Triple lock to ‘add pressure’ on Healey with state pension set to top £13,000

Next year, the state pension will increase by £490, thanks to the triple lock mechanism, exacerbating the financial challenges for Chancellor John Healey as he prepares his inaugural budget. The triple lock stipulates that the state pension increases annually by the highest figure among wage growth, inflation, or 2.5 per cent. Economic data released in September indicates that the triple lock will rise by 3.9 per cent this time around.

This surge in the state pension is projected to bring the total to approximately £13,036, surpassing the tax-free personal allowance of £12,570. According to calculations by Hargreaves Lansdown, the full new state pension could reach this amount. While the Labour government has assured that pensioners relying solely on the state pension will not face income tax, those receiving income from other sources might experience higher taxation.

Liam McLaughlin, an associate economist at the National Institute of Economic and Social Research, noted that this rise will introduce additional fiscal pressures during a period when the triple lock is already under scrutiny. Critics argue that the triple lock pension is "unsustainable" for public finances, with the Institute for Fiscal Studies warning that maintaining it could cost the government up to £40 billion more annually in today's terms compared to linking increases to wage growth alone.

Deputy Director of the IFS, Jonathan Cribb, emphasized that the more volatile inflation and earnings growth, the higher the taxpayer's cost. He stated that each increase in spending compounds the previous ones, resulting in a substantial but uncertain long-run cost. The state pension, being the largest government benefit, is projected to cost about £196 billion by 2031, according to forecasts published in March.

The Office for Budget Responsibility estimates that the state pension triple lock will increase spending by nearly £16 billion more per year by 2030 compared to a standard earnings-linked rise, which is nearly three times the initial forecast when the uprating mechanism was introduced. Various economists from different political backgrounds have called for replacing the triple lock pension to enhance its sustainability.

The Resolution Foundation, a left-leaning economics think tank, suggested replacing it with a "smoothed" earnings link, where the state pension would temporarily rise with price increases if inflation exceeds wage growth. Conversely, if earnings growth surpasses inflation, the state pension would not immediately follow wage growth increases to maintain its stability.