Pensioners will get a boost of up to £900 a year from April 2024 as the Jeremy Hunt has ruled out plans to adjust the triple lock mechanism.
The state pension will increase by a bumper 8.5 per cent, in line with the earnings figure used in the triple lock, the Chancellor said today.
It means the full new state pension would increase to £203.85 per week to £221.20, or £11,502.40 per year.
The full basic state pension will rise from £156.20 per week to £169.50 per week - equating to a total of £8,814 per year.
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Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the announcement would be greeted with relief by pensioners who have been struggling with the rising cost of living.
She said: "With inflation starting to fall back, the 8.5 per cent increase will start to put some much-needed space in people’s budgets.
"This huge increase is down to red hot wage data stoked by one off bonuses made to NHS and civil service workers during the summer. The concern was that a government concerned about the ongoing cost of state pension would look to mitigate the impact by going for a lower figure. Options included using wage data that stripped out the effect of these bonuses or using the inflation figure.
"There’s precedent for government doing this – when the furlough scheme elevated wage data during the pandemic they chose to break the triple lock in favour of using the lower inflation figure. However, with an election on the horizon it is understandable why government may have decided against this, but debate will rage over whether the triple lock remains the best way to uprate the state pension long-term."
Speaking ahead of the Autumn Statement, Evelyn Partners’ Head of Tax Sian Steele said: “Since average earnings growth for the May to July quarter came in so high, at 8.5 per cent including bonuses, there has been speculation that the Government would adjust down the prescribed rise for April to the excluding-bonuses rate of 7.8 per cent, to save some money for the Treasury.
"While this would inevitably lead to accusations of ‘watering down’ the triple lock, it is arguably quite a sensible alteration.
"The surprise is more that successive governments have allowed bonuses to be included in the calculation, as they are volatile and something that only a small proportion of the working population benefit from – and this year’s figure was particularly distorted by a one-off NHS deal."
The state pension increased by 10.1 per cent in April 2023.
It added £11billion to the spending on the state pension this financial year, according to the IFS.
An 8.5 per cent hike pencilled in for April 2024 would cost the Treasury £2billion more in 2024/25 than the OBR forecast at the Spring Budget, the IFS said.
Ms Steele said removing bonuses from the earnings figure used in the triple lock would have been an "obvious and relatively uncontroversial reform" to the triple lock - even if it had been implemented earlier this year "when it was already clear that costs to the Treasury from state pension increases were escalating rapidly".
Rishi Sunak will reportedly ensure the 8.5 per cent figure will be used for the state pension triple lock
She added: "But now the dialogue over the triple lock has become charged by election politics, any reduction in the current slated increase will doubtless be a matter of controversy."
A DWP spokesperson said the government was committed to the triple lock, adding: "As is the usual process, the Secretary of State will conduct his statutory annual review of benefits and State Pensions using the most recent data available.”
A six-year freeze to the personal allowance - which will remain at £12,570 until 2028 - means as taxable incomes rise, those on a lower income could tip into the 20 per cent basic tax rate band, and have to pay income tax on anything above the personal allowance threshold.
An HM Treasury spokesperson said: “Our tax burden remains lower than any major European economy, despite the difficult decisions we’ve had to make to restore public finances after the dual shocks of the pandemic and Putin’s illegal invasion of Ukraine.
“But the best tax cut we can provide is lower inflation, and we have now achieved our priority of halving it this year, and will continue to build on our work to get it all the way back down to two per cent.
“We have also taken three million people out of paying tax altogether since 2010 through raising personal thresholds, and the Chancellor has said he wants to lower the tax burden further – but has been clear that sound money must come first.”