Triple lock: UK earnings surge will push state pension payments up by £900 a year

The rise means the state pension will jump to £11,501 in the spring – a rise from £10,600 this year.

The triple lock promise means the state pension rises in line with whichever is highest out of inflation, average earnings growth, or 2.5 per cent.

Dean Butler, managing director for retail direct at Standard Life, part of Phoenix Group, said: “While Rishi Sunak fell short of committing to include the triple lock in the Conservative Party manifesto this week, he confirmed it remains Government policy.

“It would be a huge shock if that were to change ahead of April 2024. With inflation widely forecast to continue to fall as we move towards the end of this year and into 2024, it seems almost certain that today’s earnings figure will be the decider and the new state pension will rise to £11,501 in the spring.”

Pensions and taxation

He added that the changes mean pensioners only need an additional £1,069 of income to cross the tax threshold. Butler said: “After the sharp cost of living increases we’ve seen over the past couple of years, the rise will come as a welcome boost to many.

“However, it’s worth considering the possible tax implications for pensioners. The personal allowance, which is the amount of income you can receive before paying tax, has been frozen since 2021-2022 and currently remains fixed for quite a few years to come.

“This means that the full state pension payment has grown from 70 per cent of the allowance in 2019-20 to a likely 92 per cent next year, leaving pensioners with only £1,069 of headroom before they begin paying income tax.”

Wage inflation

The new data means that older pensioners who retired before April 2016 will get a weekly rise from £156.20 to £169.47, and an annual rise from £8,122 to £8,812.

Higher-than-expected wages data reflects surging wage inflation during the summer both in the private and public sector, including the NHS one-off bonuses of at least £1,250 per person in June.

Interestingly, the state pension has risen £3,158 in real terms since 2011, when the triple lock was introduced, but remains one of the lowest in Europe.

Alice Guy, head of pensions and savings at Interactive Investor, welcomed the triple lock increase as it provides a lifeline to many lower-income households.

She said: “The triple lock increase is great news for millions of pensioners, providing a lifeline to many poorer households. One in eight pensioners don’t have any income in addition to the state pension and are completely dependent on the triple lock to help them cover their rising costs."

“Women are particularly likely to rely solely on the state pension, especially if they are on their own, as many have taken time out from the workplace, which makes it harder to build up a workplace pension.

“It’s important to remember that, even with the triple lock, the UK state pension is still one of the lowest in Europe. Many other countries have a state pension system based on the amount you pay in, rather than a simple flat rate. That means UK pensioners are hugely reliant on workplace pensions to supplement their state pension income. But not everyone has access to a workplace pension. Those who are long-term carers, disabled or simply self-employed often end up with the rough end of the lollipop when it comes to retirement incomes.”

High living costs

Although the rise in the state pension will mark the second biggest rise in payments under the triple lock guarantee, Tom Evans, managing director for retirement at Canada Life, warned there will be many who will not see a quick benefit.

He said this is true for overseas retirees in countries, where a ‘reciprocal agreement’ is in place, will honour the state pension increases seen by UK retirees, so their state pension incomes will rise in line with their UK counterparts.

However, where no such agreement is in place, including popular countries like Australia, Canada, and New Zealand, the UK pension is frozen at the point the person leaves the UK.

Evans said: “Another bumper boost to the state pension will offer a glimmer of hope for many retirees as we face into another winter with continuing high energy costs and stubborn high inflation. But it’s worth remembering many people relying on the state pension for their retirement income won’t feel the full effect of this increase due to the way the system works, with the average weekly payment presently around £166 a week.

“For those retirees who have opted to spend their later years abroad, many will have seen their state pension frozen at the point they left the UK, and won’t be seeing a penny of this increase.”

PM's triple lock pledge

Prime Minister Rishi Sunak confirmed last month the Government will stick to its triple lock pledge next year, despite the guarantee being put on hold in the 2022-23 tax year when wage data was distorted by the pandemic.

Jon Greer, head of retirement policy at Quilter, said over the past few years, the triple lock has become a symbol of intergenerational tension. He said: “ Over the past few years, the triple lock has become a symbol of intergenerational tension. On the one hand, some say the triple lock should be scrapped because it provides a huge boost to pensioner income at significant cost to Government at a time when funds are being increasingly stretched in other vital areas.

“On the other hand, there are arguments that the younger people should welcome the increased state pension as they will one day receive the benefit themselves.

“The truth is that both arguments are correct. Young people will benefit eventually, but that is a long time away. What matters in the here and now is that state pension uprating is done in a way that links pensioner income to experiences in the wider economy.”

Paying for the state pension increase

For every 1 per cent increase in the state pension, the Government will need to find around £900m a year to pay for it.

Alice Haine, personal finance analyst at Bestinvest, said the escalating cost of maintaining the triple lock for the UK’s 12 million retirees could force HM Treasury to make savings elsewhere or even reassess the State Pension age.

She said: “The heavy cost of maintaining the triple lock for the UK’s 12 million retirees could force the Treasury to make savings elsewhere or even reassess the state pension age.

 “Looking ahead, wage growth is expected to slow in the second half of the year as the softening labour market feeds through to pay increases along with inflation, so retirees may not see such large jumps in their state pension in the years to come – even if the triple lock is maintained.

Economic dilemma

 “With unemployment on the rise and vacancies continuing to fall, the UK jobs market is likely to loosen further as businesses rethink expansion and hiring plans. It means the labour market is very much on the turn with staff shortages, wage pressures and early retirement giving way to a hiring slowdown, lay-offs and more people looking to return to the workplace to cope with rising living and borrowing costs.”

James Carter, head of pension products and policy at Fidelity International, said a broader review of the UK pension system is required.

He said: “The policy intention when the triple lock was originally put in place was to address the perceived level of developing pensioner poverty over time. It wasn’t simply an annual revaluation formula. In recent years the triple lock has become a political and economic dilemma for the Government. As a long-standing Government policy, to which commitment has frequently been reasserted, economic volatility and issues of cross-generational fairness continue to force difficult debate.”

He added that recent analysis by the Institute for Fiscal Studies illustrated that, in applying the higher of the increase in prices and wages, the State Pension has increased more quickly than it would if either measure had been used individually.

Carter added the experience of recent years has shown that perhaps the triple lock is another casualty of more volatile times. 

He said: “The real question we’re facing now is whether this is a viable long-term solution. Now is the time to consider the right and stable basis for the future of the UK state pension so consumers have certainty.

“We live in a more volatile economic and political environment and a resilient future strategy is needed. To achieve this, one cannot consider the role and level of the state pension in isolation. A broader review of the UK pension system is required, taking into account the state pension alongside the development of the automatic enrolment regime.

“Considerations must be made towards both eligibility for automatic enrolment, how the coverage and quantum of contributions might increase in the future and how workplace pensions together with the State Pension can provide fair and adequate retirements.”