Rising wages will cause bumper increases to state pension

The state pension is set to receive its biggest increase in a decade next year, thanks to a sharp rise in earnings caused by the end of lockdown.

In addition, billions of pounds will be added to the Treasury’s pension bill if Britain enters a sustained period of rising inflation. Experts warned this could make future pension rises “unaffordable”.

Pensioners have already been promised a 2.5pc boost this April, shielding them from the worst of the economic damage caused by the pandemic, as wage growth and inflation remain low.

However, retirees stand to receive a much larger increase in April 2022 as average earnings growth is forecast to hit 4.6pc. This would increase payouts on the full state pension from £175.20 per week in 2021 to £179.60 next year.

That would add an estimated £1.5bn to the Treasury’s bill. Figures calculated for Telegraph Money by David Robbins, of Willis Towers Watson, the consultancy, estimate each percentage point increase in the state pension costs the Government £750m.

The triple lock – which guarantees the state pension rises every year by the highest of wage growth, inflation or 2.5pc – was designed to ensure pensioners’ spending power rose in line with that of workers. However, pension income will have risen faster than wages during the pandemic when millions were furloughed. There are worrying signs that inflation could run out of control thanks to a spending boom as Britain exits lockdown.

Steven Cameron of Aegon, the pension provider, said the state pension increased in line with inflation to ensure that retirees’ spending power did not fall. However, if inflation were to reach high levels, say 6pc, then it would be very costly. Mr Cameron said: “The question comes down to intergenerational fairness. In the context of controversial decisions such as a 1pc increase in NHS wages, there may come a point when the Government might have to explain that commitments made pre- pandemic are no longer ones they can stick to on fairness or affordability grounds.” Guy Opperman, the pensions minister, told Telegraph Money that the Government’s commitment to the triple lock policy still stood, but he refused to rule out changes being made over the coming months.