Retirees set for 2.5% state pension boost

•    Wednesday’s CPI inflation announcement for September will confirm the ‘triple-lock’ state pension boost retirees can expect from April 2021
o    The triple-lock guarantees the state pension will rise in line with the highest of average earnings, CPI or 2.5%
o    The Government has previously used CPI in September and average earnings in the three months to July to determine the triple-lock state pension increase
o    With COVID-19 likely to keep inflation subdued (CPI stood at 0.2% in August) and average earnings in the three months to July down 1%, it appears all-but-certain the 2.5% triple-lock underpin will kick in
•    This would imply from April next year:
o    The ‘old’ basic-rate state pension will rise by £3.40 a week from £134.25 to £137.65
o    The ‘new’ flat-rate state pension will rise by £4.40 a week from £175.20 to £179.60
•    If a 2.5% increase is confirmed on Wednesday, this will mean since the triple-lock was introduced in 2011/12:
o    the basic-rate state pension will have increased by 41%
o    the flat-rate state pension (introduced in 2016) will have risen by 15%
•    By 2024/25 the triple-lock is expected to cost £6 billion more than a straight CPI inflation lock and £3.2 billion more than a lock to average earnings (Source: OBR)

Tom Selby, senior analyst at AJ Bell, comments: 

“With COVID-19 hammering wages and pushing inflation to almost 0%, the value of the state pension triple-lock has never been clearer. If it were not for the policy, pensioners would likely see their state pension frozen next year.

“As it is, retirees are set to benefit from a 2.5% state pension boost in 2021/22, adding £3.40 a week to the value of the ‘old’ basic-rate state pension and £4.40 a week to the ‘new’ state pension introduced in April 2016.

“This will be the 4th time the 2.5% triple-lock underpin has kicked-in since the policy was introduced in 2011/12, meaning the value of the state pension will increase in real terms against both workers’ average wages and the price of goods and services.”

Triple-lock appears safe…for now

“After the planned November Budget was cancelled it appears the triple-lock is safe from the Chancellor’s scythe for at least one more year. 

“However, with the Treasury’s COVID-19 bill now set to soar pass £300billion as the UK enters a second phase of lockdown, it is inevitable the policy will come under review next year. 

“If the economy bounces back substantially next year and average earnings surge then the costs of the triple-lock risk ballooning.

“More broadly, as a policy the triple-lock remains a slightly odd feature of the UK’s retirement system. Its existence implies the value of the state pension is too low, but it only increases its value in real terms during periods of low wages and inflation such as we are seeing at the moment. 

“Rather than having this random ratcheting mechanism in place, it would make much more sense to agree the value of state pension the Government is looking to achieve and then set a course to reach that level.” 

How the triple-lock could increase the value of the state pension between now and 2025

Source: OBR Financial Stability Report and AJ Bell analysis; state pension increases rounded up to nearest 5p each year

 
Source: Parliamentary research briefing note https://researchbriefings.files.parliament.uk/documents/CBP-7812/CBP-7812.pdf