Interactive Investor

State pension to rise at five times inflation as calls to cut it grow

21st October 2020 13:02

Laura Miller from interactive investor


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The state pension increase by 2.5%, but yet another group of experts call on the government to curb these rises.

State pensioners are set for a 2.5% pay rise next April, but at five times the rate of inflation calls are growing to scrap the ‘triple lock’ protection behind the bumper increase.

Under current rules, the state pension triple lock means the payments rise by the highest of earnings growth, price inflation or a 2.5%. 

Today the inflation figure for September was 0.5%.

Earnings growth is measured by the July figure, which was -1%. This means the 2.5% guaranteed increase will kick in for the state pension when it is increased next April, giving pensioners an income boost 2% above current inflation.

With furloughed workers suffering heavy cuts to their income of 20% or more, increasing redundancies, and ballooning public debt to pay for the government’s Covid-19 bill, the triple lock is increasingly being seen as over-generous.

The Centre for Policy Studies, an influential think tank, is now calling for the triple lock to be replaced by a double lock.

This would protect state pensions by the higher of earnings or inflation, but not the current 2.5% guaranteed increase. This would save some £2 billion a year, it said.

Other think tanks also want the triple lock to be axed or watered down. These include the Social Market Foundation and the Resolution Foundation.

Under the planned 2.5% state pension increase from next April, a single pensioner currently on the new full payment of £175.20 would get an extra £4.40 per week. An older single pensioner on the old basic state pension of £134.25 would get an extra £3.35 per week. 

Steve Webb, partner at LCP, a pension consultancy, said the UK state pension is still low by international standards, so the Chancellor may feel justified in going ahead with such an increase.  

“He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5% or more. At that point we may see a more ‘flexible’ interpretation of the government’s manifesto commitment,” Webb said.

Experts are worried about both the affordability and intergenerational fairness of maintaining the triple lock. Contrary to popular opinion, the state pension is not funded in advance but on a ‘pay as you go’ basis from current workers’ National Insurance contributions. 

Since April 2019, those getting the state pension have received an above inflation increase. 

The 3.9% increase in April 2020 was in line with the earnings growth figure, which was 2.2% higher than price inflation, and next year’s exceeding inflation by a further 2%. 

Steve Cameron, pensions director at Aegon, says:

“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.”

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