State pension likely to rise 8.2% before election to nearly £11,500

The full state pension could reach £220 a week if earnings growth remains at the current 8.2 per cent, as experts believe the government is very unlikely to break its triple lock pledge ahead of an election.

Older people have been hit hard by rising household bills, but the pain could be eased by another bumper increase in the state pension next spring, following a 10.1 percent increase in April last year.

Meanwhile, the elderly are more likely than other age groups to avoid the current high interest rates if they are mortgage-free, while benefiting from improved savings rates.

The triple lock commitment means that the state pension must increase each year with the highest price inflation, average income growth or 2.5 percent.

Wage inflation including bonuses was 8.2 percent in April-June according to official data released today, a month before the crisis figure used to institute the triple lock. Excluding bonuses, that was 7.8 percent.

CPI inflation stood at 7.9 percent in June and is expected to ease before the key figure is announced in October.

“Today’s new average income growth figures suggest that next year’s state pension increase could easily be 2 percent higher than expected by the chancellor at the time of the budget,” said former pensions minister Steve Webb.

At the time, the Office for Budget Responsibility assumed the increase would be 6.2 per cent, and it is a ‘reasonable rule of thumb’ that an extra 1 per cent on the state pensions increase would add about £1bn to the Department for Work and Pensions account, he explains.

“It seems very likely that the pension increase implied by the triple lock policy will be much higher than expected at the time of the March 2023 budget,” said Webb, now a partner at LCP and the retirement columnist for This is Money.

While inflation is falling, the rate of average income growth is accelerating and is likely to be the most important factor determining next year’s state pension increase.

An additional bill of £2bn due to higher-than-expected earnings growth seems quite plausible. But it is unlikely that this would lead the government to break the triple lock, especially ahead of the likely general election in 2024.”

Steven Cameron, director of pensions at Aegon: ‘If the profit growth figure announced next month remains at this level, this will guarantee pensioners 8.2 percent in April, even if inflation continues to fall.

‘State pensioners can be the winners, especially because they are less likely to suffer from sky-high mortgage costs and can also benefit from higher interest rates on savings.’

Annual growth in average wages including bonuses by a staggering 8.2 per cent has been skewed by one-off bonus payments to NHS staff, but it’s going up in the air, according to Hargreaves Lansdown, head of pension analysis Helen Morrissey.

‘We may not see the stunningly high increase in the AOW that we saw last year, but something close to 7 percent is not excluded.

This would be welcomed by retirees who have battled rising costs, but adds to the woes of the government trying to find a way to curb the rising cost of state pensions. Now that the system continues to crack under pressure, it is time for a review of how the state pension works and the role of the triple lock in it.’

Adrian Lowery, financial analyst at asset manager Evelyn Partners, says: “This above-expected wage growth will be watched nervously at the Treasury as it threatens to add fuel to the triple lock fire.

The wage element of the triple lock – annual earnings growth for May to July – won’t be available until next month, but this outcome suggests it could be significant.

In addition, strong wage growth is likely to hamper inflation’s pullback in coming months, and the Bank of England recently warned that the pace of wage growth threatens its longer-term inflation target of 2%.

Lowery says a very substantial increase in the state pension and sparks debate over whether the triple lock is sustainable.

‘The costs of the state pension are expected to exceed the combined expenditure on education, police and defense in the next two years.

“With none of the leading parties willing to question the affordability of the triple lock ahead of a general election, this could add to the strain on public finances.”

Jon Greer, head of pension policy at Quilter, says: ‘Despite the cost, the Conservative government is unlikely to go back on its triple lock pledge.

In recent years, the triple lock has been a major bone of contention, and with the next general election on the horizon, Conservatives will be reluctant to rock the boat of core voters.

“However, it is inevitable that at some point the increase in the state pension will be replaced by a less generous increase mechanism, but what exactly that will look like remains to be seen.”