Britons are warned that “difficult decisions need to be made” when it comes to the future of the triple lock as new data shows it will cost the Treasury an extra £1.3bn.
The increase in state pension costs come after the Bank of England revised its inflation forecast upwards.
The central bank now predicts inflation will reach 3.7 per cent this year, nearly one percentage point higher than its previous forecast of 2.75 per cent in November.
This unexpected rise in inflation is set to drive up state pension payments for 2026-27, putting additional strain on public finances.
The increase stems from the Government’s “triple lock” commitment, which ensures state pension payments rise annually by the highest of inflation, average earnings, or 2.5 per cent.
The Treasury will need to pay £148.4bn in state pension costs for 2026-27, compared to £147.1bn under the previous inflation forecast, according to analysis by wealth management firm Quilter.
The higher inflation forecast would have “serious ramifications” for the Treasury when it comes to the state pension
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Ian Futcher, of Quilter, said the higher inflation forecast would have “serious ramifications” for the Treasury when it comes to the state pension.
He said: “The extra £1.3bn cost to the taxpayer highlights the precarious nature of the Government’s fiscal position, and frankly how the triple lock can quickly become unsustainable. Pensioners receiving the full new state pension will also be perilously close to breaching the personal allowance
“While it is an undeniably popular policy, with an ageing population it is becoming difficult to afford, and there may come a point where difficult decisions need to be made about it.
“But the can is likely to keep being kicked down the road by all political parties scared to upset a large cohort of the electorate.”
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The state pension increase is calculated each April based on the previous September’s inflation and wage growth figures.
Britain’s pension costs are already mounting significantly, with overall pension spending projected to be £23bn higher in 2027-28 compared to the start of the 2020s, according to Office for Budget Responsibility forecasts.
The burden of pension spending has grown dramatically over recent decades, rising from two per cent of GDP in the early 1950s to more than seven per cent today.
The Adam Smith Institute has warned that the state pension could become “fiscally unsustainable” by 2035, as benefit payments exceed National Insurance contributions meant to fund them.
However, Baroness Altmann, a former pensions minister, said yearly state pension uplifts were the “minimum” the Government should be doing to protect pensioners from rising prices.
She added: “The triple lock doesn’t work properly as it doesn’t protect pension credit or the basic old state pension. The 2.5pc element is arbitrary and makes no sense.
“But that’s not an argument to say we can’t inflation-link state pensions. The idea that the country can’t afford it simply isn’t true”
An ageing population with deteriorating health is expected to add further pressure to national finances.
The “full” new state pension currently stands at £221.20 per week, equivalent to £11,502 annually. This will increase to £230.25 weekly, or £11,976 per year, when the next rise takes effect in April.
Under the projected 3.7 per cent increase for the following year, annual payments would reach £12,419. This figure would bring state pension payments remarkably close to the tax-free personal allowance threshold of £12,570.
Labour has pledged to keep tax thresholds frozen until 2027-28, despite rising prices and wages. This move, along with rising pension payments, could greatly affect retirees.
Former pensions minister Sir Steve Webb warns that by 2032, around 10 million pensioners—three-quarters of all retirees—could end up paying taxes.
The Treasury has been approached for comment.