Next year’s state pension triple lock hike could smash inflation
BBC Money Box experts explain increases to State Pension
This will be brilliant news more than 12 million retirees who depend on the state pension for some or even all of their retirement income. Yet it could also hand more ammunition to long-term clinics of the triple lock mechanism, who claim it is unaffordable.
The triple lock, introduced by the coalition government in 2010, has boosted the incomes of millions of pensioners. It does this by increasing the state pension every year by inflation, earnings or 2.5 percent, whichever is highest.
It’s done a terrific job. When it was temporarily suspended in the 2022/23 tax year, pensioners suffered.
The triple lock would have given pensioners a pay rise of 8.3 percent in April 2022, based on earnings growth.
Rishi Sunak, who was then Chancellor, decided the pandemic had distorted wages, and scrapped the earnings element of the triple lock.
Instead, pensioners got a rise of just 3.1 percent just as inflation was going through the roof and millions felt cheated as a result.
They got a double-digit increase of 10.1 percent in April this year, based on the inflation figure for September 2022, the month that applies under the triple lock.
Most of us assumed the April 2024 state pension hike would also be driven by inflation. However, that seems unlikely as UK wages are on course to rise faster than prices.
And that could spell good news for pensioners.
In the three months to June, earnings climbed by 7.3 percent as workers demanded bigger pay rises to keep up with inflation and employers battled to retain staff amid shortages.
The triple lock will use earnings figures for the three months to July, published next month.
Capital Economics forecasts wages will rise by 7.4 percent over that period, and that will beat September’s inflation figure.
In June, inflation dropped more than expected to 7.9 percent, and Capital Economics now predicts it will fall again in July, to just 6.5 percent.
That trend is expected to continue, which could even see inflation fall below six percent by September.
By next April, when the triple lock increase comes into force, inflation could be heading towards four percent or lower.
In this scenario, a wages-based increase of 7.4 percent would be well worth having and offer some relief to pensioners after the agonies of the cost-of-living crisis.
It won’t lavish them with riches as the state pension isn’t enough to live on, but it will offer some much-needed respite. The worry is that it could intensify calls for the mechanism to be scaled back or scrapped.
Earnings growth now looks set to beat inflation for the first time in 14 months, said Steven Cameron, pensions director at Aegon. “If that happens, pensioners could be winners.”
The new state pension currently pays £10,600 a year to those who retired from April 6, 2016, assuming they qualify for the maximum amount.
An increase of 7.4 percent would increase that by almost £785, lifting the payout to £11,385.
However, older retirees on the basic state pension, which pays a maximum £8,122, would get a lower pay rise of £601.
This would lift the basic state pension to around £8,723, notably lower than its successor. However, many will get this topped up by additional state pension, such as the state second pension (S2P) and state earnings related pension scheme (Serps).
David Pye, director at consultancy Broadstone, said those on the new state pension will get hundreds of pounds more income for the second year in a row. “At this rate of increase, it won’t be long before retirees start tripping over the £12,570 income tax threshold solely based on their state pension.”
The Office for Budget Responsibility recently reported that spending on the state pension will hit £124billion this year then continue to rise.
Pye warned: “With government finances under pressure, the soaring cost of the triple-lock will raise further questions around its long-term viability.”
The triple lock has been a big win for pensioners and the Daily Express has campaigned for its retention.
It will raise its voice again if need be. Millions of state pensioners are struggling even with the triple lock in force. They would do far worse without it.
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