In previous years, British pensioners enjoyed the certainty the State Pension provided, thanks in part to the ‘triple lock’ guarantee on its annual growth. Nowadays, things look a little different. The combination of the government pausing these payment increases during the pandemic, alongside our current rise in inflation (we’ll come to this later) have caused concerns, among pensioners and working people alike, as to what their retirement could look like.
For the past decade, the State Pension’s increased by at least 2.5% almost every April, but for many it’s still not enough to make ends meet. However, most British retirees view their State Pension benefits as their primary source of retirement income. So, with many changes afoot from recent government announcements, where does that leave retirees?
First, let’s cover the basics and explore how inflation, and the triple lock impact State Pension.
What is inflation?
Inflation is the change in the cost of goods or services over time. In the UK, inflation is measured each month by the Office for National Statistics. By compiling a list of common purchases (from a loaf of bread to the cost of a holiday) to calculate an overall price level.
For example: if a pint of milk costs 80p and a year later costs 84p, the increase would represent 5% annual inflation on that product. However, inflation doesn’t affect all goods equally. Items might remain at the same price for several years, or not - because inflation can weigh heavier on certain products if components are scarce or expensive.
The Consumer Price Index compares a range of goods to create an overall rate of inflation. As of June 2022, the rate of inflation rose to 9.1%. Meaning on average the cost of a weekly supermarket shop, or a car, increased by just over 9%.
What is the State Pension?
The UK State Pension is a regular payment you can receive from the government once you have retired. When it was founded in 1908, The Old Age Pensions Act offered eligible citizens five shillings a week (equivalent to £20 in today’s money). Here’s how today’s State Pension works:
- How can I qualify for a State Pension? You’ll need to pay National Insurance Contributions for at least 10 years to receive the minimum, and at least 35 years for the maximum.
- When can I claim State Pension? Once you’ve met all the requirements above and reach State Pension age, currently set at 66 but due to rise to 67 by 2028.
- How much State Pension will I receive? If you have the maximum qualifying years (or equivalent credits) you’ll receive £185.15 a week, or £9,627.80 a year, in the 2022/23 tax year.
It’s becoming widely accepted that living off the State Pension alone would be difficult, if not impossible. In the Pensions Act 2008, the government introduced Auto-Enrolment as an initiative to boost private pension savings, and decrease reliance on State Pension income.
What is the triple lock?
The UK government introduced the triple lock commitment to State Pensions in 2010. This was designed to ensure that each year the State Pension’s adjusted based on the higher of three measurements; average earnings, the Consumer Price Index, or 2.5%.
For example: if the Consumer Price Index grew by 3% then the current State Pension would match that figure and equally rise by 3% for pensioners. In times where both the average earnings in the UK and the Consumer Price Index hadn’t exceeded 2.5%, then that figure would apply.
The triple lock safeguards the value of the State Pension against the UK’s rate of inflation. As inflation erodes the value of money over time, the State Pension must rise in line with the cost of goods and services to ensure retirees can afford the essentials for day-to-day living.
Why did the government pause the triple lock?
We’ve covered the basics: inflation, State Pension, and the triple lock. Following the economic crisis from the coronavirus pandemic, the government chose to temporarily pause the triple lock on State Pensions. Meaning for two years, the UK’s State Pension saw no growth.
Fast forward to 11 April this year when the government increased State Pension payments by just over 3% (equivalent to an extra £5.55 a week for those eligible for full benefits). This rise wasn’t given a warm welcome considering the UK’s current rate of inflation and the current cost of living crisis being experienced.
The UK’s State Pension is currently still trailing behind compared to average earnings and the Consumer Price Index. This has caused an inflationary squeeze, hitting those reliant on their State funded retirement income the hardest.
What are my options when I retire?
State Pensions aren’t the only pensions many retirees have. There’s also defined benefit and defined contribution pensions. Throughout your working life, you may have been enrolled in your employer’s pension scheme and have several scattered pension pots as a result. With the State Pension becoming less appealing, you may consider combining any existing pensions to help boost your overall retirement income.
If you’re not sure who your old pension providers are, then you can contact your former employers to find out or, use the government’s Pension Tracing Service. When you know where all your pensions are, you may want to consolidate them to keep on top of your retirement savings. You can consolidate your old pensions with PensionBee, contribute to your savings, and withdraw from your retirement age. Read more about how it works.
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.