Tuesday, April 02, 2024

WORKLERS CAPITAL

UK
What is the triple lock pension ?

by Nick Green


The ‘triple lock’ is a safeguard that applies to the UK state pension, to ensure it doesn’t lose value because of inflation.

In the past, there have been calls to scrap or modify the triple lock, which intensified during the Covid-19 pandemic, amid fears that it could become too expensive.

Here’s how the triple lock pension works, what it means for you and your retirement income, and what the consequences might be if it were scrapped or amended.

The triple-lock state pension

A triple lock was introduced to the UK state pension in 2010 as a guarantee that it would not lose value in real terms and that it would rise at least in line with inflation.

The three-way guarantee means that each year, the state pension would increase by the highest of the following three measures:Average earnings
Inflation as measured by the Consumer Price Index (CPI) 2.5%

In other words, if average earnings were to increase by 3%, the state pension would also rise by 3%. But if neither average earnings or inflation rises by over 2.5%, the state pension will still grow by this amount.

What does the triple lock mean for me?


If you are currently receiving the state pension, the triple lock ensures that your spending power will not diminish over the course of your retirement (for as long as all three guarantees remain in place).

It also means that if inflation is below 2.5% (which it hasn’t been for a while), your pension increases will beat inflation, improving your spending power.
Why is the triple lock good for pensioners?

It’s clearly important for pensioners that the state pension increases over time.

Retirement can last around 20 years or longer, and over such a length of time, prices can increase dramatically.

Will the triple lock end?

The state pension triple lock has proved to be a burden for successive governments, as it has been costly for the taxpayer.

On several occasions, the government has considered modifying the triple lock, for example, to replace it with a double lock based on increases in earnings or CPI (whichever is the highest). But, this has not been a popular idea with voters.

As a General Election is coming up within 18 months, it’s highly unlikely the triple lock will change, particularly as the cost of living crisis and high inflation continue.

However, if the state pension continues to rise at a fast pace, this could become more difficult for the government to justify in the future.
What would happen to my state pension without the triple lock?

The loss of the triple lock would not have a huge immediate impact on current pensioners, especially if it were replaced with a double lock.

The level of the state pension would still rise with inflation – it just wouldn’t exceed it.

A more pessimistic scenario would be for the state pension to have only a single lock, linked either to earnings or the CPI, but not both. In this case, pensioners’ spending power might deteriorate over the medium to long term.

The worst-case scenario would be the complete loss of any lock, and a return to the times when increases in the state pension were simply made at the whim of the Chancellor in the annual Budget. This is unlikely, but it can’t be ruled out in the long term.

Ironically, those most likely to be hit hardest by the removal of the triple lock are younger generations. Those currently around 10 to 20 years from retirement might feel more impact when the time comes.

What can I do to safeguard my retirement income?


If you are not yet drawing your state pension and are still working, it is a good idea to save as much into workplace or personal pensions as possible.

Given that the state pension is far from generous in any case, and the age you can receive it continues to rise, it is sensible not to rely too much on it.

The state pension should be seen as a supplement to private pension savings. Find out how much retirement income you might receive from your private pension and how to boost it using our Pension Calculator.

If you found this article helpful then you might also find our free pension guide and article on how to find or trace a lost pension informative, too.


ABOUT THE AUTHOR

388 articles
Nick Green
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.


What is the state pension triple lock?

Georgie Frost
|Editor-at-large
Updated March 25, 2024



State pensioners will get an inflation-busting 8.5% rise in April. This will take the weekly new full state pension payment to £221. Chancellor Jeremy Hunt has also said the Conservative Party will keep the triple lock system to decide rises in the state pension if they win the election, which must be held by 28 January 2025. Here we explain how the triple lock works.

The full basic state pension rises each year in line with the highest of three factors: earning growth figures between May to July the previous year, CPI inflation from the previous September, or 2.5%. This system is known as the triple lock.

Due to soaring inflation, the state pension increased 10.1% last April, costing the Treasury £124bn. Prime Minister Rishi Sunak has previously promised that the commitment will stay, and now Jeremy Hunt has confirmed the promise to the BBC.

