Triple lock to provide 'substantial' rise in state pension for second year running

State pensions are set for a "substantial" 8.5 per cent increase in April 2024 under the triple lock mechanism, with the new state pension set to rise just over £900 per year to over £11,500.

Under the triple lock, the basic state pension received in retirement rises each year in line with whichever is the highest out of three factors: wage growth, inflation or 2.5 per cent.

The latest update from the Office for National Statistics (ONS), which is used as part of the triple lock calculation, revealed that annual growth in employees’ average total pay in May to July 2023 was 8.5 per cent, given the NHS and Civil Service one-off payments made earlier this year.

Basing the triple lock on these figures would see the full new state pension rise from £203.85 per week to £221.20 per week, while the full basic state pension would rise from £156.20 per week to £169.50 per week.

Whilst next month’s inflation data will also be a factor, industry experts have suggested that even if this were to rise slightly by the time of the September figure, it would probably still be lower than the earnings growth figure.

The increase is expected to be a boost for many pensioners, with Aegon pensions director, Steven Cameron, pointing out that, if the government delivers on its pledge to halve inflation to 5 per cent by the end of the year, the increase will "pack a positive punch for pensioners' purchasing power".

This was echoed by AJ Bell head of retirement policy, Tom Selby, who pointed out that the latest increase also comes "hot on the heels of the bumper 10.1 per cent state pension increase applied in April this year, in line with inflation in the prior September".

“Retirees are set to receive their second blockbuster state pension increase in a row as a result of the government’s ‘triple-lock’ policy," he continued. “For those in receipt of the state pension, the protection provided by the triple-lock is extremely valuable."

However, LCP pointed out that, with the personal tax threshold due to be frozen again at £12,570 next year, a large pension rise, coming on top of last year’s 10.1 per cent rise, will drag many more pensioners into paying income tax.

Indeed, between 2022/23 and 2023/24, HMRC figures suggested that the number of those aged 65+ who pay income tax rose by roughly three quarters of a million from 7.73m to 8.5m off the back of the April 2023 state pension increase, with a further 650,000 set to be brought into this umbrella should the state pension rise by a further 8.5 per cent in 2024.

Rising costs, rising concerns

However, industry experts have also raised concerns as to whether the triple lock will be upheld, with some speculation that the government might opt to use a lower figure, such as the current inflation figure of 6.8 per cent, for the April 2024/25 uprating.

Hargreaves Lansdown head of retirement analysis, Helen Morrissey, also noted that whilst this increase will be welcome news for pensioners, "it will continue to be a headache for government who need to battle the ever spiralling cost of the state pension bill".

Industry analysis also recently revealed that maintaining the triple lock could increase spending by anywhere between a further £5bn and £45bn per year by 2050, having already raised state pension spending by around £11bn a year compared since 2010.

And this could be set to grow further, as the Institute for Fiscal Studies (IFS) associate director, Jonathan Cribb, pointed out that, compared with the OBR's forecast from just six months ago, today's figures mean spending on the state pension is set to increase by another £2bn in 2024–25.

‘These increasing public finance pressures caused by the triple lock, especially in periods of macroeconomic volatility as we have experienced in recent years, risk the sustainability of the state pension system, meaning heightened uncertainty for individuals planning their retirement finances," he stated.

However, LCP partner, Steve Webb, suggested that there are several reasons why the government is likely to stick with the earnings growth figure in line with the ‘triple lock’ policy, explaining that the savings from breaking the triple lock would be relatively modest compared with the political challenge.

Regardless of desire, timing could also prove an issue, as Webb noted that breaking that link would therefore require legislation and the government might struggle to get such legislation through, especially in the final uprating before an expected Autumn 2024 General Election.

Webb stated: “With a General Election in the offing it seems quite inconceivable that the government would choose to break the triple lock promise for a second time in three years.

"Such a decision would be like aiming a laser-guided missile at the core of Conservative support and could fatally undermine the party’s electoral prospects.”

However, Webb acknowledged that it is "far less clear" as to what each party will do when it comes to their manifesto.

Time for a new approach?

There are other options available to government though, as Cameron suggested that one fairer and less unpredictable option would be to move away from a year-on-year comparison of earnings, inflation and 2.5 per cent to one which averages out across say three years.

In addition to this, Morrissey said that increasing the state pension age is another lever government can pull to manage these costs.

"But this needs to balanced with people’s ability to keep on working and people need certainty of when they will receive their state pension to help them plan," she added.

"A review of the long-term direction of the state pension and the triple lock’s role should be a priority for whoever wins the next election.”

Calls for a broader review were echoed by Fidelity International head of pension products, James Carter, who said that the "real question" is whether the triple lock remains a viable long-term solution.

"Now is the time to consider the right and stable basis for the future of the UK state pension so consumers have certainty," he continued.

"We live in a more volatile economic and political environment and a resilient future strategy is needed. To achieve this, one cannot consider the role and level of the state pension in isolation.

"A broader review of the UK pension system is required, taking into account the state pension alongside the development of the automatic enrolment regime.

"Considerations must be made towards both eligibility for automatic enrolment, how the coverage and quantum of contributions might increase in the future and how workplace pensions together with the State Pension can provide fair and adequate retirements.”

Quilter head of retirement policy also suggested that, "arguably there should be agreement on the level of the state pension and separately a fair mechanism for ensuring its value is maintained overtime".

"Without such an approach each time the uprating of the state pension occurs a dividing line will be drawn setting generations against each other," he added, arguing that this is a subject that will be further pressed in the coming months as election campaigning kicks off.

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