Unexpected wage increases set course for bumper 2024 state pension rise
Earnings growth came in at 8.2% – a higher figure than inflation – which is likely to drive a larger-than-expected increase in the state pension from April 2024.
In the three months to June 2023, annual growth in regular pay (excluding bonuses) stood at 7.8%, according to the Office for National Statistics (ONS).
This is the highest rate since comparable records began in 2001. Meanwhile, annual growth in employees’ average total pay (including bonuses) was 8.2%, spurred on by pay awards for NHS staff.
These figures are significant and could mean that retirees see a larger-than-expected state pension increase next year.
This is because of the pensions triple lock which guarantees that the state pension – both the old ‘basic’ and the new ‘flat rate’ schemes – will rise by the higher of average earnings (usually the figure from May-July), inflation (usually the September rate) or 2.5%.
Now, while soaring inflation led to retirees receiving the biggest ever 10.1% increase in state pensions under this mechanism in April 2023, inflation is now receding (currently 7.9%) while wages are creeping up.
As such, experts suggest that next year’s state pension rise will be determined by earnings growth (the figure which includes bonuses) rather than inflation and is likely to be 2% higher than anticipated by the Chancellor at the time of the March Budget.
Indeed, when the Office for Budget Responsibility (OBR) published its Economic and Fiscal Outlook 2023, the pensions triple lock assumption was 6.2%.
Steve Webb, former pensions minister, and partner at consultancy LCP, said if average earnings growth were to be around 8.2% when next month’s figures are published, this would suggest an extra £2bn or so which the Treasury would have to find compared with the assumption of a 6.2% increase.
Webb added: “It seems very likely that the pension rise implied by the triple lock policy will be much higher-than-expected at the time of the March 2023 Budget. Although inflation is coming down, the rate of average earnings growth has been heading upwards and is likely to be the key factor in determining next year’s state pension rise.
“An extra £2bn bill arising from higher than expected earnings growth seems quite plausible. But it is unlikely that this would lead the Government to break the triple lock, especially in the run-up to a likely 2024 General Election.”
According to calculations from Interactive Investor, if wage inflation remains high, the state pension could rise by £869 next April to £11,469. Pensioners who retired before 2016 and are on the basic state pension would see their pension income rise from £8,122 this year to £8,788 next tax year.
Controversial pensions triple lock
Former Prime Minister Liz Truss renewed her promise to keep the pensions triple lock before she departed the top job.
But there was a lot of back and forth with this policy, as calculations suggested it would cost the Government around £21bn over three years.
As the cost-of-living crisis gained momentum, many people criticised the bumper 10.1% pay out to retirees, while working classes were hit with real terms cuts.
The triple lock was ditched for April 2022 – breaking the Conservative manifesto – due to distortions created by the pandemic which would have seen retirees receive big increases in their retirement income.
However, more recently, both Labour and the Conservatives have pledged their commitment in a bid to win the next General Election.
Adrian Lowery, financial analyst at wealth manager, Evelyn Partners, said: “The cost of the state pension is already expected to outweigh combined spending on education, policing and defence in the next two years. With neither of the leading parties yet willing to question the affordability of the triple lock in the run-up up to a General Election, this could intensify the squeeze on the public finances.”
Steven Cameron, pensions director at Aegon, said: “If earnings growth remains above price inflation in the coming months, state pensioners may be winners, particularly as they are less likely to be affected by rocketing mortgage costs and could also be benefitting from higher interest rates on cash savings.”