Pensioners will miss out on a £930 state pension boost because of the Government’s freeze on energy bills, which will dramatically slash headline inflation, according to predictions from an influential forecaster.
The state pension was on track to rise by at least 10% for two years in a row to help older people keep up with price rises during the cost-of-living crisis.
However, state pensions will now rise by just a quarter of what they would have in April 2024, because inflation in September 2023 will register far lower than what was originally thought.
Prime Minister Liz Truss’s “energy price guarantee” means that a typical household will not spend more than £2,500 on annual energy bills in the next two years, falling to £2,100 as a result of an already announced £400 energy discount.
This measure, to protect households from the worst of the soaring costs, is expected to heavily mute inflation.
Consumer prices were forecast to rise by 12.5% in the year to September 2023, but inflation will instead fall to 3.7pc because of the intervention, according to forecasters Pantheon Macroeconomics.
Under these predictions, in April 2024 the state pension would rise by £392 a year rather than £1,324 under the “triple lock” mechanism.
This policy ensures that the state pension rises by the highest of the previous September’s inflation rate, wage growth or 2.5%.
Steven Cameron, of pensions group Aegon, said the Government could have delivered the same amount of support without affecting the headline inflation figure, thereby ensuring higher pension increases.
There were two main ways the Government could support Britons as the cost of fuel continues to skyrocket, Mr Cameron said. One was to allow energy bills to continue to increase but roll out large support grants to help households pay for them. In this case, the CPI would have continued to rise.
The second option, and the one chosen by Ms Truss to freeze prices, has a similar impact on households, but the grants go directly to energy companies.
“The effect for individuals might be similar but the impact on the rate of inflation would be very different. There could, of course, be other complex consequences, including on future tax policy,” Mr Cameron admitted.
Sir Steve Webb, who is a former pensions minister and now a consultant at LCP, warned that the lower rate of inflation would result in a permanent loss of income for pensioners.
The increase would have carried through for every year of retirement, he explained. A 66-year-old today would miss out on more than £22,000 over a 20-year retirement, even by conservative estimates.
However, the freeze on the energy price cap will prevent half of the state pension from being swallowed by household bills next year. Pensioners will now spend 20% of their payments on energy bills next year, down from a predicted 58%.
‘Freeze doesn’t go far enough for pensioners’
The state pension will increase by around 10pc in the spring if inflation is sustained, after CPI hit 9.9% in August.
Under previous forecasts, pensioners would have had to spend almost two thirds of the state pension on energy bills, with Cornwall Insight, the energy consultancy, predicting just weeks ago that the cap would surge to £5,387 in January before increasing again in April to £6,616.
The energy crisis will still wipe out a much larger share than in previous years, as bills took up just 14% of the state pension last winter when the energy price cap stood at £1,277.
However, the energy price freeze will not go far enough for millions of pensioners. Around 2.8m older households in England will be living in fuel poverty from next month, according to charity Age UK. That is an extra 1.8m compared to a year ago, it warned.
The charity’s Caroline Abrahams said Britain faced a “humanitarian emergency” this winter like nothing we have ever seen.
Many will be in an “impossible position financially,” unless the Government does more to help, she added.
Rebecca O’Connor, of stockbroker Interactive Investor, said that pensioners living in large homes but on low incomes would be hit the hardest, as they will find it particularly difficult to limit their energy usage this winter.
She said: “For many, the increase in the state pension will only be enough to cover other rises in costs like food and transport.”
Adapted from an article in the Daily Telegraph by Jessica Beard