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State pension triple lock could exceed Government budget by £9bn

Paloma Kubiak
Written By:
Paloma Kubiak

The cost to the Government in providing the pensions triple lock could be £9bn more in 2024/25 and £2bn more than current forecasts, calculations reveal.

Higher than expected wage and price inflation could see the Department for Work and Pensions (DWP) exceed its original forecast for total state pension payouts under the triple lock mechanism.

The pensions triple lock guarantees that the state pension will rise by the higher of average earnings, inflation or 2.5%.

In April, retirees received a bumper 10.1% increase – the biggest rise ever – as the figure was based on September’s inflation reading, taking the new/flat rate state pension to £10,600 while the basic state pension for pre-April 2016 retirees increased to £8,122.

According to calculations by investment platform Interactive Investor, based on the latest data from the DWP, Office for National Statistics and the Bank of England, it suggests the pension triple lock mechanism could actually cost £2bn more to deliver than initially expected.

This is because the March 2023 forecast for the 2024/25 tax year projected the state pension to rise to £11,172 at a cost of £6.9bn.

But latest forecasts for Q3 suggest the state pension could rise to £11,331 a year at a total cost of £8.8bn – nearly £2bn more.

Overall, the DWP March forecast expected the total state pension cost to rise to £135bn in the tax year beginning April 2024. But sticky inflation and increasing wages mean that the state pension bill could rise to around £137bn next year, with the triple lock estimated to cost around £9bn to the taxpayer based on II calculations:

Is the triple lock a financial burden?

Alice Guy, head of pensions and savings at Interactive Investor, said with more of us living for longer, the triple lock is “fast becoming an costly financial commitment for the Government.”

Guy said: “Both inflation and average wage rises are higher than expected back in March when the DWP set their budgets, which could push the state pension higher than expected in March. The latest ONS wages data shows that average wages rose 6.9% between March and May 2023, while inflation also remains stubbornly high, expected to average 6.9% in Q3 based on the latest Bank of England forecast.

“This compares with a lower level of inflation expected when the DWP set its budget in March, 5.4% on average for Q3 2023. And this has a knock-on impact on the state pension.”

Government faces ‘stark choice’

She added that the state pension final bill could be lower if inflation or wages fall over the summer.

“There are signs that the labour market is loosening, with vacancies falling in recent months. This could mean inflation and wages fall slightly over the summer, resulting in a slightly lower state pension bill,” she said.

However, the Government could face a “stark choice” between reducing the value of the triple lock or raising the state pension age quicker than planned.

“There are no easy solutions as even with the triple lock, the cost-of-living crisis means that an increasing number of pensioners are living in poverty. There’s a big time-lag between high inflation and an increase in the state pension, meaning that many poorer pensioners are facing a shortfall and are struggling to make ends meet.

“If you are struggling on a low income in retirement then it’s important to see if you could be entitled to benefits to supplement your income. It’s estimated that 800,000 pensioners are entitled to pension credit that aren’t current claiming it, a benefit that is worth an estimated £3,500 on average,” Guy added.