The State Pension is set to rise in line with the average earnings growth, which stands at 8.5% in the year to July. The increase would start applying from April 2024.
This is because of the ‘triple-lock’, which legally requires the government to increase State Pensions by the highest of either average earnings growth, Consumer Prices Index (CPI) inflation or 2.5%.
As the ONS confirmed that the CPI inflation for the year to September is 6.7%, State Pensions are set to be aligned on the average earnings growth.
Tom Selby, head of retirement policy at AJ Bell, said: “Provided the government sticks to its State Pension triple-lock promise, today’s CPI figure should confirm an inflation-busting 8.5% increase for April next year.
“While that will cost the Treasury billions of pounds, it may be viewed as a price worth paying for prime minister Rishi Sunak given the proximity of the general election and with the Conservatives trailing Labour in the polls.”
If the government uses July’s earnings growth for the triple-lock, the ‘old’ State Pension would be increased from £156.20 to £169.50 per week or £8,814 per year. The old State Pension is paid to those who reached State Pension age before 6 April 2016.
As for the ‘new’ State Pension, this would mean a rise from £203.85 to £221.20 per week or £11,502.40 per year.
Selby said: “If this earnings measure is used, the new State Pension will surge to over £11,500 a year – although many will see some of that benefit taxed away if the Personal Allowance remains frozen at £12,570.”
Yet, the government could argue that NHS bonus payouts inflated July’s earnings and opt instead for the lower 7.8% figure, which strips out bonuses.
In this case, the old State Pension would increase to £168.40 per week (£8,756.80 per year), while the new State Pension would rise to £219.75 per week (£11,427 per year).
Selby added: “This would allow the government to claim it has stuck with the triple-lock pledge while saving some cash, although it would inevitably face accusations of a stealth attack on pensioner incomes.”
Another option for the government would be to provide a CPI-linked State Pension increase, which would imply a rise from £156.20 to £166.65 per week (£8,665.80 per year) for the old State Pension and an increase from £203.85 to £217.50 per week (£11,310 per year) for the new State Pension.
While that would mean ditching an element of the triple-lock, this would not be unprecedented. The Treasury did this in 2022/23 which is the last time earnings spiked significantly.
The pension triple-lock is likely to be a contentious point in the next general election, with all major parties committing to it in their respective manifestos. Yet, Selby believes there should be a debate over what the State Pension should be worth and when it should be paid to people.
He said: “The triple-lock remains a policy without an explicit aim, randomly increasing the value of the State Pension depending on earnings growth and inflation at a specific point in time each year.
“Politicians need to be brave enough to kick-off an honest conversation about what the State Pension is aiming to deliver in retirement, how it should look over the long-term and the associated costs.”