The government has confirmed its plan to suspend the ‘triple lock’ for annual state pension increases for a year. A key part of previous budget commitments since its introduction in 2010, the triple lock ensures the UK state pension continues to rise each year. The move to suspend it comes in the wake of the economic and social disruption caused by the pandemic, but what exactly does it mean?
The last few years have probably not turned out the way many of us planned, least of all those in charge of the country’s finances. Extraordinary measures such as the furlough scheme and business support measures have not only sent government borrowing to record peacetime heights, but have also impacted its ability to honour some of its past commitments.
The pension triple lock is one prominent example, with the government announcing that it will be suspended for 2022-23. The move will have an impact on the income that pensioners would have received. So what has prompted this significant change to government policy and what will it mean for those in retirement?
What is the triple lock for pensions?
The triple lock has been a core commitment of every government budget since 2010, when it was announced by the Coalition Government made up of the Conservatives and the Liberal Democrats. It was a response to the fact that the real value of the state pension had fallen, and it looked to guarantee that this vital state benefit would continue to rise every year.
The ‘triple lock’ refers to the idea that the state pension rises in line with the highest of these three measures every year:
A flat 2.5% rise
Average earnings growth (measured from May to July each year)
Inflation (measured in the year from September every year)
This annual rise is applied to the basic state pension as well as the new state pension (for people retiring after 2016). The government uses it to make sure that people’s retirement benefits keep pace with the rising cost of living.
Critics of the policy’s introduction have often cited the fact that it would be too expensive to maintain over the long run, especially if unforeseen events forced the government to dramatically raise its borrowing levels. This is exactly what has happened as a result of the Covid-19 pandemic.
Why has it been suspended?
As far as unexpected events go, it doesn’t get much bigger than a global pandemic. It has caused a huge amount of disruption to the UK economy and required the government to put in place a number of extensive support mechanisms. All of which came at a cost. According to the Office for National Statistics, in the year to March 2021 the UK government had borrowed £297.7 billion to finance its Covid-19 response measures. This equates to around 14% of the country’s total GDP.
One of the main features of the government’s response was the furlough scheme. Millions of workers have had the majority of their reduced wages paid by the government in order to allow them to keep their jobs. As restrictions lift and economic activity returns, companies are bringing furloughed staff back to work and back to their full salaries.
This means that average earnings in the UK have jumped by 7.3% this year. Under the triple lock this rise would be translated to a 7% rise in the state pension – a development the government says is simply not feasible in the current climate.
What does this mean?
The jump in average wages and the impact it would have on the triple lock is an unfortunate by-product of the furlough scheme and it certainly puts the government in a tough position. Its answer is to temporarily suspend the triple lock and replace it with what is essentially a ‘double lock’.
For 2022-23, the UK state pension will either rise by 2.5% or the inflation rate. The government has committed to reinstating the triple lock for 2023-24.
The move has understandably left many currently receiving the state pension confused as to what all of this actually means for their retirement income. So, let’s look at what we know.
State pension for the 2021-22 tax year
The current full state pension is £179.60 a week or £9,339.20 a year.
A 2.5% increase will take this to £184.09 a week or £9,572.68 a year.
Basic state pension for 2021-22 tax year
The current basic state pension is £137.60 a week or £7,155.20 a year.
A 2.5% increase will take this to £141.04 a week or £7,334.08 a year.
Is this the end of the triple lock?
The current government has made it clear that it does not think the triple lock should necessarily be around forever. Its current commitment to the policy only officially lasts until the end of this parliamentary term in 2024. The policy is widely supported by opposition parties, meaning it is likely to be a hot topic during the next election.
The issues and challenges around funding the state pension are complex, politically emotive and impossible to avoid. The Department for Work and Pensions puts the total cost for the state pension in 2021-22 at £104.86 billion, an increase from £69.83 billion in 2010 (the year the triple lock was introduced). Currently, around 60% of the total UK welfare spending goes towards pensioners. With an ageing population and falling birth rate, this is not an issue that is going to go away. Finding an effective way to ensure people can live comfortably in retirement is going to continue to be a priority for generations.
It’s time to act
Whether or not the triple lock remains in place past 2024 remains to be seen. What is without doubt though, is that planning for retirement is more essential than ever. Finding a financial adviser that can help you ensure you have a comfortable income in your twilight years is the best way to guard against any uncertainty around the UK state pension.
Getting the right financial advice for your circumstances is key. Find your perfect financial adviser now.