Pensioners on course for state pension increase well ahead of inflation

by Faith Glasgow from Money Observer |

An inflation-busting 4% state pension uplift is forecast for April 2020 under the 'triple lock' system.

Pensioners are set to see a 4% increase in the state pension in October, more than double the current inflation rate of 1.7%. 

Under the "triple lock" rules for state pension increases, the state payout will rise by whichever is the highest of consumer price inflation (year to September), earnings growth (year to July), or 2.5%.

The increase will be confirmed when the CPI figures for September are released in mid-October, but the most recent CPI figure (for August) is 1.7%, down from 2.1% at the end of July and seems very unlikely to leap beyond 4%. 

If the forecast 4% rate is used, pensioners will enjoy their biggest uplift since April 2012, when it rose by 5.2% on the back of earnings growth. Since then, the annual increase has been in the 2-3% range.

Since the triple lock was introduced in 2011, state pensions have outstripped both prices and earnings. Insurer Aegon has calculated that a single person receiving the old basic state pension – £97.65 back in April 2010 – is now receiving £129.20, an increase of 32%, while prices have increased by 24% and average earnings by only 20%.

That sum will rise to £134.35 from April 2020, assuming the 4% rise takes effect. Those who reached state pension age after April 2016 and therefore receive the new state pension will see their income rise from £168.60 to £175.35. 

However, the triple lock is an expensive arrangement for the government and there is no guarantee that it will continue beyond 2022. Government figures indicate that if the triple lock continues indefinitely, pension spending is set to rise by £35 billion over 40 years from 2020-21. Without it, or under just earnings indexation, the increase will be only £21 billion. 

Steven Cameron, pensions director at Aegon, comments: "Based on the latest earnings growth figures, it looks like state pensioners can look forward to an inflation-busting 4% increase in their state pension from next April.

"However, these inflation-busting increases do come at a significant cost. The state pension is not funded in advance so pensions are funded on a ‘pay as you go’ basis from today’s workers’ national insurance contributions. With the prospect of an early general election, it will be interesting to see where each party stands on commitments to retaining the triple lock for the next five years."

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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