As the UK awaits the inflation announcement that will decide how much the basic and flat-rate state pensions will rise by in the next financial year, it will be the first time pensions have not increased according to the triple lock since its inception.
The system sets out that state pensions grow every year based on average earning growth, inflation or 2.5%, whichever is highest.
But because of a surge in earnings figures exceeding 8%, due to the effects of the pandemic, the UK government decided to suspend the pensions triple lock for the 2022-23 tax year.
Pensions will rise by the highest of inflation or 2.5%, instead.
Analysis by AJ Bell has found that since the triple lock was introduced in 2011-12, the basic state pension has increased in value by 35% – to £137.60 ($188, €160) per week from £102.15.
Whereas the flat-rate state pension, which was first introduced in April 2016, grew in value by 15% – to £179.60 from £155.65 a week in the current financial year.
If the average earnings figures had been adopted, this would have sent the basic state pension to £149 and the flat-rate one to £194.50 per week.
A costly move
Tom Selby, head of retirement policy at AJ Bell, said: “Since its introduction in 2011/12, the state pension triple lock has dramatically boosted retirement incomes for millions of people.
“However, in 2022/23 the state pension will rise in line with the highest of inflation or 2.5% only, with consumer price index (CPI) for September historically the figure used. This will therefore confirm just how much the government’s decision to axe the earnings element of the policy will cost retirees.
“Average earnings for the three months to July 2021 – the figure historically used for the triple lock – rose by a staggering 8.3%. This jump can primarily be explained by labour market distortions caused by the pandemic, with average earnings plummeting in 2020 as society locked down and then rebounding in 2021 as restrictions have eased.
“This would have been a boon to retirees but at a significant cost to the Exchequer in a year when lots of people faced huge uncertainty over their pay and employment.
“According to the Office for Budget Responsibility, every one percentage point rise in the state pension costs the Treasury around £900m. This implies an 8.3% increase would have cost over £7bn compared to freezing the state pension and over £5bn versus a 2.5% rise.
“Despite being a central part of the Conservative party manifesto, the triple lock was viewed as too expensive a pledge to maintain – although it is due to be reinstated after next year.”