Rishi Sunak faces state pension dilemma

Retired people are set to receive a 4.1% rise in the state pension in April 2022, an official forecast predicts.

The state pension is going up by 2.5% in April 2021, but the bigger forecast rise in 2022 will come at a time when unemployment is expected to be high.

Chancellor Rishi Sunak will face a balancing act between keeping to a manifesto promise while addressing claims of intergenerational unfairness.

The UK state pension remains one of the less generous in Europe.

Near the end of each year, the government sets the level of state pension to be paid from the following April.

The increases each year are in line with the rising cost of living seen in the Consumer Prices Index (CPI) measure of inflation, increasing average wages, or 2.5%, whichever of those three is highest.

This is known as the triple lock and is a Conservative manifesto promise until at least 2024.

So, in April next year, the state pension will rise by 2.5% which means:

• The new flat-rate state pension (for those who reached state pension age after April 2016) will go up by £4.40 a week from £175.20 a week at present to £179.60 a week in April
• The old basic state pension (for those who reached state pension age before April 2016) should go up by £3.35 a week from £134.25 a week now to £137.60 a week in April

In its official forecast for the following year, the Office for Budget Responsibility (OBR) expects the state pension to go up by 4.1%, a rise of about £7 a week.

This is based on its estimates of wage growth and reflects the expectation of a rebound in wages for those still in work, many of whom had been on furlough.

But it is likely to coincide with a time when young people, particularly, are feeling the economic effects of the coronavirus outbreak and unemployment is predicted to be at relatively high levels.

As 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, with unemployment rising and workers on furlough or reduced hours for reduced pay, many have questioned would it be affordable or fair to follow through a pre-pandemic formula.