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Retirees set for 2.5% state pension boost

Emma Lunn
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Emma Lunn

Tomorrow’s CPI inflation announcement will confirm the ‘triple-lock’ state pension boost retirees can expect from April 2021.

The state pension looks certain to rise by 2.5% next year under the triple-lock guarantee.

Under the controversial formula, annual payments increase by the highest of average earnings in July, CPI inflation in September, or 2.5%.

With Covid-19 likely to keep inflation subdued (CPI stood at 0.2% in August) and average earnings in the three months to July down 1%, experts say it appears all-but-certain that the 2.5% triple-lock underpin will kick in.

How much will the state pension rise by?

According to calculations by AJ Bell, from April next year:

  • The ‘old’ basic-rate state pension will rise by £3.40 a week from £134.25 to £137.65
  • The ‘new’ flat-rate state pension will rise by £4.40 a week from £175.20 to £179.60

If a 2.5% increase is confirmed tomorrow, this will mean that the basic rate state pension will have increased by 41% since the triple-lock was introduced in 2011/12. The flat-rate state pension (introduced in 2016) will have risen by 15%.

According to the Office for Budget Responsibility, by 2024/25 the triple-lock is expected to cost £6bn more than a straight CPI inflation lock and £3.2bn more than a lock to average earnings.

Tom Selby, senior analyst at AJ Bell, said: “With Covid-19 hammering wages and pushing inflation to almost 0%, the value of the state pension triple-lock has never been clearer. If it were not for the policy, pensioners would likely see their state pension frozen next year.

“As it is, retirees are set to benefit from a 2.5% state pension boost in 2021/22, adding £3.40 a week to the value of the ‘old’ basic-rate state pension and £4.40 a week to the ‘new’ state pension introduced in April 2016.

“This will be the 4th time the 2.5% triple-lock underpin has kicked-in since the policy was introduced in 2011/12, meaning the value of the state pension will increase in real terms against both workers’ average wages and the price of goods and services.”

“After the planned November Budget was cancelled it appears the triple-lock is safe from the Chancellor’s scythe for at least one more year. However, with the Treasury’s Covid-19 bill now set to soar pass £300bn as the UK enters a second phase of lockdown, it is inevitable the policy will come under review next year.”

Furlough skews the formula

Back in June the government was rumoured to be looking to scrap the triple lock as sustaining the protective measure for older Brits will become unaffordable in the post-coronavirus period.

Analysts suggest that earnings next year compared with 2020 could skyrocket, particularly if those on furlough return to 100% pay, after receiving just a proportion of their pay under the Coronavirus Job Retention Scheme.

The figures could also be skewed by lots of low paid jobs disappearing altogether.

Selby said: “If the economy bounces back substantially next year and average earnings surge then the costs of the triple-lock risk ballooning. More broadly, as a policy the triple-lock remains a slightly odd feature of the UK’s retirement system. Its existence implies the value of the state pension is too low, but it only increases its value in real terms during periods of low wages and inflation such as we are seeing at the moment.

“Rather than having this random ratcheting mechanism in place, it would make much more sense to agree the value of state pension the government is looking to achieve and then set a course to reach that level.”