The government has confirmed a one-year suspension of the ‘triple lock’ for annual state pension increases.
The ‘triple lock’ is a formula used to guarantee pensioner’s incomes rise by either September’s rate of inflation, earnings growth, or a guaranteed minimum of 2.5% – whichever is larger.
But the government confirmed today that the average earnings component would be disregarded in 2022-23 (as it was last year) and the rise will temporarily be replaced with a ‘double lock’ linked to either inflation or 2.5%.
Pensioners were on track to get a record boost to their state pension next year thanks to artificially high earnings growth – by more than 8% thanks to the effects of the furlough scheme, according to the Office for Budget Responsibility (OBR).
The news is the second blow for pensioners in one day. Earlier, the Prime Minister announced a 1.25 percentage point hike to National Insurance contributions from 2022, which will also apply to workers that have reached state pension age from 2023.
Here, Which? looks at what the change means for your state pension payments.
How much will the state pension go up by next year?
Under the double lock system, the state pension is expected to increase by September’s rate of inflation (announced in October) or the 2.5% guaranteed minimum.
This means retirees under the new state pension system can expect payments to go up from £179.60 a week to at least £184.10 in the 2022-23 tax year.
While the basic state pension will be increased from £137.60 to at least £141.05 from next April.
According to wealth management firm Quilter, using a 2.5% figure would save the government £5bn compared with an 8% increase. If the 8% increase had gone ahead pensioners would have benefited from a boost to £194 under the new state pension and £148.65 under the basic state pension.
Speaking today in the House of Commons, work and pensions secretary Therese Coffey – who announced the changes – said the 2.5% increase will stop pensioners ‘unfairly benefiting from a statistical anomaly’.
- Find out more: your state pension forecast explained
Will the triple lock return?
The triple lock was introduced in 2010 by the then coalition government to ensure the state pension would keep up with inflation and wage growth.
In its manifesto pledge for the 2019 general election, the Conservative Party said it would not scrap the triple lock guarantee. Although, that was before the pandemic.
Rumours of the triple lock being scrapped have been floating around for quite some time, but the pressure to scrap or amend the guarantee has accelerated since the coronavirus crisis started last March.
Chairwoman of the Treasury Committee, Mel Stride, recently said the triple lock is unsustainable in its current form, and the wages element should be suspended due to the artificial boost to wage growth.
A year ago, wages were depressed because of the beginning of the furlough scheme, so the current rate isn’t really a reflection of workers getting large pay increases but just that wages are returning to pre-pandemic levels.
This doesn’t spell the end of the triple lock forever. In today’s announcement, Therese Coffey said: ‘We can and will apply the triple lock as usual from next year for the remainder of this Parliament, in line with our manifesto commitment.’
Is the change fair to pensioners?
Think tank Social Market Foundation (SMF) suggests capping the triple lock could help to ensure that the financial cost of coronavirus was borne by all generations.
Other experts have a similar same view, including pension provider Royal London, which says keeping the triple lock would cause issues around intergenerational fairness given many working people had seen their incomes fall during the pandemic.
Caroline Abrahams, charity director at Age UK, which has supported keeping the triple lock in the past, admitted temporarily removing the guarantee was ‘a price worth paying’ if it helped ministers agree on a deal on social care.
As well as watering down the state pension guarantee the government has also announced changes to National Insurance – intended to help pay for the social care system. Under the reforms, the new 1.25 percentage point health and social care levy will come in from April 2022 but will also apply to workers who have reached state pension age from April 2023.
- Find out more: social care reforms explained