Covid recovery will prompt huge hike in state pension payments

Triple lock rule risks £34bn increase in retirement bill by 2022

Under current rules, the state pension increases each year in line with the rate of inflation, average earnings growth or 2.5 per cent – whichever is higher (GettyiStock)

When money gets tight, the response is usually a bit of austerity, of cutting back and bearing down on costs – whether you’re a consumer or an entire government.

Expensive habits are swept aside in a bid to recover the bottom line, especially after a period of huge, some might say unprecedented, spending.

So it would come as quite a surprise to most of us that just when the nation’s debt levels are screamingly high, the latest official figures now point to an enormous increase in the amount paid to pensioners through the state pension over the next two years – all because of the infamous triple lock.

The Office for Budget Responsibility (OBR) predicts that the UK’s average earnings will fall by more than 7 per cent this year as the impact from Covid continues to work through the economy. This, the public body calculates, will be followed by an 18.3 per cent rebound next year – assuming the economy recovers rapidly.

Meanwhile, inflation looks set to increase by 1.2 per cent in 2020 before creeping up to 2.3 per cent next year, the OBR forecasts.

The numbers appear to be positive news for those fearing a long and protracted period of personal financial hardship.

But the way the numbers inform spending on individual benefits mean that, if these predictions come true, the knock-on effect on the state pension could cost an extra £34bn.

The triple lock is supposed to ensure that those receiving a state pension after they retire have a consistent value in that income as the cost of living changes over time.

Under current rules, the state pension increases each year in line with the rate of inflation, average earnings growth or 2.5 per cent – whichever is higher.

The rules meant that in the middle of lockdown and the wider economic fall, pensioners received a 3.9 per cent pay rise.

With the triple lock in place, the OBR figures predict the flat-rate state pension would rise by more than 21 per cent in the next two years alone – first by 2.5 per cent in 2021 as the minimum is applied, and then by 18.3 per cent in 2022 in line with those average earnings hikes.

Payments would rise from £175.20 a week to £212.45 a week.

“The triple lock is meant to provide a relatively straightforward underpin to people’s state pension incomes,” says Tom Selby, a senior analyst for investment platform AJ Bell.

“However, it simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next.

“The implications this could have on the cost of the triple lock over the next two years are astronomical and it is hard to see a way Boris Johnson can stand by one of his key election promises.”

Based on previous OBR costings and its own estimates for inflation and earnings, retaining the triple lock for 2021 and 2022 would cost more than £22bn above a straight average earnings link, and a staggering £34bn more than if it were only protected in line with inflation.

“The government has two options open to it: carry on with the state pension triple lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners,” adds Selby.

If the state pension rose in line with average earnings only, it would increase 9.7 per cent in value over the next two years from £175.20 a week to £192.15 a week – at an extra cost to the public purse of £18.76bn, according to calculations by AJ Bell.

If the state pension rose in line with the OBR’s inflation prediction only, it would rise by just 3.5 per cent to £181.40 by 2022, costing the country an extra £6.8bn compared with current payments.

Last month the prime minister vowed to retain the triple lock in response to expert calls, including from the Treasury, for it to be scrapped in a bid to recoup the mounting costs of coronavirus.

He also stated that “unless I specifically tell you otherwise”, taxes including national insurance, income tax and VAT would not increase to pay for emergency measures, such as the furlough scheme.

It is not the first time appeals for reforms to the expensive rules, introduced in 2011 by the last coalition government, have been made. But now critics are warning that the triple lock must be scrapped so that all generations pay the bill for the global pandemic equally and fairly.

Were the triple lock to be scrapped and an alternative benchmark introduced, retirees would see a gradual reduction in the annual rate of increase rather than an immediate drop in their state pension pay.