The triple lock’s 2.5% rule is set to be triggered following a low CPI annual rate and low earnings figures, offering pensioners 2% above inflation.
On Wednesday (21 October) the CPI annual rate for the year to September was revealed to be 0.5%, while earnings figures, released in July, stood at -1%.
As a result, the 2.5% rule on the triple lock will kick in, offering pensioners 2% above inflation.
Pensioners on the new state pension will see a rise of £4.40 a week to £179.60 and those on the old state pension will see a rise of £3.40 a week to £137.65.
Aegon pensions director Steven Cameron said: “The state pension is not funded in advance but on a ‘pay as you go’ basis from today’s workers’ National Insurance contributions. The chancellor will no doubt be facing difficult decisions over whether he can afford to retain the triple lock as he supports the economy through wave two of the pandemic and looks ahead to getting the nation’s finances back on track.”
The triple lock guarantees the basic state pension will rise in line with the highest of earnings, inflation or 2.5%.
Quilter pension expert Ian Brown pointed out that, despite the Conservative’s manifesto pledge to keep the triple lock in place, the Department for Work and Pensions has discretion in setting the rate at which state pension benefits will increase, and are yet to confirm the exact figure they will use in 2021/22 – although a 2.5% increase is widely expected.
He added: “This is despite a challenging economic backdrop in which many workers are taking a cut to their pay packet, are working fewer hours than they would like, 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.”
Canada Life technical director Andrew Tully said although the 2.5% up-rate looks like a generous uplift in state pension, in reality the UK system “remains one of the least generous in the western world.”
“Any future attempt to reduce the value of the uplift by moving to a double-lock or some other mechanic would risk a serious retirement rebellion from millions of voters and any government would be foolish to ignore that” Tully added.
Lifetime allowance increases
Meanwhile, the pensions lifetime allowance will increase by around £5,800 to a new limit of £1,078,900 the next tax year 2021/22, from the current £1,073,100.
Tully continued: “Another small increase in the amount people can save into a pension before being hit by the lifetime allowance is helpful and will present new financial planning opportunities. However, it again highlights the complexity of having restrictions as people make pension contributions and restrictions when people take benefits.
“Simply scrapping the lifetime allowance and letting the annual allowance do its job would simplify the system and not penalise those people who benefit from good investment growth.”
AJ Bell senior analyst Tom Selby added: “While a lifetime allowance of over £1 million might sound like a king’s ransom, for a healthy 65-year-old it would buy a single-life annuity paying less than £28,000 (assuming full tax-free cash entitlement is taken) – a decent income but below the average salary in the UK.
“The lifetime allowance has been cut repeatedly from a high of £1.8 million in 2011/12, creating unwelcome complexity on the way, punishing those who enjoy strong investment growth and causing particular problems for long-serving public sector workers.
“Although clearly dealing with unnecessary complexity in the pension tax system is not a priority at the moment, at some point we hope the government will address these issues.”
The lifetime allowance is a limit on the amount of pension benefit that can be drawn from pension schemes and can be paid without triggering an extra tax charge.