The State Pension will be uprated by 3.1 per cent in April, following the publication of the inflation figures for September.
Inflation, as measured by the Consumer Price Index, fell slightly between August and September (from 3.2 to 3.1 per cent). But this remains the third highest increase to the State Pension since the triple lock was introduced, despite the government removing a key plank of this protection for this year.
Normally the State Pension is uprated by whichever is highest: inflation, average earnings increase or 2.5 per cent. But the earnings element has been removed for this year after earnings figures have been distorted by the effect of Covid furlough payments. This pushed the average earnings figure up by 8.3 per cent for this year, after negative earnings growth the year before.
This uprating means that the basic state pension will be increased to £141.85 a week from next year, and the new single tier state pension to £185.15 a week. Currently it pays £179.60 a week.
It is estimated that the Chancellor will save £4.7bn by increasing this benefit in line with CPI rather than average earnings figures.
The pensions lifetime allowance is normally also increased in line with these inflation figures, but is frozen at its current limit of £1,073,100 until the 2025/26 tax year. This was announced in the last Budget.
Quilter pensions expert Ian Browne says: “The state pension triple lock has been pulled from pillar to post since the beginning of the pandemic thanks to wild swings in earnings and inflation data. Last year, we had negative earnings growth and paltry inflation numbers. This year, we’ve had the opposite problem: booming wage growth and rampant inflation thanks to the end of the furlough scheme and reopening of the economy. Nothing has really changed fundamentally speaking, but the economy is playing catch-up, and this is skewing the numbers.”
Aviva pointed out that this rise is unlikely to cover current increases in household bills, particularly energy and food costs.
Aviva head of savings and retirement Alistair McQueen says: “3.1 per cent is a backward looking measure, reflecting the rise in prices from September 2020 to September 2021. It underplays recent rises in food prices. And it does not reflect October’s 12 per cent rise in the energy price cap.
“Food and energy represent a bigger proportion of typical household expenditure for those aged 65 and above – 18 per cent of their typical monthly expenditure. Pensioners will be hit harder by these rising prices.
“With expectations of inflation rising above 4 per cent in the coming months, a 3.1 per cent rise in the state pension in 2022 looks set to be a challenging outcome for the millions who rely on the state pension. Official figures show that the state pension continues to represent the biggest single source of income for people in retirement.”
Canada Life technical director Andrew Tully adds: “Despite Government efforts to keep the lid on pension increases through the temporary double-lock, the UK’s runaway inflation data published today results in state pensions increasing by £5.55 a week for those on the new single tier system.
“The boost to state pensions will be welcomed by many retirees who are looking to balance household budgets with the inflationary headwind of ever-increasing bills. But despite what some may consider to be a generous uplift in the State Pension, the UK system remains one of the least generous in the western world.
“Any future attempt to reduce the value of the State Pension by moving to a permanent double-lock would risk a serious retirement rebellion from millions of voters and any Government would be foolish to ignore that.”