There has been a lot of talk about what UK chancellor Rishi Sunak is going to do in the upcoming autumn budget to pay for the multi-billion-pound covid-19 bill.
Many believed the government was going to scrap the pensions triple lock, while others speculated on what other taxes could be increased.
Sunak also ordered a review of capital gains tax, one of the areas that could be impacted in the budget.
But it seems like that the government will stick to its manifesto pledges and keep the triple lock in place, which would see state pensions being increased by at least 2.5% in the 2020/21 financial year.
Small print
Steven Cameron, pensions director at Aegon, said the government will be able to uprate pensions by passing a technical bill that cancels a “technical detail in the small print” stating that, if earnings growth is negative, state pensions will see no increase, regardless of price inflation and the 2.5% guarantee.
“This obscure technical detail has escaped the notice of pensions experts and had the government used this to justify no state pension increase next April, would have come as a shock to millions of state pensioners,” he added.
“While removing the legal barrier to granting an increase is welcome news, it may not be the final twist in the tail of the triple lock saga, as it’s still to be seen if the government will stick rigidly to this formula year on year.
“The government could decide to retain the spirit of the triple lock, but rather than the formula working year on year, it might smooth earnings fluctuations caused by furlough over two years, which would present a fairer approach across generations.”
Numbers
Ian Browne, pensions expert at Quilter, said: “Given both earnings growth and inflation will be around or below 1% next year, the triple lock will guarantee a 2.5% increase in the state pension next April, which means recipients of the individual full basic state pension will receive £7,155.53 a year, up from £6,981 this year and recipients of the new style state pension will receive £9,338.16 ($12,012.4, €10,181) a year, up from £9,110.4.”
“This is despite the fact that inflation is predicted to remain low, or perhaps even negative, for some time to come, and average earnings growth will remain subdued given the gloomy employment environment resulting from covid-19.”
The move, however, has received criticism as the older generation will be better off than the younger ones who are struggling with unemployment.
‘Intergenerationally unfair’
Browne added: “There is a danger that guaranteeing a 2.5% boost to the state pension is perceived to be intergenerationally unfair, given it will provide a considerable boost to pensioners’ income when many others are taking a cut in their pay, working less hours or have lost their jobs altogether.
“But even more contentious is the fact that, once the furlough scheme ends later this year and if wages recover, in its current form the triple lock will provide an artificially large boost to state pension income in 2022/23 when we could be in the clasp of a deep recession and when the government is struggling to control the deficit.
“Once wages recover next year, average earnings growth is expected to bounce back to create a one-off spike in wage growth, estimated to be as high as 5%. This will increase the full basic state pension to £7,513.30 a year in 2022/23 year, and the new style state pension to £9,805.07 a year.
“As such, the triple lock will no longer provide a link between the real economy and increases in the state pension. The 8% boost in state pension income over two years will come at a time when real economy metrics including earnings, employment, growth and inflation are flat.
“Now the government has shown it is willing to honour its manifesto commitment to keep the triple lock, will the chancellor do the same with the triple promise not to raise income tax, VAT or national insurance?”
