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Why the state pension increase could leave retirees worse off
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.”