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National Living Wage set to outpace new state pension

The National Living Wage (NLW) rises by over 6% in April.

The 6.2% increase to £8.72 an hour equates to £15,870 a year based on a 35-hour week. The substantial rise is not down to inflation – which ended 2019 at only 1.3% – but due to a policy of George Osborne’s. When he made the surprise announcement of the NLW in his 2015 Summer Budget, Osborne set a goal for it to match 60% of median earnings by 2020. Sajid Javid, the new Chancellor, has set a revised target of the NLW reaching two thirds of median earnings by 2024.

Pushing up minimum earnings is a double-edged sword for the Treasury. It ought to mean a reduced government outlay on in-work benefits and increased tax and NICs income, but it also adds to the government’s costs as an employer, placing pressure on all wages, not just those at the minimum level. What it has not done so far is impact on the cost of state pensions.

State pension equivalence?

As a result of the Conservative party election win, we know that the ‘Triple Lock’ will continue to apply to the new state pension, with annual increases which are the greatest of:

· Consumer Price Index (CPI) price inflation;

· average earnings growth; or

· 2.5%.

The NLW will have to rise faster than earnings to move from 60% to 662/3% of median earnings over the next four years. It’s therefore quite likely that, as in the past four years, the NLW’s growth will outpace earnings.

A corollary is that the new state pension looks set to continue shrinking as a proportion of the weekly equivalent of the NLW. From April, the new state pension will be only about 57% of the NLW (and thus little more than one third of median earnings). When the NLW and new state pension first came into being in 2016, the pension was nearly 62% of the NLW.

Those numbers are a reminder that the new state pension is far from generous, even for those with minimum earnings. If you want a comfortable retirement, then the new state pension needs topping up.

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