- Tomorrow’s Consumer Prices Index (CPI) figure is set to confirm how much the state pension will increase by in April next year
- The ‘triple-lock’ guarantees the state pension rises by the highest of average earnings growth, inflation or 2.5% each year
- Seasonally adjusted pay growth for the three months to July, which came in at 8.5%, is the figure that usually counts for the triple-lock, while CPI for the year to September is the key inflation figure
- Markets are anticipating a CPI figure of 6.6% tomorrow, implying the state pension will increase by 8.5%, in line with average earnings growth in July
- Assuming July’s earnings growth figure is used for the triple-lock, this would imply:
- An increase in the old state pension from £156.20 per week to £169.50 per week (£8,814 per year)
- An increase in the new state pension from £203.85 per week to £221.20 per week (£11,502.40 per year)
- If the government opts to instead use the average earnings growth figure that strips out bonuses, which came in at 7.8%, this would imply:
- An increase in the old state pension from £156.20 per week to £168.40 per week (£8,756.80 per year)
- An increase in the new state pension from £203.85 per week to £219.75 per week (£11,427 per year)
- Had the new state pension increased in line with either inflation or wages since 2011, it would be worth around £180 per week today – meaning the policy has added an extra £11 billion a year to public spending, according to the Institute for Fiscal Studies (IFS) (The triple lock: uncertainty for pension incomes and the public finances | Institute for Fiscal Studies (ifs.org.uk))
- In 2022/23, the government spent £110 billion on state pensions, with the Office for Budget Responsibility (OBR) predicting real-terms state pension spending will rise by £23 billion by 2027/28
Tom Selby, head of retirement policy at AJ Bell, comments:
“Inflation is still running hot and well above the Bank of England’s 2% target, but it is average earnings that are set to provide the latest bumper boost to the value of the state pension.
“Assuming the triple-lock is applied in April 2024 and the approach taken in previous years is maintained, pensioners should receive an inflation-busting 8.5% rise in their state pension in April, in line with July’s average earnings figure.
“This would take the value of the full ‘new’ state pension to £221.20 per week, or over £11,500 per year. It’s worth noting that as long as tax thresholds remain frozen, some of the benefit of these income rises will be lost through the application of income tax. Indeed, the full new state pension is fast approaching the personal allowance of £12,570, meaning it won’t be long before the full state pension is above this allowance.
“Given the fiscal challenges facing chancellor Jeremy Hunt, there have been reports he could look to tinker with the earnings measure used for the triple-lock to save the Treasury a bit of cash. Using the earnings figure which excludes bonuses, for example, would allow him to provide a slightly lower increase while keeping the core triple-lock pledge. Whether or not voters would view that as a reasonable move or a stealth attack on their pensions is another question entirely.
“Ditching the earnings link altogether and increasing the state pension by inflation instead may be tempting from a fiscal perspective, potentially saving the Exchequer billions of pounds. However, with a general election edging closer and the Conservatives trailing Labour in the polls, it is hard to imagine No.10 countenancing such a move.”
The case for reviewing the state pension
“A fundamental issue with the triple-lock is that it remains a policy without a clear aim. Instead, it randomly ratchets up the value of the state pension in real terms whenever inflation and earnings growth are below 2.5%. The triple-lock also leaves the Exchequer exposed to spikes in inflation or earnings each year. In April this year, for example, a 10.1% increase was applied, in line with CPI the previous September. 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.
“What savers of all ages need from the government is stability when it comes to state pension policy. Ideally, that would come through cross party agreement on how much income the state pension should provide in retirement and how much of someone’s later years should, on average, be spent in receipt of the benefit. Serious consideration should also be given to developing smoothed earnings and inflation measures which can then be used to deliver less volatile annual increases.
“Sadly, there is currently a vacuum of sensible debate on the state pension, with the triple-lock essentially used as a totem for ‘doing right by older people’. Another independent review of the state pension will likely be needed to break this cycle and build the foundations of a consensus on what the state pension should look like over the long-term.”
