State pensioners will not get the bumper increase to their state pension in 2022/23 after the Government chose to temporarily abandon the triple-lock formula.
Under the triple-lock system, state pensions increase each year by either September's Consumer Prices Index (CPI) rate of inflation, earnings growth between May and July, or 2.5% - whichever is higher.
A big post-pandemic rise in average earnings between May and July 2021 seemed certain to have resulted in a state pension increase of more than 8%.
But with billions spent on support for the UK economy from the fallout of COVID-19, the triple-lock is taking a one-year break in 2022/23.
Instead, a double-lock formula will be used to determine whether 2022/23 state pensions rise by either the CPI's inflation rate for September 2021 or 2.5%.
Therese Coffey, Work and Pensions Secretary, said:
"A social security uprating and benefits bill will be in place for 2022/23 only to ensure the basic and new state pensions increase by 2.5% or in line with inflation.
"Inflation is expected to be the higher figure this year, and as happened last year, it will again set aside the earnings element for 2022/23 before being restored for the remainder of this Parliament."
Why did average earnings soar?
The driving force behind average earnings soaring between 1 May and 30 July 2021 was mostly down to the number of employees returning to work after furlough.
A million employees came off the furlough scheme on 1 May 2021, the day the scheme was originally due to end before an extension was announced in the Spring Budget on 3 March 2021.
According to HMRC's furlough statistics, a further 590,000 in June and 340,000 employees in July came off the furlough scheme. In total, around 1.93m furloughed workers returned to work during these three months.
This created an unusual spike in earnings, with the Work and Pensions Secretary expecting to see average earnings rise by more than 8% prior to making the one-year adjustment.
Inflation or 2.5% - which will be higher?
It's not all bad news for state pensioners, however.
Despite missing out on the 8% increase through the triple-lock, they should be set to receive an inflation-busting rise next month when the September rate of inflation is released.
The CPI rate of inflation jumped 3.2% in August 2021 - the highest monthly increase in prices on record, and considerably higher than the Bank of England's long-term 2% target.
Speaking at the time, the central bank's monetary policy committee said it expects "CPI inflation to rise temporarily to 4% in Q4 2021, owing largely to developments in energy and other goods prices, before falling back to close to the 2% target".
That points towards September's rate of inflation remaining around 3% or possibly higher, which in times of rising prices should be a good uprating before the triple-lock returns for 2022/23.
Is the triple-lock sustainable?
While it's fair to say the Government broke a manifesto pledge "to keep the triple-lock" made in 2019 before the impacts of the pandemic were fully known, they have vowed to fully reinstate the policy in future years.
It stands to reason, therefore, that the triple-lock will remain sustainable for the rest of this parliament. What happens after the next general election, due to be in May 2024 but possibly sooner, remains to be seen.
National Insurance (NI) contributions fund the state pension, along with other state benefits, and the Government Actuary's Department expects the NI Fund to be empty by around 2032.
Talk to us about retirement planning.