What is the pension triple lock?
The pension triple lock is a safeguarded measure used to adjust the value of the State Pension each year. It ensures that the State Pension’s value doesn’t decrease and is in place to protect pensioners’ income.
The State Pension is a regular payment you can receive from the government once you reach State Pension age. Currently, both men and women can claim their State Pension from the age of 66. However, this is set to increase to 67 by 2028. The amount you’ll receive is dependent on the National Insurance Contributions you made during your working life. The maximum you can currently receive is £175.20 per week (2020/21), which totals £9,110.40 per year.
The triple lock guarantee was introduced so that each new tax year the State Pension would increase by the greatest of:
- Average earnings
- September’s price inflation
For example, if average earnings and inflation were to only increase by 2%, the State Pension would still rise by 2.5% because of the 2.5% guarantee. Whereas, if average earnings were to increase by 3%, the State Pension would also increase by 3% because this is greater than the 2.5% guarantee.
When did the government introduce the pension triple lock?
The triple lock guarantee was proposed by the Conservative-Liberal Democrat coalition in 2010. It was introduced to protect the State Pension and ensure that pensioners’ income wouldn’t be overshadowed by the rising cost of living.
Since its introduction, the triple lock has come under a lot of scrutiny as it’s proven to be costly to the government and UK taxpayer. On numerous occasions there has been talk about either changing, or completely removing the triple lock. In recent years, average earnings and price inflation have been lower, meaning the State Pension has actually outperformed these and increased by the 2.5% guarantee.
With concerns over the long-term affordability of the triple lock, it’s been a regular topic of conversation within the government. With an expected rise in the number of pensioners over the next few decades too, the debate is likely to continue for the foreseeable future.
What aspect of the pension triple lock might change?
If the government was to change the triple lock, it’s been suggested that it could be adjusted to become a double lock. This would likely mean that the 2.5% guarantee would be removed so the State Pension would only increase by the greatest of average earnings or price inflation.
Alternatively, the Treasury may look to just suspend the triple lock or set the State Pension rate for the next few years.
Why could coronavirus affect the triple lock?
The coronavirus outbreak has put major financial pressure on the Treasury, which has promoted more speculation about the affordability of future State Pension increases. This is why there have been calls for Rishi Sunak, Chancellor of the Exchequer, to either break or suspend the triple lock pledge, amid fears it will be too expensive to maintain following the crisis. Although it was announced in the Summer Statement there won’t be any immediate changes to the triple lock, changes are still expected to be made in the Autumn Budget.
There’s been a huge increase in the number of applicants for the UK furlough scheme due to coronavirus, with the government now supporting over nine million workers, in comparison to three million in April. The furlough scheme means that the government pays 80% of a worker’s wages, up to £2,500 a month.
When the furlough scheme ends in October, there will be a huge spike in average earnings as workers will receive 100% of their pay again, as well as the possibility of low-paid jobs disappearing. The Office for Budget Responsibility has estimated that once the scheme ends, there could be an 18% rise in average earnings in 2021.
Those currently receiving the State Pension will be protected from the current drop in average earnings, and would stand to benefit from the spike in wages next year.
Based on predictions from the Office for Budget Responsibility, keeping the triple lock for 2021 and 2022 would cost over £34 billion more than if the State Pension was to only increase in line with inflation.
How could the pension triple lock changes affect me?
If you’re currently receiving the State Pension, the removal of the triple lock isn’t likely to have much of an impact on your retirement income, especially if it’s just replaced with the suggested double lock. However, if changed to a single lock guarantee, linked to either average earnings or price inflation, then this could have a more noticeable impact on the State Pension’s value over the medium to long-term.
The State Pension should be seen as an additional income to private pensions, and not the other way round.
Those most likely to feel the impact if the triple lock is removed, will be those who are yet to retire. The State Pension is already unlikely to be a sufficient retirement income on its own, but any changes will mean that younger generations will need to make their own provisions for their old age, which isn’t always possible. The State Pension should be seen as an additional income to private pensions, and not the other way round.
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Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.