If price inflation remains low, the state pension triple lock formula may produce “more predictable and affordable increases,” an expert has stated.
The inflation cut will also put further pressure on the Bank of England to cut interest rates from their 16-year-high of 5.25 per cent, further easing squeezed finances for households.
This creates a glimmer of hope for savers as price inflation is finally getting back under control.
Price inflation helps alleviate the cost-of-living crisis and can hopefully pave the way to future falls in interest and mortgage rates.
An expert has explained these new figures could also signify stability for the state pension triple lock.
Steven Cameron, pensions director at Aegon said: “If price inflation stays low and earnings growth also gradually falls back to levels more typical of the last decade, then the state pension triple lock formula may produce more predictable and affordable increases.
The state pension age could rise to 71GETTY“This will make it less costly for the next Government to commit to maintaining it for a further five years. We may see lower rates of increases, but in times of lower inflation, the state pension doesn’t need to increase by as much to allow pensioners to maintain living standards.
“However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”
Under the state pension triple lock, pensioners are granted an annual increase equal to the highest of either price inflation, earnings growth or a minimum rate of 2.5 per cent.
Last year, pensioners saw a record-breaking 10.1 per cent increase in their state pension due to high inflation.
This year, earnings growth in 2023 produced an inflation-busting 8.5 per cent increase.
These increases and the underlying high volatility that was present in both price inflation and earnings growth have since raised serious questions over longer-term affordability of the state pension, which is paid for by today’s workers.
Cameron continued: “With inflation having now fallen below the 2.5 per cent underpin, it’s likely to be earnings growth that determines next year’s Triple Lock increase, as the latest figures have this sitting at 5.7 per cent (for January to March 2024).
“The specific figure used for determining the triple lock will be the year-on-year increase in earnings for the period ending May to July 2024, which will be published in September. Barring a significant drop in earnings growth over the next few months, this figure will likely determine next year’s triple lock.
“If price inflation stays low and earnings growth also gradually falls back to levels more typical of the last decade, then the state pension triple lock formula may produce more predictable and affordable increases.
“This will make it less costly for the next Government to commit to maintain it for a further five years. We may see lower rates of increases, but in times of lower inflation, the state pension doesn’t need to increase by as much to allow pensioners to maintain living standards.
“However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”
Taxpayers could be forced to work longer to pay for the future triple lock increases, which would mean households across the UK would need to pay around £10billion extra a year by 2034.
LATEST DEVELOPMENTS:
Annual spending on the state pension will soar past £150billion in real terms within the next decade, the Office for Budget Responsibility (OBR) found.
The current full state pension is £221.20 per week after rising by 8.5 per cent in April. The triple lock will ensure the 4.3 million pensioners who currently receive the full state pension see a real weekly uplift of around £50 a week by 2034. This is around £11.30 per week higher than if the state pension rose in line with average wage growth – as was the case previously.
Around two-thirds of pensioners currently receive the basic state pension of £169.50 a week, which is also covered by the triple lock guarantee.
However, this share is expected to fall to just half before the end of the decade.
The Institute for Fiscal Studies (IFS) has previously estimated the triple lock could “easily” cost anywhere between an additional £5billion and £40billion per year in today’s terms by 2050.