How much will the State Pension be in 2022?
How much will the State Pension be in 2022?
Following from our recent article on State Pensions and the triple lock, we set out here what the rate of increase for the State Pension will be in 2022 and what this means for pensioners.
As a reminder, the triple lock means State Pensions in payment will increase each year by whichever is the highest of:
Earnings – the average percentage growth in wages (in Great Britain);
Prices (inflation) – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI); and
2.5%.
The government announced last month that due to the impact of the coronavirus pandemic the triple lock promise cannot be kept. Instead, the State Pension in 2022 will rise by CPI.
The CPI measure is taken from the September data prior to the year of increase, which means September 2021. CPI for September 2021 was 3.1%.
This means that the State Pension is due to rise by 3.1% from 6th April 2022 in line with CPI inflation.
What is CPI?
The Consumer Price Index (CPI) is the official measure of consumer prices in the UK. It is a measure of inflation, which is a general rise in the price of a basket of goods and services, such as transportation, food, and medical care, over a period of time.
Inflation is measured each month showing how much prices have risen (or fallen) since the same date last year.
When prices rise, our money buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power of our money. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services.
There are several different measures of inflation that exist in the UK, namely CPI, CPIH (a version of CPI) and RPI. CPI is the inflation measure used in the government’s target for inflation and is therefore used and quoted the most.
What’s the difference between CPI and RPI?
CPI - The Consumer Price Index (CPI) is a measure of consumer price inflation produced to international standards and in line with European regulations. The State Pension and many Defined Benefit pension schemes use CPI as a potential rate of increase for pensions in payment.
CPIH – This uses the same basis as CPI but with the significant addition of owner occupiers’ housing costs (that is what the H represents), which includes the costs associated with owning, maintaining and living in one's own home, along with council tax. For this reason CPIH is the most comprehensive measure of inflation and is therefore the ONS’ lead measure.
RPI – The Retail Price Index (RPI) is an older measurement of inflation that is still published because it is used to calculate cost of living and wage escalation; however, it is not considered an official inflation rate by the government. It tends to be higher than CPI and is still used by some Defined Benefit pension schemes as a potential rate of increase for pensions in payment.
The key differences between all the UK measures of inflation are:
They include different items within their respective ‘baskets’.
Currently the coverage of CPIH and CPI is identical, except for the inclusion of a measure of owner occupiers’ housing costs within CPIH.
The RPI includes certain items relating to housing costs (such as mortgage interest payments) that are not included in the CPIH and CPI.
Conversely there are also some services covered by the CPIH and CPI – such as charges for financial services – which are not in RPI.
CPIH and CPI covers a broader population than RPI.
CPI covers all private and institutional households; it also includes spending in the UK by foreign residents.
RPI excludes the top 4% of households by income and pensioner households where at least three quarters of their income is from state benefits. It excludes institutional households and foreign residents. By excluding the richest and the poorest, RPI reflects the notion that inflation should be viewed as experienced by the majority of the population.
They use different formulas for calculating averages.
CPIH and CPI mostly use the geometric mean (the calculation of the average of a series of values which takes into account the effect of compounding).
Whereas RPI uses the arithmetic mean (the calculation of the average by using the sum of the total of all values divided by the number of values).
You can learn more about these inflation measures on the ONS website.
How has CPI changed over time?
The ONS publishes detailed information on the CPI and other measures of inflation used in the UK. This is a graph produced by the ONS showing CPI since its inception.
Consumer Price Inflation time series published by the ONS
Source: ONS website
What impact will CPI have on the State Pension?
CPI inflation dipped by 0.1 percentage points to 3.1% in September after rising by a record amount in August to 3.2% from 2% the previous month.
Unless the government intervenes again, this means:
The old Basic State Pension (for anyone who reached State Pension age before 6th April 2016) will increase by £4.25, from £137.60 per week to £141.85 per week
The new flat-rate State Pension (for anyone who reached State Pension age after 6th April 2016) will increase by £5.55, from £179.60 per week to £185.15 per week.
The calculations are based on weekly figures rounded to the nearest 5p.
If the government had kept the link to the triple lock, the State Pension could have risen by 8.3% next year, based on the increase in average weekly earnings as published by the ONS in September 2021.
This would have increased the State Pensions as follows:
Basic State Pension to £149 per week (an increase of £11.40).
Flat-rate State Pension to £194.50 per week (an increase of £14.90)
Some people will feel they are losing out by not receiving the full 8.3% increase next year, but the significant increase in earnings is mainly down to the labour market distortions caused by the pandemic, with average earnings plummeting in 2020 as society locked down and then rebounding in 2021 as restrictions have eased. To have applied the 8.3% to State Pensions would have been at a significant cost to the Exchequer in a year when so many people still face huge uncertainty over their pay and employment.
We are all facing further uncertainty over inflationary increases, in particular with increases in energy prices and food which will undoubtedly lead to increasing inflation over the coming months and year.
How AV Trinity can help.
If you would like to discuss your pensions or other areas of your finances, please get in touch to speak with one of our Chartered Financial Planners or Mortgage Advisers. We offer a free, no-obligation initial consultation at our office, over the phone or by video chat.
This article offers information about financial planning and should not be taken as personal advice. All data is correct at the time of publication.