State pension will increase by 2.5% next year, Government confirms

State pensions will be increased by 2.5% next year, rising to £179.60 per week for those on the full new rate.

Pension experts said the announcement about the changes in the 2021/22 tax year sends out a “difficult message” at a time when many of the working population are facing pay freezes.

Highlighting concerns about fairness between the generations, they pointed out that pensions were funded by the national insurance contributions of current workers.

The current full new state pension is £175.20.

The changes were confirmed in a written statement made by Secretary of State for Work and Pensions Therese Coffey.

Under the “triple lock” system, state pensions increase every year in line with inflation, earnings, or 2.5% – whichever is highest.

Earlier this year,  the Government moved to avoid a state pension freeze, with a Bill to remove a legal barrier – as under the rules the state pension could only be increased if there had been growth in average earnings in the relevant period of the preceding year.

Many working adults have suffered pay cuts, job losses and furloughing this year as a result of the coronavirus pandemic.

The written statement on Wednesday said the Social Security (Up-rating of Benefits) Act 2020 enables Ms Coffey to increase state pensions “even though there has been no growth in earnings”.

Ian Browne, pensions expert at Quilter said: “As expected, the Government has confirmed that state pension incomes will rise next year by 2.5%, maintaining the minimum increase promised under the triple lock.

“This will be welcome news for retirees and it means the Chancellor and Work and Pensions Secretary can, for now at least, avoid accusations of breaking manifesto pledges to the elderly.

“But it will be hard to ignore the fact that giving retirees an inflation-busting income rise, while simultaneously announcing a pay freeze on many public sector workers, is a difficult message.”

Mr Browne added: “Whilst state pension incomes are protected for the coming year, there will be big pressure on Government to unpick the triple lock over the remainder of this Parliament …

“In addition, the current cost of the state pension will not go unnoticed by younger generations as intergenerational inequality had been growing even before the pandemic and has been heavily exacerbated in the past six months.”

Steven Cameron, pensions director at Aegon said: “With the huge financial impact of Covid-19 laid out alongside today’s Spending Review, many had questioned if it was either affordable or fair to stick to a pre-pandemic formula.

“Today’s state pensions are paid from the national insurance contributions of today’s workers, many of whom have and continue to suffer financially during the pandemic.

“Every 1% state pension increase adds around £1 billion to the ‘pay as you go’ bill met by earners below state pension age in every future year.

“The big question now is whether the triple lock will survive another year.

“Earnings growth is likely to be distorted and highly volatile for the foreseeable future, further exacerbated by the public sector pay freeze.

“A scenario with a fall in earnings next year followed by a sharp recovery the next could see the triple lock formula in that year produce a huge increase to state pensions while workers might simply be returning to pre-Covid pay levels.

“On grounds of intergenerational fairness, we believe some smoothing may need to be introduced to the formula.”