The government is expected to make a decision on April’s state pension pay rise today in a move that will affect almost every single retired person next year.
Under the terms of the Tory ‘triple lock’ manifesto promise, the state pension must rise by the highest of average earnings, inflation or 2.5% every year.
However, payroll figures, skewed due to furlough, show total pay for the year is on track to top 8% next month when the figures come in – putting pensioners on track for a record pay rise.
To avoid this £800 a year payout, the Chancellor wants to swap the triple lock for a double lock in April 22, meaning pensioners will see their salaries rise by 2.5% instead.
That will allow him an extra £3billion to help pay for the £299billion and rising Covid bill.
It is estimated that if Sunak sticks to the Tory manifesto, it would cost the Treasury £5billion more than a 2.5% increase.
The double lock plan would only be implemented for one year and would raise pensions by the larger of 2.5% or September’s Consumer Prices Index inflation.
The government has long been deliberating on how much the state pension will rise by next year due to heightened wage growth post furlough.
On Monday, the chairman of the Treasury Committee claimed the state pension triple lock would be “unsustainable” next year.
Mel Stride said the wages measure used to calculate the triple lock should be temporarily suspended.
The triple lock guarantees that the state pension will increase in line with inflation, earnings or 2.5 per cent, whichever is higher.
But distortions to wages during the coronavirus crisis could mean pensioners receive a rise of as much as 8% extra – an extra £3billion – while many workers have been dealing with job losses, salary cuts and pay freezes in the pandemic.
Mr Stride said: “A potential almost double-digit percentage rise is unrealistic and unfair, with knock-on effects for the public finances.
“Given that average wage levels have been skewed by the unprecedented events of the past 18 months, the Chancellor should temporarily suspend the wages element of the lock.
“This is a sensible approach which will aid our recovery from the pandemic.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said it’s time to reform the entire pensions lock promise.
“Such a move will no doubt disappoint pensioners who could have been in line for an inflation busting increase to their state pension of more than 8% under the triple lock,” she said.
“However, given many of the working population saw their income fall during the pandemic such a large increase would be unlikely to be popular at a time when the government needs to balance the books as the economy emerges from the pandemic.
“The triple lock has played a role in boosting the incomes of pensioners over the past decade, but the current situation has exposed its flaws.
“The time has come to look at whether it remains the best way to preserve the long-term value of the state pension.”
What is the pensions triple lock?
Despite popular belief, there is no state pension retirement ‘pot’ that is built up as we work and pay National Insurance.
Instead, the state pension for retirees today is paid by people currently working.
The state pension is usually paid every four weeks, in arrears.
Under the triple lock arrangement agreed in 2011, the state pension must by the highest of inflation, 2.5% or average wage growth during a set period each April.
This is separate to your workplace pension which is privately invested by you and your employer. Workers over the age of 22 and earning £10,000 or more a year are automatically enrolled onto it and your employer will, in most cases, match your contributions. Anything you pay in each month is tax-free.
If you have shortfall in your pension, you may be able to apply for pension credits to top it up.
What impact has Covid had on the triple lock?
Nine million people going from furlough to employment has resulted in a record rise in average earnings on paper – which puts pensioners in line for a rise of over 8% according to the Bank of England.
However, the government argues this is unfair given that so many people are still struggling due to Covid pressures.
So will the triple lock change?
The Chancellor has hinted that the triple lock could be broken to ensure “fairness for pensioners and taxpayers”.
In a letter to the Treasury Committee, he says he is aware of “legitimate concerns” about potentially artificially inflated earnings numbers leading to a big rise in the state pension, but that the forecasts remain uncertain.
The triple lock guarantee was introduced by the Conservative-Liberal Democrat coalition to ensure pensioners did not see any rise in their state pension being overtaken by the rising cost of living, nor that the working population would be see a much bigger income rise than them each year. It has proved to be a very expensive policy.
From April this year, the full, new flat-rate state pension (for those who reached state pension age after April 2016) is £179.60 a week.
The full, old basic state pension (for those who reached state pension age before April 2016) is £137.60 a week.
How to prepare for retirement