Millions of retired Britons are likely to benefit from the move announced by George Osborne to reinstate the link between the state pension and earnings from next April.
The decision to increase the state pension in line with average earnings rather than inflation is expected to lead to a considerably improvement in the real value of the state pension in the coming years.
George Osborne told MPs that in the future pensioners would be protected by a “triple lock” guarantee that the state pension, currently up to £97.50 a week for a single person, would rise by the greater of either average earnings, inflation measures by the retail price index or 2.5 per cent.
He said: “There will be no more 75p increases in the state pension. We will provide lasting help to pensioners.”
The link between the state pension and prices was originally broken by Margaret Thatcher in 1980, leading to a considerable fall in the value of the state pension in real terms.
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Mr Osborne also announced that compulsory annuitisation would be scrapped from April next year, ending the existing rules that requires pensioners to buy an annuilty with their pension pot by the age of 75.
He also confirmed that the Government will call for evidence this week on the planned increase in the state pension age to 66, a moved which could save £13 billion a year. The coalition Government could introduce the change as early as 2016, 16 years earlier than planned by the previous Labour government.
It will also consider proposals to abolish the default retirement age, which currently forces workers to retire at 65.