Could the State Pension be in line for a bumper increase?

The State Pension looks set to rise by a record amount, but Chancellor Rishi Sunak may have other plans for it.

The State Pension could be in line for a bumper hike this year thanks to distortions in the way its increases are calculated through the so-called ‘triple lock’. The triple lock was conceived during the Coalition Government’s early days as a protection to ensure the State Pension always rises – either by matching the rate of wage growth, inflation or 2.5% – whichever is higher.

However, the triple lock has come under criticism in recent times for its perceived lack of fairness. In times such as 2020 when wage growth was plummeting thanks to the COVID-19 crisis, pensioners enjoyed a healthy 2.5% rise as this was higher than both wage growth and inflation at the time.

Now the situation has become even more distorted as wage growth is sky high – around 7.3% at the most recent set of figures from the Office for National Statistics (ONS). The ONS itself concedes that this may not be truly reflective of the average growth in wages as the low levels of last year, plus the effects of the furlough scheme, have put the data way out of whack.

But thanks to the way the triple lock is set out this may not matter, leaving pensioners with a bumper pay rise.

However, sources in the Government are now intimating that Chancellor Rishi Sunak could be set to thwart the triple lock in the interest of preventing an expensive hike in the Treasury’s bills.

It would make for a fairly extraordinary intervention to break the triple lock. The suggestion is that the Chancellor will likely make it a temporary fix thanks to the unforeseen circumstances, but calls for a double lock to be made permanent have been heard for some time now.

Does the State Pension matter?

The State Pension, while a relatively modest sum on the face of it, is an incredibly important consideration for all but the wealthiest retirees. In later life it can account for a significant sum.

Currently paid at a rate of £179.60 a week from age 67, it forms a core part of many retiree’s later life income.  With an uplift on the cards of, conservatively, 7.3% – pensioners could see an extra £629 per year. Some estimates suggest the month when the news uplift is calculated could lead to an 8.5% rise – which would mean an extra £729 next year.

Former pensions minister Steve Webb, who put the triple lock into law and is now a partner at Lane Clark & Peacock, says: “The Chancellor will no doubt be considering a wide range of options to avoid a hike in the state pension. Dropping any earnings link would be quite controversial as ‘restoring the earnings link’ has always been a rallying cry for the pensioner movement.

“It would also be an explicit breach of the Conservative manifesto. I suspect that a modified earnings figure will remain the most attractive option to a Chancellor who will want to avoid opening up battles on too many fronts at the same time.”

If you’d like to discuss the issues raised in this article more, don’t hesitate to get in touch with your adviser.