Interactive Investor

State pension shocker: inflation-busting rise on the cards in 2022

7th July 2021 10:42

Alex Sebastian from interactive investor

Pensioners could receive a major boost to income in 2022 following latest estimates from the Office for Budget Responsibility.

Pensioners are on track to see the state pension jump 8% to £194 a week next year due to the obligations the government faces under its so-called ‘triple lock’ policy.

The move would be very costly for taxpayers though, with the rise requiring an additional £3 billion, the Office for Budget Responsibility (OBR) warned.

The triple lock was a Conservative manifesto pledge at the 2019 general election. The term refers to the government’s stated policy of increasing the state pension each year in line with whichever figure is highest out of average earnings, prices, or 2.5%.

Such a large increase would double even the most hawkish inflation forecasts of around 4%, however.

The OBR recently said "unusual pandemic-related fluctuations in earnings growth" meant a 5.6% rise was on the cards, but this looks set to increase to as high as 8% from April 2022 as people’s earnings climb.

The jump in earnings is largely due to the unlocking of the economy after the pandemic, and could therefore be considered an anomaly.

“8% would be high and out of kilter with reality - that’s why there were calls to smooth anomalous figures such as post pandemic wage growth, which wasn’t real wage growth at all, said Becky O’Connor,” head of pensions and savings at interactive investor.

“Making tweaks to resolve anomalies is a more rational response here than renewing calls to scrap a part of the pension system we should actually feel proud of. The triple lock is a virtue of our state pension system.

“Yes, it is relatively costly and it could be reasonably tweaked, perhaps to become a double lock of inflation or 2.5% or to take an average of two or three years data to avoid anomalies skewing the rise. But it is a tweak to resolve an anomaly, not scrapping it, the government should direct its energy at. 

“Some of the argument for scrapping it seems to rest on the belief that pensioners in this country have it easy and are rolling in cash.

“It is true that there are some who did very well from defined benefit pension schemes and house price rises, the classic baby boomer pensioner, for whom the state pension is probably unnecessary, but they receive it anyway,” O’Connor continued. “That gilded life is not the case for millions of older people and will become less common over time.

“Many pensioners - often women - do not receive the full state pension because of time out of work for children and other caring. 

“Many pensioners live in poverty despite the apparent generosity of the state pension scheme, because that’s all they have. 

“Expenditure on things like petrol and energy often makes up a higher proportion of outgoings for pensioners, so inflation caused by rises in fuel prices tends to hit them harder. 

“Maintaining rises to the state pension protects future generations of retirees too. In fact, they will probably need it even more, as those generous defined benefit pensions fall by the wayside and the problem of inadequate defined contribution schemes begins to really bite. 

“Looking after an older population is important. Protection of rises to the state pension absolutely must not be scrapped. A bit of a tweak to account for this strange year of wage growth that isn’t really wage growth is all that is needed.”

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