State pensions face fresh blow: Bank of Englands interest rate plan risks lower payouts

Budget 2021: Rishi Sunak issues warning about interest rates

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Bank of England governor Andrew Bailey has warned it will “have to act” due to the increased rate. Inflation is expected to be above four percent by the end of 2021 and continue into next year.

State pension payouts are partially linked to inflation, with a higher inflation rate leading to a higher monthly pension.

Any efforts by the Bank to reduce an increase in prices would lead to a smaller payout from the Treasury.

Mr Bailey said he expected the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer.

“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” Mr Bailey told an online panel discussion organised by the Group of 30 consultative group yesterday.

“And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act.”

Interest rates are currently at a record low of 0.01 percent.

An increase in rates, which would need to be signed off by the Bank of England’s Monetary Policy Committee, would likely ease the inflation currently being seen.

The bank will next meet on November 4.

State pensions are usually bound by the triple lock, which requires the Government to increase payments each year by 2.5 percent, average earnings or inflation, whichever is highest.

The triple lock, enshrined by law, was suspended this year due to the coronavirus pandemic.

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Ministers said a “statistical anomaly” caused by the furlough scheme meant that average wages were due to rise by as much a nine percent this year and the formula would have to be paused for 12 months.

The new “double lock” means pensions will increase in April by the highest out of 2.5 percent or inflation.

Work and Pensions Secretary Therese Coffey told MPs in the Commons last month: “At a time when we have made tough decisions to restore the public finances which have impacted working people, such as freezing income tax personal thresholds at current levels, this would not be fair.

“Setting aside the earnings element is temporary and only for one year.

“This means we can and will apply the triple lock as usual from next year for the remainder of this parliament in line with our manifesto commitment.”

Analysis indicates Britain already has one of the worst pension provisions in the developed world.

Of the 36 countries in the Organisation for Economic Co-­operation and Development, which includes America, Australia, Canada and major European nations, the UK’s state pension ranks bottom.

UK pensioners typically have a post-retirement income of approximately 28 percent of their earnings according to the research.

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