State pension set for bumper above-inflation increase

The state pension will increase by 8.5 per cent in April 2024 after today’s inflation figures confirmed the ‘triple lock’ increase will be determined by wage growth levels instead.

The triple lock mandates that the state pension rises every year in line with whichever is the highest between average annual earnings growth from May to July, inflation in the year to September or 2.5 per cent.

Consumer Price Index (CPI) inflation was up by 6.7 per cent in the year to September 2023, according to figures released today by the Office for National Statistics. This is lower than the wage growth data for the three months to July 2023, which stood at 8.5 per cent and was released last month.

An 8.5 per cent increase would see the new state pension jump from the current £10,600.20 a year to £11,501.22 in April 2024. With the personal allowance still frozen at £12,570, this would result in hundreds of thousands of pensioners paying income tax for the first time next tax year.

Tom Selby, head of retirement policy at AJ Bell, said sticking to its state pension triple lock promise will cost the taxpayer billions of pounds but it would be viewed as a "price worth paying" for prime minister Rishi Sunak, especially given next year's general election and with the Conservatives trailing Labour in the polls.

However, the Treasury could argue NHS bonuses inflated July’s earnings and use the lower 'smoothed' 7.8 per cent figure, which excludes bonuses. Or it could ditch the earnings element of the triple-lock and increase the state pension by 6.7 per cent, in line with today’s inflation figure.

This happened in the 2022-23 tax year, with the earnings part of the lock was ignored after wages jumped following the Covid-19 pandemic. It was later reinstated and in 2023-24 the state pension increased by 10.1 per cent in line with September 2022’s inflation rate, the highest increase ever.

Dean Butler, managing director for retail direct at Standard Life, noted that while the state pension was on the up, it still fell short of the £12,800 a single pensioner needs for a minimum standard of living in retirement, as per on the Pensions and Lifetime Savings Association’s Retirement Living Standards.