The state pension is likely to be worth just over £11,500 from next April, after a higher-than-expected 8.5 per cent rise in average earnings.
It is widely expected that this will be higher than September’s inflation figures — given CPI currently stands at 6.8 per cent and is on a downward trend. Under the terms of the triple lock the state pension rises by whichever is higher, average earnings (over the May to July time period), September’s CPI figures, or 2.5 per cent.
After this April’s 10.1 per cent increase — based on last year’s soaring inflation figures — this latest boost means the state pension will rise by almost 20 per cent in just two years, a far higher percentage that wage rises over this period. Most state benefits, and public pay have seen far smaller increases. This has led to some comments for politicians to review how the triple lock functions, although any amendments seem unlikely with a general election looming.
The earnings data published today by the Office of National Statistics show that earnings, including bonuses have risen by an average of 8.5 per cent of the year, with the figure falling to 7.6 per cent if bonus payments are stripped out.
Former pensions minister and a partner at LCP Steve Webb says: “Pensioners are set to enjoy a substantial cash increase in April 2024, with the new state pension set to rise just over £900 per year.”
However, he points out that while this will be welcomed by many the “hidden sting in the tail” is that more pensioners will be dragged into tax net, with the personal tax threshold due to be frozen again at £12,570 for the next year.
Between 2022/23 and 2023/24, HMRC figures show the number of those aged 65+ paying income tax rose by roughly three quarters of a million from 7.73m to 8.5m off the back of the April 2023 state pension increase. Today’s figures, leading to a further rise of 8.5 per cent, would be expected to increase the number of taxpaying pensioners to 9.15m, an increase of around 650,000, according to LCP.
Aegon pensions director Steven Cameron says: “If the government delivers on its pledge to halve inflation to 5% by the end of the year, this will pack a positive punch for pensioners’ purchasing power. However, pensioners may spend a higher proportion of their income on the likes of food, which continues to experience stubbornly high price hikes.
“The triple lock has been on a wild ride in recent years due to the high level of volatility in the economy and the unpredictability of both inflation and earnings growth. Looking ahead, all eyes will be on party manifestos to see what commitments are made for the next five years, something Rishi Sunak refused to comment on last weekend.
“The huge popularity of the triple lock amongst pensioners is balanced by the huge cost of funding it, which is met by the current national insurance contributions of today’s workers. All parties must find a way to balance the books. One fairer and less unpredictable option would be to move away from a year-on-year comparison of earnings, inflation and 2.5 per cent to one which averages out across say three years.”
AJ Bell head of retirement policy Tom Selby adds: “Retirees are set to receive their second blockbuster state pension increase in a row as a result of the government’s ‘triple-lock’ policy.
“With price rises seemingly on a steady downward trajectory, it is almost certain – barring a major inflationary shock – that today’s 8.5 per cent earnings growth figure will be used for next year’s state pension rise. As a result, the full new state pension will surge to £221.20 per week, while those in receipt of the old state pension will see their benefits increase to £169.50 per week.
He adds: “From the government’s perspective, the policy means the state pension system costs the Exchequer around £11bn more versus a ‘double-lock’ to earnings and inflation, according to the IFS. By 2050, the policy could see state pension spending rise by anything between £5 billion and £45 billion a year in today’s terms
He adds that the central problem of the triple lock is that it is a policy without a clear goal. “It randomly ratchets up the value of the state pension in real terms whenever inflation and earnings growth are below 2.5 per cent. It also leaves the government exposed to spikes in inflation or earnings – a flaw which has been brutally exposed in recent years. However, any move to deviate from the triple-lock would come with significant political risk and is therefore unlikely to be countenanced by any major party, particularly with a general election less than two years away.”