Unpicking the State Pension ‘triple lock’
Whenever the government or the media talk about the State Pension, you’ll generally hear the phrase ‘triple lock’ being used. Even if you’ve grasped that this refers to a good thing, not everyone will know exactly what it means. IFA Carl Roberts of Wealth and Tax Management unlocks its mysteries.
If you want a promise to sound particularly convincing, you might say that it’s ‘locked in’. To really make your point, you could say that it’s ‘double locked’. So to claim that something has a ‘triple lock’ really must be the ultimate in reassurance. No Big Bad Wolf is getting through that door.
We hear a lot about the triple lock that the government has put on the State Pension. Often it will be a story about whether or not it’s going to be kept or abandoned – and so far, it has always turned out that they are going to keep it. However, the media are sometimes guilty of assuming that their readers know what this mysterious locking system actually is. And it’s important to know, because without understanding the State Pension you can’t properly estimate what your income might be in retirement.
Before I explain the triple lock itself, let’s recap how the State Pension itself actually works.
Your State Pension – a quick reminder
The government State Pension is payable to everyone in the UK who is eligible once they reach the State Pension age. This age is set by the government, and varies from person to person depending on i) when you were born and ii) (sometimes) whether you are male or female. For some time the State Pension age was 60 for women and 65 for men. However, the age has been rising for the last few years, and is also being aligned so that men and women will have the same State Pension age. You can find out what yours is by going here: https://www.gov.uk/state-pension-age
You will be eligible to receive the State Pension provided you have made sufficient National Insurance (NI) contributions – these are usually deducted from your wages as part of PAYE. A State Pension forecast is available online, and this will tell you whether you have paid enough NI contributions and what the pension may be. You can get your forecast here: https://www.gov.uk/check-state-pension
The current weekly payment (at the time of writing) for someone who has reached State Pension age and entitled to the full State Pension is £159.55.
Now on to the triple lock!
Each time a new government is elected, it is up to them to decide how the State Pension will be increased each year. It’s clearly essential that it does increase, as prices for items in the shop generally go up each year due to inflation, which over longer periods of time can result in a significant price difference. For instance, 25 years ago a litre of petrol would set you back only around 50 pence. This illustrates how some everyday prices have more than doubled in that time – and many retirements are as long as that or even longer.
In 2010, the then-Chancellor George Osborne announced a flashy new guarantee for the State Pension, which he called the ‘triple lock’. It would mean that the weekly pension payout would be increased each year by the highest of three measurements: national wages, prices, or a set percentage. What could possibly go wrong?
Breaking down the triple lock
Every year, the State Pension increases by the highest of the following three measures:
- Earnings – (e.g. if national wages grow by 3 per cent, the State Pension would increase by that amount if this measure happened to be the highest of the three)
- Prices, as measured by the Consumer Prices Index (CPI)
- 2.5 per cent
The last point in particular is the failsafe (and ironically, the one that has proved most troublesome for the government). When the figure was set, it was reasonably assumed that either earnings or price growth would be around 2.5 per cent at least. However, in recent years the third of the ‘locks’ has comfortably outpaced both of these – meaning that people on the State Pension have been enjoying higher ‘pay rises’ than most of the rest of the country.
The downside of this, of course, is that the government has begun to wonder if the triple lock is sustainable in its current form. Before the 2017 General Election it was mooted that the government were intending to reduce it to a double lock – one that followed the higher of price growth or wages growth, but was not bound to a fixed figure. In hindsight this would appear to be a more sensible measure, and more affordable for the nation in the long term – even if it would be less good news for pensioners themselves.
However, after the poor showing at the polls, the government appears to have abandoned its plans to revise the triple lock – for now, at any rate. Will it survive into the future? No-one can be sure, but usually once a controversial political subject is raised for the first time, it has a way of popping up again and again until the issue is resolved.
In summary, no-one expecting to retire in the next five or ten years should rely too heavily on getting a State Pension that is quite so generous as the one currently offered. Don’t make the mistake George Osborne made – plan for the worst-case scenario, and talk to a financial adviser to ensure you can still afford the retirement you want.
Carl Roberts is a chartered financial planner with Wealth and Tax Management.