- Another bumper increase in the state pension could follow 10.1% hike last April
- Wage inflation was 8.2 per cent in May-July in official data released today
The full rate state pension could top £220 a week if earnings growth sticks at its current 8.2 per cent, as pundits reckon the Government is highly unlikely to break the triple lock pledge ahead of an election.
Older people have been hit hard by rising household bills, but the pain could be eased by another bumper increase in the state pension next spring, following a 10.1 per cent hike last April.
Meanwhile, the elderly are more likely than other age groups to dodge current high interest rates if they are mortgage free, while reaping the benefit of improved savings rates.
The triple lock pledge means the state pension should increase every year by the highest of price inflation, average earnings growth or 2.5 per cent.
Wage inflation including bonuses was 8.2 per cent in May-July in official data released today, a month before the crunch figure used to set the triple lock. Excluding bonuses, the figure was 7.8 per cent.
CPI inflation was 7.9 per cent in June, and is expected to slow before the deciding figure, meaning earnings are the economic statistic to watch this year, say pension experts.
‘Today’s new figures on average earnings growth suggest that next year’s state pension rise could easily be 2 per cent higher than expected by the Chancellor at the time of the Budget,’ says former Pensions Minister Steve Webb.
At the time, the Office for Budget Responsibility assumed the hike would be 6.2 per cent, and it is a ‘reasonable rule of thumb’ that an extra 1 per cent on state pension uprating adds around £1billion to the Department for Work and Pensions’ bill, he explains.
‘It seems very likely that the pension rise implied by the triple lock policy will be much higher than expected at the time of the March 2023 Budget,’ says Webb, now a partner at LCP and This is Money’s pensions columnist.
Although inflation is coming down, the rate of average earnings growth has been heading upwards and is likely to be the key factor in determining next year’s state pension rise.
‘An extra £2billion bill arising from higher than expected earnings growth seems quite plausible. But it is unlikely that this would lead the government to break the triple lock, especially in the run-up to a likely 2024 general election.’
Steven Cameron, pensions director at Aegon, says: ‘If the earnings growth figure announced next month stays at this level, this guarantees state pensioners 8.2 per cent next April, even if inflation continues to fall.
‘State pensioners may be winners, particularly as they are less likely to be affected by rocketing mortgage costs and could also be benefiting from higher interest rates on cash savings.’
Annual growth in average pay including bonuses at a whopping 8.2 per cent was skewed by one-off bonus payments made to NHS staff but it is moving skyward, according to Hargreaves Lansdown head of retirement analysis Helen Morrissey.
‘We may not see the eye-wateringly high increase in state pension that we saw last year but something in the region of 7 per cent is not out of the question.
‘This would be welcomed by pensioners who have been battling rising costs but adds to the woes of government trying to find a way to tame spiralling state pension costs. As the system continues to creak under pressure it’s time for a review of how the state pension works and the triple lock’s role within it.’
Adrian Lowery, financial analyst at wealth manager Evelyn Partners, says: ‘This above-expectations wage growth will be watched nervously at the Treasury as it threatens to add fuel to the triple lock fire.
‘The wages element of the triple lock – annual earnings growth for May to July – won’t be available until next month but this outcome suggests it could be significant.
‘Moreover, strong wage growth is likely to impair the retreat of inflation in the coming months, and the Bank of England recently warned that the pace of wage growth is a threat to its longer-term inflation target of 2 per cent.’
Lowery says a very substantial rise in the state pension and reignite the debate over whether the triple lock is sustainable.
‘The cost of the state pension is already expected to outweigh combined spending on education, policing and defence in the next two years.
‘With neither of the leading parties yet willing to question the affordability of the triple lock in the run-up up to a general election, this could intensify the squeeze on the public finances.’
Jon Greer, head of retirement policy at Quilter, says: ‘Despite the cost, it is unlikely the Conservative government will backtrack on its triple lock promise.
‘Over the last few years, the triple lock has been an area of significant contention and with the next general election looming large the Conservatives will be reluctant to rock the boat with core voters.
‘It is inevitable though that at some point the uprating of state pensions will be replaced with a less generous uprating mechanism, though exactly what this looks like remains to be seen.’
Tanya Jefferies (This is Money)