State pension to rise by 2.5% as inflation lags at 0.5%

The state pension will rise by £4.40 per week, or £228.80 a year, in 2021 following confirmation from the Office for National Statistics that CPI inflation rose by just 0.5 per cent in September.

Under the current triple lock strategy for state pensions, the benefit’s annual increases are kept in line with whichever is highest out of CPI inflation, earnings growth or 2.5 per cent, with 2021 set to herald a 2.5 per cent increase after the Covid-19 pandemic pushed earnings to a 1 per cent decline.

Unless there are some last minute changes from the government, it is the fourth time that the minimum 2.5 per cent increase has been instituted since the creation of the triple lock in 2011.

Aegon pensions director, Steven Cameron, pointed out that this was the third consecutive “inflation-busting increase” to the state pension, as the benefit had been hiked by earnings growth of 3.9 per cent and 2.6 per cent in 2020 and 2019 respectively.

Cameron continued: “While this will be welcomed news in a difficult climate for pensioners, concerns remain over both the affordability and intergenerational fairness of maintaining the triple lock.

“The state pension is not funded in advance but on a ‘pay as you go’ basis from today’s workers’ National Insurance contributions. The Chancellor will no doubt be facing difficult decisions over whether he can afford to retain the triple lock as he supports the economy through wave two of the pandemic and looks ahead to getting the nation’s finances back on track.”

The triple lock system has faced scrutiny since Covid-19 began having a severe impact on the economy, with various commentators expressing concern that a rapid economic recovery could lead to the state pension rising sharply and damaging government coffers in 2022.

Royal London pension specialist, Helen Morrissey, said: “While the triple lock plays an important role in safeguarding pensioner incomes it will leave government with a headache next year. With wage growth expected to rebound we could see pensioners receiving record rises in state pension which will stretch government purse strings even further.”

However, Hymans Robertson partner, Chris Noon, spoke out in support of continued use of the triple lock, stating that scrapping it “would not be a wise short-term fix” to pressure for continued public spending to prop up the economy through a second wave of Covid-19.

He continued: “It is unlikely to provide suitable cost savings in the medium to long term, removes an important safety net for pensioners and would risk a widening gap between incomes for working and pensioner households.

“It is more likely that, as consumer confidence eventually returns and we see employment rates begin to recover, inflation and salary increases will outstrip the 2.5 per cent guaranteed by the triple lock in 2022 and possibly in the years beyond this. Therefore, keeping the triple lock is important as it will retain a valuable protection to low income pensioner households.

“If the government is looking to restrict future state pension increases, a fairer approach may be to adjust the earnings increase criteria to account for increases over a longer period, which would align employment and pensioner income increases more closely.”

    Share Story:

Recent Stories


Responsible investing
Laura Blows speaks to Standard Life head of investment solutions, Gareth Trainor, about the latest responsible investment trends and developments for providers, pension schemes and their members
ESG and member engagement
Laura Blows speaks to Legal &General Investment Management head of DC, Emma Douglas, and Nest Insight Director of Research and Innovation, Jo Phillips, about member attitudes towards ESG and how this may impact upon pension fund investments