The state pension is on course to top £10,000 a year if the Government keeps its promise to reinstate the ‘triple lock’ on annual increases.
The popular guarantee means the state pension is raised by the highest of inflation, wages growth or 2.5 per cent – but it was ditched last year because the pandemic temporarily skewed the earnings figure.
The inflation rate will be highest this year, so the state pension increase should be decided by the September CPI figure, which is due out on 19 October.
Popular guarantee: State pension is on track to rise 10% if new PM Liz Truss keeps triple lock pledge
Inflation in August, published last week, was running at 9.9 per cent, down from 10.1 per cent. The latest earnings growth figure, based on total pay including bonuses, was 5.5 per cent.
But older people waiting anxiously to find out what state pension increase they will get next April might find it still lags behind prices.
Inflation could stick at around 10 per cent during the key month of September, but rise further this winter despite the Government’s freeze on the energy price cap.
Last year, the triple lock was suspended because wage rises were distorted as the labour market recovered from the impact of Covid-19.
I paid NI for 44 years but get a smaller state pension than people retiring now – how is that fair?
This is Money’s pensions columnist Steve Webb explains how the revamp in April 2016 was designed to be fair to everyone, and why people who reached state pension age before that don’t need to feel hard done by.
‘The move to the new state pension does not represent a windfall to people who have yet to retire,’ he says.
But this year, sky high inflation is taking a severe toll on pensioners struggling to pay household bills.
If the 9.9 per cent inflation rate from August was used, pensioners on the post-2016 full rate state pension of £185.15 a week or around £9,600 a year would see a rise to £203.50 a week or £10,600 a year.
Those on the old basic rate would see a jump from £141.85 a week or around £7,400 a year to £155.90 or £8,100 a year.
During the Tory leadership campaign, Prime Minister Liz Truss promised to reinstate the triple lock this year, but is likely to come under pressure to u-turn due to the squeeze on public finances.
There is overwhelming support for the triple lock among pensioners, though less among younger generations.
Some 55 per cent of adults overall back keeping the triple lock under the current circumstances, according to a Canada Life survey weighted to be representative of all UK adults.
But that breaks down to 78 per cent among over-55s, 44 per cent among 35 to 54-year-olds and 33 per cent among 18 to 34-year-olds.
>>>What do YOU think? Vote in our triple lock poll below
Separate research from Canada Life found two fifths of UK adult have made cutbacks to spending as a result of rising prices.
Some 37 per cent are worried about their own or their household finances, and 31 per cent are already feeling the impact of inflation on their finances.
How was state pension decided under triple lock over the years
* Subject to seasonal adjustments
State pension on track to increase by a record amount next year
‘The immediate outlook looks bleak, with The Bank of England predicting the peak of inflation to come later this year at around 13 per cent,’ says Andrew Tully, technical director at Canada Life.
‘The peak, when it does come, will offer little respite when the tail of inflation is predicted to last well into next year and not come close to the target of around 2 per cent for several years.
‘While UK workers continue to feel the pain as wages lag inflation, there will be some positive news in the coming months for retirees.
‘As inflation marches on, September’s data will determine the living standards for millions of retirees across the UK for the coming year, and it is highly likely the state pension is on track to increase by a record amount in April 2023.
What do This is Money readers say about?
Our recent poll showed strong support for older people getting the full state pension rise as promised under the triple lock next April.
Have your say below.
‘People are clearly making cutbacks where they can and many are worried about their household finances.
‘Unfortunately the worst is yet to come unless we see further significant interventions from the Government in the coming weeks.’
April rise feels a very long away away for struggling pensioners
‘Inflation eased this month, but it still remains sky high and looks set to stay so for the foreseeable future,’ says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.
‘This means pensioners are in line for a significant pension boost next year as long as the Government keeps its pledge to keep the triple lock.
‘If the link to CPI remains, then we could see pensioners on a full new state pension get more than £200 per week.
‘Last year’s 3.1 per cent increase was no match for soaring inflation and has left many pensioners struggling and so a more generous increase will be welcomed.
‘However, any such increase will not kick in until April which feels a very long way away right now for those struggling to make ends meet.’
Questions remain over the affordability of the triple lock
‘The Government has previously committed to reinstating the triple lock after suspending the earnings element for 2022-23 due to distortions caused by the Covid-19 pandemic,’ says Kate Smith, head of pensions at Aegon.
She notes that new Prime Minister Liz Truss reiterated this during her leadership campaign, but adds: ‘Questions will remain over its affordability and whether the triple lock will survive in its existing form in the manifestos of all parties ahead of the next general election.’
How much is the state pension?
The basic state pension is currently £141.85 a week, or around £7,400 a year. It is topped up by additional state pension entitlements – S2P and Serps – if accrued during working years.
The two-tier state system was replaced in 2016 by a new ‘flat rate’ state pension. This is currently worth £185.15 a week or around £9,600 a year.
People who have contracted out of S2P and Serps over the years and retire after April 2016 get less than the full new state pension.
But they can fill gaps in unpaid and or underpaid National Insurance in previous years, make voluntary top-ups to buy extra qualifying years, and build up more years if they have enough time between now and state pension age.
Workers needed to have 30 years of qualifying National Insurance contributions to get the old state pension, but they now need to have 35 years of contributions to get the new flat rate state pension.
But even if you paid in full for a whole 35 years, if you contracted out for some years on top of that it might still reduce what you get.