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Why the state pension increase could leave retirees worse off

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Written by: Emma Lunn
28/10/2021
Pensioners could effectively experience an income cut in real terms due to soaring inflation.

The UK state pension is set to increase by 3.1% next year, in line with September’s CPI inflation figure. This follows government’s decision to axe the earnings element of the ‘triple-lock’ for 2022/23.

However, chancellor Rishi Sunak yesterday warned inflation is set to average 4% over the next 12 months – meaning pensioners could effectively be worse off. If prices rise by 4% but the state pension increases by 3.1%, that implies a real term cut of 0.9%.

The basic state pension is set to increase by £4.25 a week next year, from £137.60 per week to £141.85 per week. The flat-rate state pension will increase by £5.55 a week, from £179.60 per week to £185.15 per week.

However, if inflation hits 4% the real value of the basic state pension in 2022/23 will fall by £1.20 to £136.40 per week, while the real value of the flat-rate state pension will drop by £1.60 to £178 per week.

Tom Selby, head of retirement policy at AJ Bell, said: “While a 3.1% increase in the value of the state pension might feel like good news, with chancellor Rishi Sunak warning inflation could run at 4% over the next 12 months pensioners are set to feel the pinch from a real term cut in their retirement income.

“If prices rise by 4% then the 3.1% ‘increase’ in the state pension next year will feel like a 0.9% fall, translating to around £1.20 per week less in real terms for those in receipt of the basic state pension and £1.60 per week less for those entitled to the full flat-rate state pension.

“That might not sound like a lot but for pensioners struggling to make ends meet a £60 to £80 drop in their annual spending power could make all the difference. For retirees already set to feel the pinch from rising fuel bills over the winter, a drop in the real value of their state pension will feel like being kicked while they are down.

“From the Treasury’s perspective axing the triple-lock for a year represents a cash bonanza, delivering £5 to £6 bn a year of savings.”

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