The government has confirmed it will maintain the triple lock and increase the state pension in 2021-22 despite suspicions it would be scrapped due to Covid-19.
The government is today (September 23) introducing a bill to avoid a technical detail which would freeze the state pension next April.
Under current rules, state pension payments will not increase if earnings growth is negative, irrespective of price inflation, meaning the 2.5 per cent floor is also made redundant.
In normal circumstances where earnings increase, the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year.
Steven Cameron, pensions director at Aegon said: “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.
“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.
“Doing so could see pensioners receive a 2.5 per cent uplift next April and a much higher increase the following April if earnings growth rebounds after falling. This could come as many working age people might be struggling to regain pre Covid-19 earnings levels.”
For several months there has been widespread speculation that Chancellor Rishi Sunak was preparing to scrap the triple lock due to concerns it would become unaffordable.
The Office for Budget Responsibility has predicted average earnings will fall by 7 per cent this year amid the coronavirus crisis - this is largely due to the fact a sizeable chunk of the workforce has been receiving 80 per cent of its pay through the furlough scheme.
Next year, as the country is expected to recover and the furlough scheme ends, the OBR said earnings could see an 18 per cent increase.
If average earnings growth increased by this much, the current rules governing the triple lock mean the state pension would have to mirror this.
This has caused industry experts to argue the triple lock in its current form will “have to go” next year to avoid raising the state pension by a fifth.
But scrapping the triple lock altogether would break one of the key election pledges made by the Conservative party in December 2019.
Ian Browne, pensions expert at Quilter, said: “Given both earnings growth and inflation will be around or below 1 per cent next year, the triple lock will guarantee a 2.5 per cent 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 a year, up from £9,110.4.
“There is a danger that guaranteeing a 2.5 per cent 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.