- State pension costs could increase by £3 billion if average earnings hit 8% this year, the Officed for Budget Responsibility (OBR) warns in its Fiscal risks report
- Spike in average earnings expected in 2021 as the UK emerges from lockdown
- Triple-lock guarantees the state pension increases by the highest of average earnings, inflation or 2.5%
- Those in receipt of the flat-rate state pension currently receive £179.60 per week, while the basic-rate state pension is worth £137.60
Tom Selby, senior analyst at AJ Bell, comments:
“A spike in average earnings would present a real problem to the Treasury as it would dramatically increase the value of the state pension.
“The state pension triple-lock wasn’t really designed for a world where average earnings increase by 8% - which is entirely possible as lockdown restrictions ease and the UK economy hopefully bounces back from the lows of 2020.
“Such a dramatic increase in average earnings would cost the Exchequer around £3 billion – hardly loose change, even in the context of a pandemic which has seen borrowing rise by hundreds of billions of pounds.
“Chancellor Rishi Sunak has been clear that the Government intends to honour the triple-lock promise, so it may simply decide to wear this extra cost.
“If it does and average earnings rise by 8% that’ll represent a boon for retirees, adding just over £14 per week to the value of the flat-rate state pension.
“Alternatively, the Treasury might be tempted to adjust the earnings calculation used for the triple-lock to smooth it out over a longer period of time. This would potentially leave room to retain a lock to the highest of average earnings, inflation or 2.5%, while also protecting the nation’s short-term finances.”
