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Earnings link to be restored for state pension

Queen's Speech announces minimum 2.5% annual rise

Queen's speech

State pensions will rise in line with earnings from April 2011. The new Pensions and Savings Bill gives a ‘triple guarantee’ that pensions will be raised each year by the higher of earnings, prices or 2.5%. 

Earnings link restored 

State pensions were linked to earnings from 1974 to 1980, but for the last 30 years have been increased in line with prices, as measured by the retail prices index (RPI). Rises linked to prices protect pensioners from the impact of inflation but as wages tend to outstrip prices each year, state pension has fallen behind average earnings since the link to pay rises was cut. In 1980 the basic state pension was £27.15 a week. Currently, it is £97.65. According to pensions expert Dr Ros Altmann, if it had risen in line with earnings, instead of prices, it would now be ‘above £140 a week’.

Triple guarantee   

Restoring the earnings link should help pensions keep up with future rises in the standard of living. To make sure this happens, the government has committed to an annual increase which matches earnings, inflation or a minimum of 2.5%.

Responding to government proposals, Michelle Mitchell of Age UK said: ‘The coalition Government’s pledges to restore the state pension/earnings link, phase out forced retirement, auto-enrol people into pensions and extend flexible working are all welcome policies. But on the day the government announced 1.8 million older people remain in poverty, it’s disappointing the coalition makes no reference to reducing poverty or making energy affordable for people with low income. We hope to see further progress on these key issues for older people in the next few months.’

More from the Queen’s Speech

We’ve got more coverage on today’s announcements, including news that:

  • more powers will be given to the Bank of England to oversee regulation of the UK’s banking system;
  • almost a million people who lost their savings in the Equitable Life scandal will be paid compensation;
  • the new Energy Bill aims to improve energy efficiency and promote low carbon energy production.

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