in inflation confirmed today suggests a November cut to interest rates is likely, with the question now whether borrowers can look forward to another one after that before the year is out.
“Ahead of the inflation numbers this morning the bond market was pricing in three to four quarter-point cuts before the end of next year, but that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.
“Lower inflation is good news for household budgets but also for savers and investors, who will see a higher inflation-adjusted return. Fund purchases by our clients demonstrate the appetite for cash and cash line assets, with cash and shirt-maturity bond funds featuring high in Fidelity’s list of best-sellers this year. Inflation-beating interest on cash will no doubt have tempted some investors to move money from investments into savings accounts. The good news for those savers is that rates are likely to exceed inflation for a while longer. Market prices suggest this will be the case for all of next year, at least.
“But there’s also clear signs that the path for rates – including cash interest – is falling. In that context, it may be time for investors to rebalance their allocation of cash versus investments.”