Government ‘facing extra £100m bill for next year’s state pension hikes’

The Government is facing an extra £100 million bill for next year’s state pension increases following revised official figures published on Tuesday, according to a former pensions minister.

Under the triple lock guarantee, the state pension increases every April in line with whichever is the highest of earnings growth in the year from May to July of the previous year, CPI (Consumer Prices Index) inflation in September of the previous year, or 2.5%.

With inflation running at more subdued levels, it is thought that wages will determine next year’s state pension increase.

Pressure

Last month, Office for National Statistics (ONS) figures indicated that total pay had increased by 4.0% annually in the three months to July.

But when jobs data was released on Tuesday, the ONS had revised the figure up to 4.1%.

Sir Steve Webb, a former Liberal Democrat pensions minister, said the additional 0.1 percentage point could add around £100 million to the state pension bill under the triple lock formula.

The figures were released ahead of the autumn Budget.

Sir Steve, who is now a partner at consultants LCP (Lane Clark & Peacock) said: “A slightly higher rate of increase is welcome for pensioners, though will be an unwelcome £100 million extra cost for the Chancellor as she prepares her Budget.

“The rate of the new state pension will now be close to £12,000 per year, very near to the £12,570 tax-free personal allowance. This is likely to put extra pressure on the Chancellor to take action on tax allowances in the coming years.”

Analysis

The revised wage growth figure means that the new state pension, for people who reached state pension age after April 2016, could rise from £221.20 per week in 2024/25 to £230.30 in 2025/26.

The old basic state pension could increase from £169.50 per week currently to £176.45 next year.

September’s CPI figure has not yet been confirmed and will be released on Wednesday. The most recent figures show that prices rose by 2.2% in the 12 months to August 2024, which was unchanged from July.

Many pensioners do not receive the full state pension and so they will not see the full cash increases. Recent analysis released by Royal London revealed only around half of people receiving the new state pension last year were getting the full weekly amount – and around 150,000 were on less than £100 per week.

The potential pensions boost comes at a time when many pensioners face losing winter fuel payments.

Chancellor Rachel Reeves announced a plan to limit the winter fuel allowance in July, as she said there was a need to fill a £22 billion “black hole” in the public finances.

Only those who claim pension credit and other means-tested benefits will receive it after the change.

It is expected to reduce the number of pensioners in receipt of the up to £300 payment by 10 million, from 11.4 million to 1.5 million.

Drive

A drive is currently underway to encourage those who are entitled to receive pension credit to claim.

Up to 760,000 families who were entitled to receive pension credit did not claim it in the financial year ending in 2023, according to recent Department for Work and Pensions (DWP) figures.

Claims for pension credit have shown signs of jumping following the Chancellor’s announcement in July.

Sir Steve added that living costs will still eat into rising pensions.

He said: “Even a slightly improved pension rise will however leave many pensioners out of pocket in real terms overall next April.

“More than half of next year’s increase will simply be keeping pace with inflation. Taking account of inflation and the loss of winter fuel payments, older pensioners who lose winter fuel payments at the £300 rate will be worse off overall.”