At the end of the year, the government sets the level of the state pension for the following tax year. An official forecast predicts the state pension will go up by 2.5% next April and an even more significant increase is on the horizon for 2022. The increases are posing a challenge to the government.
The Office for Budget Responsibility (OBR) published its official forecast for the following year. The forecast expects the UK state pension to increase by 2.5% in April 2021. From April next year, the state pension would look like this:
- £179.60 per week would be the new flat-rate for those who reached pension age after April 2016
- £137.60 a week for those who receive the old basic state pension (reached state pension age before April 2016)
OBR also expects the state pension to increase by 4.1% in 2022. The increase would boost the state pension by around £7 a week. The spikes in the state pension come at a time when the UK is facing rising unemployment. Chancellor Rishi Sunak has to balance the economic situation and the Conservative manifesto’s promise behind the rate increase.
What is the triple lock?
The increases on state pension are based on a system called a triple lock. It means the state pension increases each year in line with the rising cost living. The growth is in line with whichever of these three figures is the highest:
- The Consumer Prices Index (CPI) measure of inflation
- The growth of average wages in the UK
If the CPI index is 3% and above average wages, pensions would increase by 3%. If both CPI and average wages were below 2.5%, then the state pension would increase by 2.5%.
The Conservative manifesto promised to follow the triple lock until at least 2024. The system has been in place for the past decade, having been introduced by the Conservative-Liberal Democrat coalition. The purpose of the system is to ensure pensioners don’t have the cost of living overtake their pension increases.
According to Willis Towers Watson, a pension consulting firm, the triple lock system has meant the old basic state pension is £13.45 week higher than it would have been without it.
The coronavirus impact on the triple lock
A big reason behind the big jump in state pension rates in the coming year is down to the coronavirus pandemic. Because of the pandemic, the government’s furlough system creates an unusual situation in terms of average wages. The government has paid the wages of around nine million employees so far. When the support ends and people receive their usual full salaries, the average earnings will increase sharply. At one point, the OBR predicted this could lead to an increase of 18% next year.
The state pension recipients would benefit from the triple lock. The 2.5% minimum increase protects the pension payments since the payments are always guaranteed to grow by this much. The current fall in wages won’t cause the state pension’s to fall. However, the recipients could also witness a massive boost in the coming year due to the artificial pay rise in average wages.
Pensions could rise faster than earnings
The COVID-19 pandemic could increase unemployment figures in the coming months and years. The government has to juggle with the consequences of this, along with calls for increasing working-age benefits to cover the cost of living. Pensions are rising much faster than earnings or working-age benefits, and this is causing issues.
For pensioners, the increases in the state pension can provide a needed boost. If you’ve not built a healthy private pension, then you will benefit from the upcoming increases.