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Retirees set for 2.5% state pension rise

Paloma Kubiak
Written By:
Paloma Kubiak

The state pension could rise by 2.5% next year under a controversial formula – if the government continues to adopt the triple lock mechanism.

Under the state pension triple lock, annual payments increase by the highest of average earnings in July, CPI inflation in September, or 2.5%.

While the formula has come under increasing pressure to be scrapped or altered, particularly in light of rising coronavirus debt levels and distortions due to the furlough scheme, such a move would mean the Conservatives breaking their manifesto.

If the formula is retained, retirees could see their state pension rise by 2.5%. This is because the earnings figure for July stands at -1% and inflation is currently hovering at 1% and isn’t expected to change much by the time September’s rate is published. Therefore, this leaves the final part of the formula – 2.5% – as the minimum level.

The ‘old’ basic state pension currently stands at £134.25 a week, while the ‘new’ state pension comes in at £175.20 per week.

Steven Cameron, pensions director at Aegon, said the current formula would lead to the state pension rising 3.5% above the average increase in earnings for the last 12 months.

He said: “Retaining the 2.5% minimum increase next April at a time when earnings have fallen and price inflation is low might be seen as more generous than was originally intended. But many were expecting a sharp fall in earnings this year, followed by a sharp recovery the next. The formula could see state pensioners receiving a relatively generous 2.5% increase in April 2021 with some predicting a double digit earnings related increase in 2022. This hugely expensive hike would coincide with many workers just seeing earnings returned to pre-Covid levels, raising big questions around intergenerational fairness.

“There has been speculation of tension between the Prime Minister not wanting to break a manifesto commitment to retain the triple lock and the chancellor fearing an unaffordable increase in the state pension bill.

“With earnings not having taken the fall many feared, a bounce back the next year may also be less pronounced, avoiding an extreme increase to state pensions in 2022. But if there remain concerns over future earnings volatility, adjusting the formula by averaging out earnings growth over two years would strike a fair intergenerational balance. This would see state pensioners receive an expected 2.5% increase next April with the increase in 2022 factoring in how earnings have performed over a two-year period.”