Earnings Growth Hints at 4.5% State Pension Increase Next Year

Recent earnings data offers the most promising clue yet about the future of the State Pension Triple Lock. According to Steven Cameron, Pensions Director at Aegon, the latest figure of 4.5% annual earnings growth could set the stage for the next increase in the state pension. However, this potential boost comes amidst a recent cut in winter fuel allowance affecting millions of pensioners.

Impact of Earnings Growth on State Pension

Steven Cameron explains, “The latest official average earnings figures (including bonuses) show an annual increase of 4.5%, compared to 5.7% a month ago.” This drop is partly due to a one-off bonus paid to NHS staff in June 2023, expected to lower the figures reported in the coming months. Under the Triple Lock, the state pension increase will be determined by the highest price inflation, earnings growth, or a minimum of 2.5%. With inflation currently at 2%, the earnings growth figure will likely set the increase rate for next April.

The specific figure for the Triple Lock is based on earnings growth from May to July 2024, with the result expected to be published in mid-September. Cameron notes, “Barring any big fluctuations when July’s earnings figures are added in, this suggests State Pensioners may receive around a 4.5% increase.”

Expected Increase in State Pension Payments

For those on the full new state pension of £221.20 a week, a 4.5% increase would increase to £231.15 weekly. Those receiving the full basic state pension of £169.50 who retired before April 6, 2016, would see their weekly amount rise to £177.13. Cameron highlights, “For someone on the full new state pension of £221.20 a week, this would equate to an increase of £9.95.”

Winter Fuel Allowance Cuts and Its Implications

Despite the anticipated pension increase, pensioners face a significant loss due to cuts in the winter fuel allowance. Chancellor’s recent announcement indicates that individuals not entitled to means-tested Pension Credit will lose their winter fuel allowance. This will affect approximately 10 million pensioners, who will lose at least £200 this winter. Cameron adds, “This is expected to see around 10 million pensioners above the income threshold losing out on at least £200 this winter, with some facing larger losses.”

Future Tax Implications and Government Plans

An increase of 4.5% would push the full yearly new state pension to £12,061. This nearing the tax threshold £12,570 could result in state pensioners having to pay income tax if the pension increases further. Cameron warns, “If the state pension rises by another 4.3% in April 2026, those with no other income on top of their state pension would be facing an income tax bill.” Additionally, the Government’s decision not to proceed with a planned social care funding deal could have further implications for pensioners, who might face additional financial pressures.

While the latest earnings growth figure suggests a 4.5% increase in the State Pension, this potential uplift may not fully offset the impact of the winter fuel allowance cuts. As the Government seeks to balance national finances and adjust policies, pensioners must navigate these changes carefully. Cameron concludes, “The Triple Lock may be safe for the next 5 years, but the Government is looking for ways to balance the nation’s finances.”