State pension could hit £10,000 next year
The flat-rate state pension could increase by £746.20 to £10,085.40 in 2022 (£193.95 per week) if earnings growth continues to be taken into account when setting the weekly rate.
The ‘triple lock guarantee’ is a safeguard that currently applies to the UK state pension, to ensure that it doesn’t lose value because of inflation. The pledge means that state payments will rise annually by the higher of average earnings, inflation, or 2.5%.
But experts have warned that the guarantee could become more expensive to maintain due to wage distortions caused by the pandemic.
Lockdown saw salaries suppressed in 2020, with millions of people furloughed on 80% of their usual wages. But as the economy returns to normal this summer, earnings are expected to spike. In the three months to May total average earnings rose by 6.6% and many expect the figure for the three months to July – historically used as the reference point for the triple-lock – to be even higher.
Even a 5% earnings jump would raise the value of the flat-rate state pension by £468 to £9,807.20 (£188.60 per week) in 2022/23.
Inflation, another element of the triple lock, is also expected to continue to rise as lockdown measures end.
Tom Selby, senior analyst at AJ Bell, said: “Chancellor Rishi Sunak faces being caught between the devil and the deep blue sea on the state pension triple-lock. While the policy could add billions of pounds to public spending at a time of severe fiscal pressure for the country, unpicking it would break a manifesto commitment.
“If average earnings spike by 8% in the three months to July, which looks entirely plausible based on the current data, this could increase the value of the flat-rate state pension by £746.20 to over £10,000 a year, or £193.95 per week.”
The Office for Budget Responsibility (OBR) estimates an 8% increase in average earnings could cost the exchequer about £3bn versus its March earnings forecast of 4.6%. In fact, the Office for Budget Responsibility (OBR) estimates every 1 percentage point rise in the state pension will cost the government about £900m.
Selby said: “One option would be to ditch the earnings element of the triple-lock altogether, either for this year only or perhaps the rest of this parliament. The amount of money this would save would depend on what happens to inflation during that period.
“However, the political price of breaking a manifesto commitment that affects older voters may be too much to bear. Alternatively, the triple-lock methodology could be tweaked so average earnings over a longer period of time are used as the reference point, rather than the figure for the three months to July.
“This would help smooth out the increase while also allowing the chancellor to say the triple-lock remains intact.”