Will the state pension rise by 10.1%?

As inflation soars to 10.1%, Alice Guy explains how the cost of living is linked to the state pension triple lock and what scrapping the triple lock could mean for pensioners.

Yesterday, we learned that Liz Truss is considering ripping up the state pension triple lock. It would mean the state pension rises by 5.5% rather than today’s 10.1% inflation figure.

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Here, we discuss the latest news on the triple lock, how it is affected by inflation and what 10.1% inflation will mean for pensioners and savers.

Inflation at 10.1%

Figures released this morning reveal that inflation is at its highest rate for 40 years. The increase is largely driven by food inflation, which is up 14.6% from this time last year.

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Victoria Scholar, head of investment at interactive investor, said: “UK September consumer price inflation hit a 40-year high of 10.1%, topping expectations for 10% and rising versus 9.9% in August. Food made the largest upward contribution, while the falling price of motor fuels made the largest downward offsetting impact. Food and non-alcoholic drinks prices rose by 14.6% in the 12 months to September, the 14th consecutive monthly rise and the highest since April 1980. This month’s reading is particularly important because it contributes to the government’s calculation of April’s rise in the state pension.”

State pension triple lock

The triple lock, a manifesto commitment in 2019, guarantees the state pension will rise by the highest of inflation (based on September CPI figures, released today), wages (measured from May to July 2022) and 2.5%.

The triple lock was suspended in 2022, meaning that the state pension rose by only 3.1% this year, rather than 8%, saving the Treasury an estimated £5 billion. The suspension froze pensioners’ income far below galloping inflation, giving them a pay cut in real terms.

Earlier this year, the triple lock was reinstated by Rishi Sunak, and just two weeks ago Liz Truss said she was "committed" to the flagship policy.

However, yesterday it looked like another U-turn could be on the cards. Truss’s spokesman said that: "The prime minister and the chancellor are not making any commitments on individual policy areas at this point, but as I say the decisions will be made through the prism of what matters most to the most vulnerable."

The government has a black hole in its budget and the state pension would be an easy, if politically damaging, way to make savings. The state pension is hugely expensive, costing the taxpayer more than £100 billion per year, and the government have limited options elsewhere.

If the triple lock was maintained, this month’s inflation figure of 10.1% will be used to set the state pension rise next April. A rise of 10.1% would mean that annual payments rise from £9,627 to £10,600 in April 2023 for a full state pension.

If instead, the triple lock is scrapped, then the state pension would rise by wages instead of inflation. That wages figure was set in July 2022 and was 5.5%. If the state pension increases at this lower figure of 5.5%, rather than 10.1%, the state pension would rise to £10,156.

At the time of writing, no decision has yet been made and critics argue that suspending the triple lock would be hugely politically damaging, and that axing it should be a last resort for the government.

Even if the government decides to keep the triple lock, they are likely to find other ways to make savings. A government pension review, led by Baroness Neville-Rolfe, is expected to recommend increasing the state pension age more quickly when it reports in May 2023.

The last review in 2017 suggested speeding up the state pension age changes to 2037-39, meaning that today’s 50-year-olds would not get their state pension until they reach 68 years old.

Pensioners hit hard by inflation

Pensioners are particularly impacted by high inflation as they have limited options to increase their income to compensate for price increases.

High inflation leaves many pensioners struggling as it’s a myth that all pensioners are well off. interactive investor’s 2022 Great British Retirement Survey revealed that nearly one in four (23%) over 65s do not own their own home, 6% are still paying off a mortgage and half of women (48%) aged over 65 are dependent on the state as their only source of income (compared with 29% of men).

Has inflation peaked?

It is possible that inflation will rise even further next month as the latest inflation figures don’t include the energy price cap increase in October. Despite the government energy support package, the cap still rose in October from £1,971 to £2,500, an increase of 26.8%.

There are also more upward pressures on inflation as the market recovers from the fiscal-expansionary mini-budget, the subsequent fallout and reversal. Tumbling gilt prices and a weak pound reveal the market’s lack of confidence in the UK economy as markets price in a significant rise in interest rates.

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The British Chambers of Commerce currently expects inflation to peak at 14% over the next quarter, far above the government’s 2% target.

Interest rates

Interest rates are intrinsically linked to inflation, and the latest figures make a big rate rise even more likely when the Bank of England monetary policy committee next meets in November.

Inflation also has an indirect impact on interest rates because the Bank has a remit to keep inflation at or below 2%. Increased interest rates have a dampening effect on inflation as higher rates reduce the amount of money available for consumers and businesses to spend.

For pensioners, potential interest rate rises are a mixed blessing. Higher rates will lead to better returns for savers, but will rub salt in the wound for a minority of pensioners with mortgages and rent still to pay.

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Victoria Scholar says “the central bank is between a rock and a hard place as it looks to curb price pressures without inadvertently adding to the risk of recession”.

The Bank of England is rumoured to be considering a 0.75% to 1% rise in rates when it meets next month, the biggest hike to date.

Scholar, who has a more conservative estimate for inflation than the British Chambers of Commerce, explains that: “inflation is likely to peak somewhere around 11% in the coming months before easing back next year. The Bank of England’s terminal rate (the highest point in the interest rate cycle) is forecast to reach around 5%, possibly higher, at some stage in 2023 once price levels are more under control.”