How does the National Living Wage affect the state pension?

In April, the National Living Wage (NLW) is increasing by 6.2% increase. This brings the hourly rate to £8.72, resulting in a salary of £15,870 a year based on a 35hr working week.

Not a result of inflation, this jump is down to a policy made by George Osborne back in the 2015 summer budget, when he set a goal for the NLW to match 60% of median earnings by 2020. Sajid Javid, the new Chancellor, has set an updated target for NLW to reach two thirds of median earnings by 2024.

Pushing up minimum earnings means a reduced cost for the government when it comes to in-work benefits and increased tax and NICs income. On the other hand, it increases their costs as an employer, placing pressure on all wages, not just those at the minimum level. But how will it impact the state pension?

The Triple-Lock Pension

Following the general election at the end of 2019, where the Conservatives retained power, we know the Triple-Lock will continue to apply to the new state pension. The infamous Triple-Lock pension was introduced in 2011. It guarantees that the basic state pension will rise in one of three ways (whichever is largest):

• a minimum of either 2.5%
• the rate of inflation (Consumer Price Index)
• average earnings growth

Before 2011, the state pension rose in line with the retail prices index (RPI) measure of inflation, which was consistently lower than annual rises in earnings or 2.5%. (Source)

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.

The new state pension looks set to continue shrinking as a proportion of the NLW. From April 2020, 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.

Planning for retirement

These numbers are a reminder that the new state pension is far from generous, even for those with minimum earnings. If you want to retain your lifestyle once you stop working, you’ll need to top up your state pension with a private or workplace pension.

Click here to find out how Alan Boswell Group can help you plan for retirement.

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