The Government has suspended the State Pension triple lock for 2022/23, moving to a double lock format.
Coming hot on the heels of the Government’s announcements on 1.25% increases to both National Insurance payments and dividend tax, the Prime Minister Boris Johnson delivered two lots of bad news in one day.
Sticking rigidly to the state pension triple lock formula would have granted state pensioners an unrealistic increase of around 8.8% at a time when earnings are still recovering from the pandemic. The Government has removed the earnings figure for this year entirely, moving to a double lock based on the higher of price inflation or 2.5%. Now the increase in the state pension will be determined by September’s CPI figure, announced in October.
Tom Selby, senior analyst at AJ Bell, commented: “The decision to scrap the state pension triple-lock for 2022/23 was undoubtedly linked to today’s social care announcement, with Prime Minister Boris Johnson keen to ensure that, optically at least, both younger and older voters are sharing the burden of Coronavirus-related costs.”
The Office for Budget Responsibility estimates every 1 percentage point increase in the state pension costs the Treasury about £900 million.
Steven Cameron, Pensions Director at Aegon said that “some adjustment was inevitable and only fair. Today’s state pensions are paid for by today’s workers through National Insurance contributions. Based on last month’s earnings data, a predicted 8.8% increase would have cost around £8bn next year and in every future year. Adding this burden to working age earners alongside the 1.25% increase to NI for the health and social care levy would have represented a double whammy hit to take-home pay.
“While the new deal on social care funding should eventually benefit us all, it is those above state pension age who are likely to benefit first, with younger generations picking up the initial cost. It would have severely stretched intergenerational fairness to also have granted such a major increase to state pensions, again paid for by today’s workers.”
Ian Browne, pensions expert at Quilter pointed out that the triple lock had been tweaked last year to ensure that pensioners received a fair deal, when the government introduced new legislation to ensure state pensions were uprated by 2.5% in recognition of their manifesto promise and commitment to pensioners. At the time, inflation was 0.5% and earnings were falling due to the furlough scheme. “Now it’s gone the other way it’s only right that the government reacted,” Brown said.
“The Bank of England’s Monetary Policy Committee estimated recently that inflation will increase temporarily to 4% in the near term. Assuming that CPI inflation is 4% this month, removing the earnings link will save the government £3.6bn next year. Music to the ears of the Chancellor.”
Sarah Pennells, Consumer Finance Specialist at Royal London, added that the state pension was still “the bedrock” of many pensioner’s retirement income, and women and the self-employed would be among those “particularly affected by the temporary scrapping of the triple lock, as they are more likely to rely on the state pension in retirement.
“However, it is encouraging that the Government hasn’t abandoned its longer-term commitment. The 2.5% minimum rate has been used on a number of occasions, and is having the effect of slowly increasing what people receive in real terms. The long term trajectory of the state pension will also be more important to younger people, more than a one-off hike in line with earnings this year.”
