- Tweak in earnings growth figure from 4% to 4.1% will boost state pension
- This will be an unwelcome extra cost for the Chancellor, says Steve Webb
Triple lock: Pledge means the state pension is increased every year by the highest of inflation, average wage growth or 2.5%
The Government’s state pension bill is set to swell by an extra £100million after a tweak to the key earnings figure that determines payments from next April.
Older people are now in line for a £475 boost in the headline flat rate state pension, to around £11,975 a year.
That is about £15 a year more than the state pension rise projected last month, but enough to cause an extra headache for Chancellor Rachel Reeves ahead of the Budget on 30 October.
It would push the weekly rate from the present £221.20 to an estimated £230.25 from next Spring for people retiring since April 2016 who qualify for the full state pension.
People who retired before April 2016 on the old basic rate state pension currently get £169.50 a week or around £8,800 a year.
The newly-tweaked rate for next year would put them on £176.45 a week, or around £9,175 a year.
Those on the lower basic rate also get hefty top-ups, called S2P or Serps, providing they were earned earlier in life. These are raised in line with inflation though, not the triple lock.
The triple lock means the state pension is increased every year by the highest of inflation, average wage growth or 2.5 per cent.
The reason for the small but costly upward revision in next year’s state pension is that earnings growth in the crunch period used in the triple lock calculation was originally estimated at 4 per cent.
However, this it has now been reassessed as 4.1 per cent by the Office for National Statistics in new data published this morning.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
The wage growth figure is as good as nailed on to be the one used to set the triple lock in the Spring.
That’s because the relevant inflation figure, which is due out tomorrow, is expected to come in much lower. It was 2.2 per cent last month.
The new Government promised during the election to maintain the triple lock for the whole of the current parliament.
‘A slightly higher rate of increase is welcome for pensioners, though will be an unwelcome £100million extra cost for the Chancellor as she prepares her Budget,’ says Steve Webb, a former Pensions Minister and now This is Money’s retirement columnist.
Webb, who is also a partner at pension consultant LCP, adds: ‘The rate of the new state pension will now be close to £12,000 per year, very near to the £12,570 tax-free personal allowance.
‘This is likely to put extra pressure on the Chancellor to take action on tax allowances in the coming years.’
The £12,570 personal allowance is the level at which income tax kicks in, and it has been frozen since 2021.
It creates an anomalous situation where the Department for Work and Pensions pays millions of people a state pension, some of which is then clawed back by the Treasury in income tax – potentially forcing an increasing number to file annual tax returns to HMRC.
Millions of pensioners already do this because they receive a state pension higher than £12,570.
This is because they reached state pension age under the old pre-2016 system, and earned enough second state pension, also known as Serps, to build up more generous payments in retirement.
Meanwhile, a rising number of pensioners who receive even a modest income from private pensions on top of the state pension also have to complete a tax return.
