According to a recent study, the state pension could reach over £14,000 a year by 2030 if inflation proves to be higher than expected. The ‘triple lock’ system guarantees that the state pension increases each year by the highest of price inflation, average earnings growth, or 2.5%. Both the Conservative and Labour parties have promised to uphold this pledge. Finance firm AJ Bell predicts that even if inflation follows current Bank of England projections, the state pension could reach £13,230 a year by the end of the decade. However, if inflation exceeds expectations, the state pension could rise even further.
This year, the UK government adhered to the triple lock pledge and gave pensioners a substantial 10.1% increase, raising the state pension to £10,600 annually or £203.85 per week. However, there was backlash when the earnings element was removed, resulting in a modest 3.1% increase for older individuals in 2022. The annual increase is typically determined by key inflation and wage growth figures released in autumn. The inflation figure used for the calculation is taken from September and published in mid-October, while the earnings figure is obtained from the three months leading up to July and published in September. The most recent figures for inflation and wage growth are 8.7% for CPI inflation in May and 6.9% for wage growth in March to May.
The triple lock system, which protects the state pension from the impact of inflation, has been praised by retirees but comes at a cost to the government. The increasing cost of the state pension puts pressure on the government to either raise taxes, reduce spending in other areas, or make savings from the state pension system. One possible option is to raise the age threshold faster than planned. While the triple lock may be politically favorable at present, there will come a time when someone must acknowledge its unsustainability. If it continues indefinitely, the state pension could eventually surpass average earnings.
To illustrate the potential growth of the state pension, AJ Bell provides tables showing the projections based on Bank of England projected CPI inflation. However, they also calculate the potential scenarios if inflation falls short or exceeds expectations. It is essential for the government to determine the appropriate value of a decent state pension and gradually increase its value to that level, rather than haphazardly raising it. Unfortunately, the existence of the triple lock has stifled meaningful discussions about state pension increases, as politicians prefer to support the promise blindly to avoid confrontation with older voters.
The next state pension rise will be determined by either wage growth or inflation. The latest figure for wage inflation, including bonuses, is 6.9%, which would increase the state pension to around £11,330 next year. The Bank of England currently forecasts inflation at 7% in September, which would result in a state pension of approximately £11,340. However, there are indications that wage growth may decrease faster than inflation during the summer. Therefore, inflation in September might be the determining factor for the state pension triple lock next year.
Around 40% of pensioners rely solely on the state pension, and many of them have little or no private pension wealth. Women, in particular, are more likely to be in poverty during retirement and have less private pension wealth compared to men. Pensioners with limited resources often spend a significant portion of their income on essential items like food and energy. Those struggling with bills should check if they qualify for pension credit, which can provide additional financial support.
As the full rate state pension approaches the income tax personal allowance of £12,570, a future government will face a dilemma. They will need to decide whether to tax the state pension, potentially at source, which could be highly unpopular among the more than 13 million people expected to be of state pension age, or raise the personal tax allowance for everyone. Currently, even individuals with a modest private income above the state pension threshold may end up paying basic rate tax at 20%. This emphasizes the value of Isas, which can provide a tax-efficient supplementary income during retirement.
The full flat rate state pension is currently £203.85 per week or £10,600 annually. Individuals who retired before April 2016 receive a full basic state pension of £156.20 a week or £8,120 annually. The old basic rate is supplemented by additional state pension entitlements earned during working years. Those who contracted out of certain pension schemes may receive less than the full new state pension upon retirement. To qualify for the new flat rate state pension, workers need to have 35 years of contributions. The option to defer the state pension is available, and individuals can also purchase top-ups to fill in any gaps in their pension contributions.
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