High wages and inflation – how do they affect the pension triple lock and the state pension?

This month’s wages and inflation data provided food for thought with inflation continuing to fall - hitting 6.8% in July. However, this was offset by data showing average wages (including bonuses) grew by a whopping 8.2%.

Slowing inflation and rising wages sound like good news for our overstretched budgets but, when it comes to the state pension, it leaves the government with a major headache.

How does this affect the state pension?

The state pension forms the backbone of many people’s retirement income and is increased every year by what is known as the triple lock.

The government has pledged to up the state pension by whichever is the highest of 2.5%, average wage growth or inflation (based on the Consumer Price Index, CPI). It was introduced more than a decade ago to ensure pensioners got decent increases every year. The decision is taken based on figures from September and takes effect the following April.

In recent years economic turbulence has played havoc with the triple lock. In April this year the state pension was increased by an eye-watering 10.1% as inflation spiked. In the previous year, it had to be suspended as post-furlough wage data meant another large increase was on the cards.

As the time comes to assess what next year’s increase will be, we are looking at another potentially big increase as both inflation and wage growth remain stubbornly high. If we were to see an increase of 7% in the state pension, then from April next year the full amount would be boosted from £10,600 to more than £11,300 per year.

The future for the state pension

These large increases come at a time when the state pension is under immense pressure. The number of people receiving the state pension continues to rise – it’s currently around 12.6m people and yet the working population, who foot the bill, is falling relative to the number receiving the state pension.

The Government has a tricky tight rope to walk between delivering decent increases in the state pension while not putting undue pressure on the younger working population.

In recent years, the government has tried to mitigate these costs by increasing the state pension age, but it has to be mindful of how many people are actually physically able to keep working into their late 60s. It has prompted discussion as to whether the triple lock remains fit for purpose or whether another way needs to be found.

The key data points to look out for will be average wage data published in September, and CPI inflation data for September due to be published mid-October. If numbers remain elevated, it spells good news for pensioners but will further fuel calls for triple lock reform.

Check your own pension

Based on Pension and Lifetime Savings Association figures, which indicate how much income you could need in your retirement, a reliance on the state pension might leave you short of the income required for even a minimum living standard in retirement subject to your own circumstances.

If you’re not sure how your pension could measure up, you can use our pensions calculator to see how much your personal or employer pension might give you for retirement.

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