Pensioners will see their state pension rise at five times the current rate of inflation next April, as the triple lock kicks into effect.
The Office of National Statistics published inflation figures for September today, which help determine the rise in a range of benefits including the state pension.
ONS figures show that annual increase in the Consumer Price Index (CPI) was just 0.5 per cent in September. However the triple lock ensure pensions rise by the highest of CPI, the growth in annual earnings or a floor of 2.5 per cent.
With annual earnings falling, this means pensioners will see a 2.5 per cent rise next year.
LCP partner Steve Webb points out that this means that a single pensioner currently on the full new state pension of £175.20 would get an extra £4.40 per week, whilst an older single pensioner on the old basic state pension of £134.25 would get an extra £3.35 per week.
This is the third year in a row that pensioners have enjoyed an inflation-beating increase to their state pension, as previous upratings have been 3.9 per cent and 2.6 per cent – both in line with average earnings growth.
Webb points out that the biggest challenge will be next year, as it is widely expected that average earnings will bounce back from the depressed level seen this year, especially for workers on ‘furlough’.
Webb says The Office of Budget Responsibility has pencilled in a 5 per cent figure for use in next year’s triple lock calculation. This would add a further £9 per week to the basic pension and might be challenging if inflation remained low and unemployment was rising.
Webb says: “Despite low inflation and falling earnings, the triple lock policy is likely to lead to the main state pension rate rising by 2.5% next April, an increase of five times the rate of inflation. Given that the UK state pension is still low by international standards, the Chancellor may feel justified in going ahead with such an increase.
“He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5% or more. At that point we may see a more ‘flexible’ interpretation of the government’s manifesto commitment to keep the triple lock.”
Aegon pensions director Steve Cameron adds: “Since April 2019, the state pension has received an above inflation increase with the 3.9% increase in April 2020 2.2 per cent higher than price inflation and next year’s exceeding inflation by a further 2 per cent. While this will be welcomed news in a difficult climate for pensioners, concerns remain over both the affordability and intergenerational fairness of maintaining the triple lock.
“The state pension is not funded in advance but on a ‘pay as you go’ basis from today’s workers’ National Insurance contributions. The Chancellor will no doubt be facing difficult decisions over whether he can afford to retain the triple lock as he supports the economy through wave two of the pandemic and looks ahead to getting the nation’s finances back on track.”