The state pension could rise to more than £12,000 next April under the Government’s triple lock guarantee, after wage growth reached 5.7% between March and May this year.
Under the triple lock guarantee, the government is committed to increasing the state pension every year by the highest of earnings growth, inflation or 2.5%.
While inflation may have retreated to 2%, annual growth in employees’ average regular earnings between March and May 2024 was 5.7%. The figure for May to July is used for the triple lock calculation.
Helen Morrissey, head of retirement analysis, said: “Inflation may be on the wane but wage growth remains red hot coming in at 5.7%. This makes it highly likely that wage growth will be used to uprate the state pension from April next year. If it remains at a similar level, we would see the full new state pension rise to more than £12,100 per year.
“Such a rise would be welcomed by pensioners who have been buffeted by the cost of living crisis. It may not be on the scale of increases given in the past but it will still make a sizeable difference to people’s day-to-day spending.”
David Brooks, head of policy at Broadstone, said: “It now looks likely that the average earnings figure will determine the next state pension increase. The OBR forecasts that earnings are likely to fall sharply soon but that may come too late to avoid triggering yet another sizeable uplift to the state pension.”
It remains to be seen if the state pension will form part of the government’s pension review, however with a burgeoning pensioner population, industry experts expect the government to act.
Morrissey said: “State pension costs are rising and the government will want to manage this and there is only so far they can go when it comes to raising state pension age. An overarching review is needed to put the state pension on a long-term sustainable footing so people have certainty over what they will get.”
The high wage growth has also raised questions over whether the Bank of England will cut rates next month.
Luke Bartholomew, deputy chief economist at abrdn, said while household spending will be supported by wages growing well in excess of inflation, the double edged sword is that wage growth is still well above a level that the Bank would consider consistent with its 2% inflation target.
“Policymakers need confidence that wage growth will slow further before embarking on rate cuts. Given the mixed data recently, if the Bank of England does plan on cutting in August, then the market may benefit from some guidance to this effect from key Bank decision makers very soon,” he said.
Lindsay James, investment strategist at Quilter Investors, said recent comments from the Prime Minister have emphasised that wage restraint is needed.
James said: “Looking ahead to August, it seems marginally less likely that the Bank of England’s first rate cut will materialise after inflation failed to cool any further so September may be a more reasonable expectation for an initial easing of monetary policy. Nonetheless, inflation is still at target and the labour market is showing some signs of cooling so we are likely to see more members of the monetary policy committee voting for a cut in the August meeting.”
