State pension may hit £14k by 2030: More big triple lock rises if inflation stays sticky

The state pension could rise to more than £14,000 a year by 2030 if inflation proves to be more stubborn than officially predicted in the coming years, according to a new study.

The ‘triple lock’ means that the state pension must rise every year at the highest rate of price inflation, average profit growth or 2.5 per cent – and both the Tories and Labor have pledged to keep this promise.

A breakdown of how this could play out puts the state pension at £13,230 a year by the end of the decade, even if inflation follows the Bank of England’s current projections, according to financial firm AJ Bell.

> When can state pensions rise to £14,000? Find year-by-year forecasts below

The government fulfilled its triple lock pledge this year, giving pensioners a massive 10.1 per cent increase to £10,600, or £203.85 a week.

But it provoked anger by scrapping the income element and giving the elderly a meager 3.1 percent increase in 2022.

Another battle looms this fall when the key inflation and wage growth figures that should determine annual increases next spring are published.

The core inflation figure used in the calculation comes from September and is published around mid-October, and the main earnings figure is for the three months to July, which is published in September.

The most recent figures for the above are 8.7 percent for CPI inflation in May and 6.9 percent for wage growth in March to May.

The Office for Budget Responsibility, the government’s independent economic forecaster, recently revealed that spending on state pensions in Britain (excluding Northern Ireland) is expected to reach £124bn in the current financial year.

“The triple-lock remains fundamentally unsustainable, but politicians are afraid of angering older voters if they abandon the pledge,” said Tom Selby, chief of pension policy at AJ Bell.

Rising inflation has been weighing on household budgets for almost two years now. However, the triple lock has protected retirees from this pain.

“This state pension protection is understandably popular with retirees, but it comes at a significant cost to the treasury.”

Selby says the real increase in costs will put pressure on governments to raise taxes, cut spending in other areas or take savings from the state pension system — with one option being to raise the age limit faster than planned.

“While capturing the triple-lock may be seen as the easy option politically at the moment, at some point someone will have to be brave enough to admit that this cannot go on forever.

‘If that were the case, the AOW would eventually be worth more than the average income.’

How the state pension could exceed £14,000 a year by 2030

The CPI inflation projected by the Bank of England is used in the first table, and AJ Bell calculates what would happen if it falls short and by a significant amount respectively in the second and third tables.

The BoE projection for the third quarter of the previous year is used for the triple-lock in 2024, 2025 and 2026, and the 2 percent inflation target is used for 2027 and beyond.

Average earnings growth is assumed to be below inflation or 2.5 percent in all three scenarios.

Selby adds: ‘The existence of the triple-lock is essentially a tacit admission by the government that the state pension is too low. Rather than arbitrarily inflating the value of the state pension, it would make much more sense for the government to determine what it believes a decent state pension is worth, and then steadily increase the value of the state pension to that level.

“Unfortunately, the triple lock has essentially shut down a sensible debate about increases in state pensions, with politicians seemingly happy to blindly support the pledge to avoid a potential scandal with older voters.”

Will the wage increase or inflation determine the next AOW increase?

The most recent wage inflation rate for total wages (including bonuses) was 6.9 per cent, which would raise the state pension from £10,600 to around £11,330 next year.

Meanwhile, the Bank of England is currently forecasting inflation to reach 7 per cent in September, equating to around £11,340.

“There are signs that the labor market is easing, so wage growth may fall faster than inflation in the summer,” said Alice Guy, Interactive Investor’s chief of pensions and savings.

If that happens, inflation in September instead of wage growth next year could be the determining factor for the AOW triple lock.

About four in ten retirees survive on state pension alone, she says.

‘Many current pensioners have little or no pension capital of their own because they worked before the mandatory occupational pensions were introduced in 2012.

“Women are less likely than men to have their own pension assets and they are also more likely than men to live in poverty when they retire.”

Guy adds that many poorer retirees spend a higher proportion of their disposable income on essentials such as food and energy.

She says those struggling with bills should check their eligibility for pension credit, which supplements your weekly income up to £201 for individuals or £306 for couples.

> Apply for a pension discount: Check whether you are eligible for extra help

Will the state pension catch up with the personal income tax deduction?

The personal deduction is £12,570, which is the threshold to start paying basic income tax rate of 20 per cent, and is currently frozen until 2027/8.

The full state pension rate could rise above this level in the coming years, points out Gary Smith, Evelyn Partners’ financial planning partner.

That puzzled the government of the time: create administrative and political headaches by taxing state pensions, possibly at source – which would be hugely unpopular among the more than 13 million people then expected to be of state pension age – or take away the headaches by increasing the personal allowance for everyone.’

He adds that senior citizens with even modest private income above the state pension are currently being tipped to pay a 20 percent base tax.

“While retirement savings can still be very tax-advantaged – especially if a saver is a higher or higher taxpayer in their working life but then a base taxpayer when they retire – this does remind today’s savers of the value of Isas, which is a valuable supplemental income for pensions during retirement, which are not subject to tax upon access.

“Although contributions to Isas will come from taxable income for most people.”