Analysts have claimed that the recent earnings growth figures provide the clearest indication yet of the potential increase in next year’s state pension.
The latest Labour market statistics from the Office for National Statistics (ONS) revealed that unemployment decreased to 4.2% in the three months to June 2024 – down from 4.4% in the previous quarter.
However, wage growth saw its lowest level in two years: average regular earnings (excluding bonuses) grew by 5.4% annually from April to June, while total earnings (including bonuses) increased by 4.5%, the smallest rise in two years.
Aegon Pensions Director, Steven Cameron, suggests that these figures strongly indicate that next year’s state pension increase will be based on earnings growth – as under the current ‘triple lock’ system, the state pension rises in line with whichever is highest: inflation, average earnings, or 2.5%.
Cameron noted: “While not yet certain, this gives the best indication yet of by how much the state pension will increase next April under the triple lock, which the Labour Government has confirmed will remain in place.
“The lower increase announced this month is because of a one-off bonus paid to NHS staff last June which will also suppress the figure announced next month.”
If the state pension were to rise by 4.5%, it would bring the annual amount given to each recipient to £12,061 – potentially pushing some pensioners into a taxable income bracket.
Quilter Cheviot Head of Fixed Interest Research Richard Carter expressed surprise at the unemployment figure, as an increase was anticipated.
Carter said: “Though wage growth is heading in the right direction as far as the Bank of England (BoE) is concerned, for now it continues to outpace inflation and in real terms, regular earnings are currently rising 3.4%, which could help buoy the economy alongside increased consumer confidence following the first rate cut.”
“Another round of data is due ahead of the Bank’s next interest rate decision in September which could sway things, but for now, this modest fall in wage growth may provide some reassurance that inflation pressures are relatively well contained and may therefore allow the BoE to continue cutting rates in the coming months, though it will continue to closely watch the unemployment rate.
“Markets have been pricing in a more aggressive path of rate cuts in the US than the UK, and we will likely have a clearer picture of what the BoE’s next steps could be by the end of the week once we have a better idea of the current state of the economy.”
In summary, the recent labour market data suggests a potential state pension increase of around 4.5% next year, with the UK’s economic conditions showing relative strength.
However, with wage growth slowing and inflation pressures seemingly contained, the BoE may have room to continue cutting interest rates, though it will remain cautious in its approach.
Source: O’Connor, Tara. FTAdviser. August 2024. https://www.ftadviser.com/work-and-wellbeing/2024/08/13/wage-growth-figures-likely-to-fuel-next-state-pension-uplift/.