The latest wage and inflation data for this month has given us some interesting insights. Inflation has continued to decline, reaching 6.8% in July, while on the other hand, average wages, including bonuses, have surged by an impressive 8.2%.
The combination of decreasing inflation and increasing wages may seem like positive news for individuals trying to manage their finances, but it presents a significant challenge for the government, particularly concerning the state pension.
State Pension Impact
The state pension is a critical component of many people’s retirement income, and it is adjusted annually according to what is known as the “triple lock” mechanism.
The government has committed to increasing the state pension by the highest of three factors: 2.5%, average wage growth, or inflation based on the Consumer Price Index (CPI). This policy was introduced over a decade ago to ensure that pensioners receive reasonable increases each year. The decision is based on data from September and takes effect in the following April.
In recent years, economic fluctuations have complicated the triple lock’s operation. In April of this year, the state pension saw a significant increase of 10.1% due to a spike in inflation. In the previous year, the triple lock had to be suspended as wage data following the furlough period indicated another substantial increase was imminent.
As we approach the assessment for next year’s increase, we are potentially facing another substantial rise, given that both inflation and wage growth continue to remain high. If the state pension were to increase by 7%, for example, the full amount would rise from £10,600 to over £11,300 per year starting in April next year.
State Pension Future
These significant increases are occurring at a time when the state pension is under tremendous strain. The number of individuals receiving the state pension continues to grow, currently standing at approximately 12.6 million people, while the working population responsible for funding it is shrinking relative to the number of pension recipients.
The government faces a delicate balancing act between providing substantial increases in the state pension and avoiding undue pressure on the younger working population. In recent years, they have attempted to mitigate these costs by raising the state pension age. However, there is a consideration regarding how many individuals can physically continue working into their late 60s. This has prompted discussions about whether the triple lock is still suitable for its intended purpose or if alternative solutions need to be explored.
The key data points to watch for will be the average wage data published in September and the CPI inflation data scheduled for mid-October. If these numbers remain elevated, it will be welcome news for pensioners but will also intensify calls for reform of the triple lock.
Your Own Pension
It’s crucial for individuals to assess their own pension plans, especially considering figures from the Pension and Lifetime Savings Association, which indicate that relying solely on the state pension might fall short of providing the income needed for a minimum standard of living in retirement, depending on individual circumstances.
To ensure you are optimising your pension, talk to one of our FCA authorised wealth managers by arranging a Discovery Call [Here]
This article is for informational purpose only. It does not constitute finacial, tax or legal advice, nor is it a recommendation to buy, sell or hold any investment. Past performance is not a guide to the future, investments rise and fall so investors could make a loss. No view is given on the present, future value or price of any investment and investors should form their own view on any proposed investment.