- Chancellor Jeremy Hunt has refused to commit to the state pension ‘triple-lock’, once again casting uncertainty over the retirement incomes of millions of people
- Tomorrow’s Consumer Prices Index (CPI) figure should, in theory, dictate state pension increases for 2024
- The state pension ‘triple-lock’ guarantees the benefit rises by the highest of average earnings, CPI inflation and 2.5%
- Abandoning the triple-lock in favour of an earning-linked increase could save HMT an estimated £4bn-£5bn a year
- If CPI comes in at 10% for September and the triple-lock is retained:
- The full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.65 per week from April next year*
- The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.05 per week*
- However, if earnings growth for the three months to July (5.5%) is used instead:
- The full-flat rate state pension would rise to £195.35 per week – £8.30 per week (or £431.60 per year) less than a 10% inflation-linked increase*
- The basic state pension would rise to £149.65 per week – £6.40 per week (or £332.80 per year) less than a 10% inflation-linked increase*
Tom Selby (pictured), head of retirement policy at AJ Bell, comments:
“The state pension triple-lock has proved a hugely divisive policy, lauded by those who argue it provides much-needed protection to retirees and criticised by others who warn it exacerbates intergenerational unfairness.
“However, in the midst of a brutal cost-of-living crisis, one thing is absolutely clear – it is extremely valuable to those in receipt of the state pension.
“In turn, the costs associated with maintaining the triple-lock next year are likely to be eye-watering – which is undoubtedly the reason the UK’s latest Chancellor, Jeremy Hunt, is reluctant to commit to the policy. Once tomorrow’s inflation figure is published, the government will come under pressure to commit to the triple-lock or announce an alternative plan for uprating the state pension in April next year.
“It is September’s CPI figure which is traditionally used to uprate the state pension. If CPI comes in at 10% and the triple-lock is retained, those in receipt of the full flat-rate state pension should see their weekly income rise from £185.15 to £203.65, or £10,589.80 per year. This would be the first time the state pension has breached the £10,000 mark.
“The basic state pension, paid to those who reached state pension age before 6 April 2016, would also be in line for triple-lock protection, if it is retained. Assuming this is the case, the basic state pension would increase from £141.85 per week to £156.05 per week.”
What would an earnings-linked state pension increase mean?
“The most obvious alternative to a full-fat triple-lock state pension increase would be to simply ditch the inflation element and apply an earnings-linked rise instead.
“While clearly better than nothing, this would amount to a real-terms cut in the incomes of millions of retirees.
“If inflation comes in at 10% tomorrow, the loss of income versus an inflation-linked increase would be over £430 a year for someone in receipt of the full flat-rate state pension. Someone being paid the full basic state pension, meanwhile, would see their income rise by over £330 less.”
Costs to the Treasury
“Office for Budget Responsibility estimates suggest every 1 percentage point increase in the value of the state pension costs the Treasury somewhere in the region of £1 billion. By that measure, moving from an inflation link to an earnings link would save the Chancellor £4-£5 billion.
“Even in the context of the huge programmes of Government spending we have seen in recent years that is a sizeable chunk of cash.
“What we have here is a genuine tussle between politics and ensuring the public finances remain on a sustainable footing.
“Clearly no politician wants to head towards a general election having applied a real-terms cut to pensioners’ incomes, and you would think No.10 will be fighting hard against such a measure.
“If the triple-lock is canned for a second year in a row, it would be hugely controversial and only add to the political pressure being piled on this government.”
*Rounded to the nearest 5p.