UK pensioners could see a significant increase in their state pension payments from April next year. According to official forecasts, state pension payments could rise by 8% due to the link with earnings growth. The Office for Budget Responsibility (OBR) said that it could mean an extra £3bn in costs for the government if the increase does go ahead.
Despite this sharp increase in pension payments, it has been pointed out that the state pension in the UK is still not as generous as in many other parts of Europe.
Governed by the triple lock
The rise in state pension payments is always a hotly debated and controversial topic among government and Treasury officials. It is governed by the triple lock, which means that any increases are based on the rising cost of living as seen in the Consumer Prices Index, an increase in average wages, or a set increase of 2.5%.
The state pension increases based on the highest of these three figures.
Experts believe 2022's state pension increase will be linked to the rise in average wages. Previously, OBR forecasters had predicted the increase in average wages would be under 5%. However, it has now changed its forecast, and the Bank of England has indicated it could be as high as 8%.
Last year, the Chancellor, Rishi Sunak, was asked whether the triple lock system was safe. In response, he said, "Yes, our manifesto commitments are there and that is very much the legislative position. We care very much about pensioners and making sure they have security and that's indeed our policy."
However, it has also been pointed out that the government ultimately decides how pension increase calculations are made. This means the government is within its rights to disregard the triple lock and give a smaller increase to pensioners, for instance, if the average wage increase is considered to be an anomaly.
The OBR stated many people on low wages had lost their jobs because of the Covid-19 pandemic. This meant that average wages were based on higher-paid workers, which means faster and steeper increases.
Not a ‘king’s ransom’
Many pensioners will undoubtedly be delighted to hear that their payments may be going up by such a significant amount. However, former Pensions Minister and now financial consultant Steve Webb said that the state pension was still "far from a King's ransom."
Not only is the state pension in the UK among the least generous in Europe, but the age at which people can claim has been increasing. This currently stands at 66 for men and women, but sources claim the government plans to increase this to 68 in the near future.