AJ Bell’s Tom Selby comments on potential state pension increase of £746.20

by | Jul 16, 2021

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Tom Selby, senior analyst at AJ Bell
  • The flat-rate state pension could increase by £746.20 to £10,085.40 next year (£193.95 per week) if average earnings increase by 8%
  • Today the ONS confirmed average weekly earnings increased by 6.6% (7.3% including bonuses) in the three months to the end of May, up significantly from the 5.6% announced for the three months to end of April
  • The state pension triple-lock normally uses the average earnings figure from the three months to the end of July and there is every chance average earnings continue to spike as society emerges from lockdown
  • Even a more conservative estimate of a 5% earnings jump would raise the value of the flat-rate state pension by £468 to £9,807.20 in 2022/23 (£188.60 per week)
  • The Office for Budget Responsibility (OBR) estimates every 1 percentage point rise in the state pension will cost the Treasury around £900 million
  • Policy options include scrapping the earnings element or smoothing it over a longer time period

Tom Selby (pictured), senior analyst at AJ Bell, comments:

“Chancellor Rishi Sunak faces being caught between the Devil and the deep blue sea on the state pension triple-lock.

“While the policy could add billions of pounds to public spending at a time of severe fiscal pressure for the country, unpicking it would break a manifesto commitment.

 

“If average earnings spike by 8% in the three months to July, which looks entirely plausible based on the current data, this could increase the value of the flat-rate state pension by £746.20 to over £10,000 a year, or £193.95 per week.”

The problem

“Lockdown has created an extreme set of circumstances which saw salaries suppressed in 2020, with millions of people furloughed on 80% of their usual wages.

 

“As the economy returns towards something closer to ‘normal’ this summer, both earnings and inflation – two of the three elements of the triple-lock – are expected to spike.

“In the three months to May total average earnings rose by an eye catching 6.6% and many expect the figure for the three months to July – historically used as the reference point for the triple-lock – to be even higher.”

Policy options for the Chancellor

 

“The Office for Budget Responsibility (OBR) estimates an 8% increase in average earnings could cost the Exchequer around £3 billion versus its March earnings forecast of 4.6%.

“In fact, the OBR reckons every 1 percentage point added to the state pension via the triple-lock costs the Treasury just shy of £1 billion. Such numbers are enough to make any Chancellor wince even during normal economic times, let alone after a year when borrowing has ballooned by hundreds of billions of pounds.

“One option would be to ditch the earnings element of the triple-lock altogether, either for this year only or perhaps the rest of this Parliament. The amount of money this would save would depend on what happens to inflation during that period.

 

“However, the political price of breaking a manifesto commitment that affects older voters may be too much to bear.

“Alternatively, the triple-lock methodology could be tweaked so average earnings over a longer period of time are used as the reference point, rather than the figure for the three months to July.

“This would help smooth out the increase while also allowing the Chancellor to say the triple-lock remains intact.”

 

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