The state pension is set to rise by more than £560 from April as wage growth figures used to calculate the increase will make the elderly the “big winner” from today’s economic data in another extra cost to Rachel Reeves.
The triple lock uprating policy, which was introduced 15 years ago, means the pension increases by whichever is highest out of 2.5 per cent, wage growth in the three months to July or the reading for inflation in the year to September.
It has long been the bane of economists involved in fiscal policy, with former Resolution Foundation chief executive and now Treasury minister Torsten Bell and the Office for Budget Responsibility (OBR)‘s board among its biggest critics.
With wage growth including bonuses rising by 4.7 per cent in July, the elderly will earn £12,534.60 per year from April on the new state pension.
The inflation-busting figure is just short of the personal allowance, which is set at £12,570 but it is a dramatic rise from the current level of £11,973, costing the government billions of pounds more in payments to non-working age people.
The pre-2016 version of the state pension will rise from £9,175.40 per year to £9,607 per year.
Nye Cominetti, principal economist at the Resolution Foundation, said pensioners were the “big winner” as the gap in state support for younger and older generations was set to grow larger.
State pension could soon trump personal allowance
According to analysis by AJ Bell’s head of public policy Rachel Vahey, pensioners could also be set for a state pension that is higher than the personal allowance offered to working Brits from 2027 should the band remain frozen and the benefit increase by its minimum of 2.5 per cent.
Vahey said the Treasury now faces a difficult battle in managing the extra cost worth billions from higher state pensions and whether it can sustain the triple lock.
“Removing the freeze on the personal allowance would come at significant cost to the Treasury at a time when the chancellor’s fiscal headroom is already strained at best, while an overhaul of the triple lock would come with huge political risk before the next general election,” Vahey said.
“Needless to say, it’s a headache Starmer and Reeves could do without ahead of a crucial Budget in November and economic and political pressure already beginning to swell both within the Labour Party and outside of it.”
Political pressures
Political parties have shied away from committing to scrapping the triple lock.
Reform UK has indicated it would review the uprating mechanism whereas opposition leader Kemi Badenoch labelled it “Conservative policy”, appearing to dismiss claims that the Tories might ditch it.
The Labour government made a manifesto commitment to maintain the triple lock but a new Pensions Commission has been set up to review savings rates among those due to retire in the next couple of decades.
The Commission is looking at the balance of types of pensions while the government has launched another review of the state pension age.
“It’s entirely possible – if not likely – this latest state pension age review will advocate bringing forward that increase to the late 2030s to save future governments’ money,” Vahey said.
“Pensions minister Torsten Bell recently ruled out scrapping the triple lock guarantee, but as the state pension grows ever closer to the frozen personal allowance threshold it could be that the government is finally forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
Earlier this year, OBR analysts said they projected spending on the state pension to rise from around five per cent of GDP to 7.7 per cent in the next fifty years due to triple lock and an ageing population.
It warned that governments could not afford the triple lock pension as it cost three times more than first forecast.