The state pension will climb to over £30,000 in the next 25 years – even if Andy Burnham cuts the triple lock.
Since 2011, the triple lock has ensured that the state pension rises by whichever is highest of inflation, average earnings growth or 2.5 per cent, but the Prime Minister proposed adjusting it last month.
Under his plan, from 2030 a new “adjusted” lock would see the state pension rise each year by at least inflation or 2.5 per cent.
Burnham also said it would “hold its value relative to earnings over time”, meaning it will receive additional uplifts to ensure it does not fall below the share of average earnings it has reached by the time of the next election.
Analysis by consultancy firm Hymans Robertson has now looked at how the state pension could grow under the new plan, and how it would compare if the triple lock was retained.
Although the exact path of the pension depends heavily on the levels of inflation and average earnings growth, its figures suggest that by 2050, the state pension could be just under £33,000 a year.
If the current triple lock remains in place, the pension could be more than £35,000 – a gap of around £2,000.
The chart below shows how the state pension could grow under both mechanisms.
To produce the figures, the firm modelled 5,000 different scenarios of different levels of inflation and earnings figures, with those quoted above being the median projections.
In all 5,000 projections, the adjusted triple lock never pays more than the triple lock and it pays less by 2050 in 95 per cent of scenarios.
The figures are all in cash terms. In today’s prices – often referred to as real terms – the state pension would reach £19,000 by 2050 under Burnham’s lock, and around £20,000 if the old triple lock is retained.
Cash vs real terms – what they mean
Cash terms refer to the actual amount of money, without adjusting for inflation. In 2050, £33,000 will not be worth as much as it is today.
Real terms take inflation into account, showing how much money is worth in terms of its purchasing power today.
What does it mean for pensioners?
Many pensioners are concerned about the future of the state pension, especially as next April it will surpass the frozen personal allowance threshold – the amount at which you have to pay income tax – of £12,570 for the first time.
Despite assurances from the Government that those reliant on the state pension alone will not pay tax, they haven’t confirmed how this will work.
Calum Cooper, head of pensions policy innovation at Hymans Robertson, says a figure of around £33,000 “will go some way to protect future pensioners from inflation” and “provide confidence in the long-term durability of the state pension.”
The full new state pension rising to around £19,000 in today’s money means pensioners are likely to receive a payment with far more purchasing power than they have today, given the current state pension is £12,548 per year.
What does it mean for government spending?
Burnham said he was adjusting the current triple lock in order to fund a new national care service.
The projections provided by Hymans suggest state pension spending could be cut by as much as 4.6 per cent by 2050, under the new lock.
Cooper says this “will also reduce long-term pressure on the government and taxpayers”.
But he warns that in some scenarios, savings won’t necessarily happen.
“In a low-growth economy, the fiscal saving can fall by almost half. The reform can support a more sustainable settlement, but outcomes will remain sensitive to inflation,” he says.