Inflation in September fell to 2.4%, activating the triple lock to boost state pension by 2.6% in April.
New figures from the Office for National Statistics today revealed that inflation fell from 2.7% in August to 2.4% in September.
The level of the state pension rises every year by the highest of 2.5%, growth in earnings or Consumer Price Index (CPI) inflation. This is thanks to the 'triple lock' guarantee, which has given retirees' incomes a strong boost since it was first introduced.
Since the inflation rate is lower than average wage growth, which was 2.6% in July, it is wage growth that will determine the level of next year's state pension rise. The fall in inflation comes as a surprise to inflation-watchers as it was expected to rise to 2.8%, and means an above-inflation increase for pensioners.
While wages grew at a bumper 3.1% between July and September, the figure used to uprate benefits is the previous July’s figure, which this time around was 2.6% including bonuses.
The full state pension will be worth at least £168.60 per week, or £8,767.20 a year, after rising from £164.35 a week - above the rate of inflation. That’s a rise of around £220 a year from next April.
Nathan Long, senior pension analyst at Hargreaves Lansdown comments: “Having at least some secure income in retirement is important for nearly everyone, making the state pension fundamental to the UK’s pension system.
"Increasing payouts using the triple lock keeps pensioners insulated from the difficulties workers are facing, where inflation is rising faster than wages, but this will do little to bolster the pockets of pensioners living in poverty."
Tom Stevenson, investment director for personal investing at Fidelity International, points out that while inflation has dropped back, “we are not out of the woods yet”.
He says: “While CPI inflation is expected to ease back closer towards the Bank of England target of 2% towards the end of 2018/mid-2019, there are a number of factors which could keep inflation stubbornly sticky in the short term, most notably the recent surge in the oil price and sterling weakness driven by growing fears of a Brexit no-deal.”
Last week, the government reaffirmed its commitment to the state pension triple lock for the remaining duration of this Parliament.
Long adds: “The government is committed to maintaining this policy for the remainder of this parliament but there is increasing demand for it to be scrapped thereafter, as many believe it has served its purpose.”
As of the current tax year, the pension lifetime allowance (LTA) is also linked to the previous September's CPI inflation rate. The LTA caps the value of pension pot that can be built up without tax penalties being payable when withdrawals are made.
The 2019/2020 LTA will therefore rise from its present level of £1,030,000 by £24,720, to £1,054,720.
Tom Selby of AJ Bell comments: “Of course this assumes Chancellor Hammond won’t once again take the axe to the lifetime allowance in his Budget later this month.
"Such a move would risk sending a seriously negative anti-savings message, as well as adding more unwelcome complexity as new ‘protections’ would inevitably be needed for those close to or over the new, lower limit.”
A version of this article first appeared on the website of our sister magazine Moneywise.