Hunt acknowledged upholding the policy would be an “expensive commitment”, but explained the party was confident that it would “deliver the economic growth that is going to pay for it.”

The rise in state pension will also see millions more retirees paying more in income tax, due to something called fiscal drag.


But is the triple lock affordable? According to the Institute for Fiscal Studies, the government could be spending as much as £45billion on the state pension.

This article outlines
:What is the pension triple lock and how does it work?
Why was the triple lock suspended in 2022?
What does the triple lock on state pension mean for you?
Will the triple lock be totally scrapped soon?
How can you prepare your finances for retirement?

Read more: State pension: how much will I get?

What is the triple lock on pensions?

The coalition government introduced a triple lock guarantee in 2010. The measure ensures the state pension rises each year in line with which measure is highest from the below:2.5%
Average wage growth between May and July (compared to the three months in the previous year)
Inflation using the consumer prices index measure in the year to September (which was 10.1% in 2022 and 6.7% in 2023)

The government confirmed the uplift in November 2022 prior to the start of the new tax year. It came into effect from 6 April 2023, with pensioners starting to see a change in their income on the first Monday of the new tax year.


The triple lock applies to both the basic state pension (pre-April 2016) and the new state pension (post-April 2016) to ensure that they keep pace with living costs.

The triple lock was suspended in the 2022-23 tax year for 12 months, with the earnings part of the triple lock was temporarily removed. There was speculation that the triple lock would be suspended for a second year.

However, on 17 November 2022, the Treasury confirmed that the triple lock guarantee will be reinstated. This means that state pension income went up by 10.1% from 10 April 2023, in line with inflation from last September.
00:38
Explainer about the pension triple lock: how your pension is aligned with inflation, average earning increases, or 2.5%

Find out more about the state pension increase 2023.
What is the full new state pension?

For the current tax year (2023/24) the full new state pension is:£203.85 a week (up from £185.15 a week in the previous tax year)
£10,600.20 per year

You will only receive the full new state pension if you reached state pension age after April 2016 and have 35 full qualifying years on your national insurance record.

Read more: ‘Should I buy national insurance years to top-up my state pension?’
What is the full basic state pension?

The increase of 10.1% takes the basic state pension to:£156.20 a week (up from £141.80 a week in the previous tax year)
£8,122.40 per year

People who receive the basic state pension (anyone who reached state pension age before April 6, 2016) can also claim an additional state pension.

There is no fixed amount for this – it is dependent on factors including your earnings and your national insurance contributions.

The triple lock does not apply to any additional state pension.
How much will the state pension rise by in 2024?

The CPI inflation figure used in the triple lock is released in October and was 6.7%, while the wage growth element came out in September and was 8.5%.

That means that the state pension will increase by 8.5% in April 2024, meaning:Full state pension – £11,501 per year
Basic state pension – £8,812.80

The personal allowance is currently £12,570 and will stay frozen at that rate until 2027/28.

If the state pension rises by just 3% on average, it will breach the personal allowance by April 2027, according to wealth manager Evelyn Partners.April 2024: 8.5% triple lock increase takes new flat rate state pension to £11,501
April 2025: 3.0% increase = £11,846
April 2026: 3.0% increase = £12,201
April 2027: 3.0% increase = £12,567
Why was the triple lock guarantee suspended in 2022?

In 2021 there were concerns that earnings growth had been distorted by the fallout from the pandemic.

Millions of workers received a reduced wage through the furlough scheme, but as restrictions lifted, businesses brought staff back to work on full pay.

This caused an artificial boost in average wages, which increased by 8.8% between April and June 2021, according to the Office for National Statistics.

Due to the triple lock commitment, this would have meant that the state pension would rise by more than 8% in 2022. The government would have needed to find an extra £3 billion to fund this increase.

As a result, the government stepped in to suspend the triple lock guarantee for the 2022/23 tax year.

This means that in 2022 the state pension increased in line with the consumer price index, which was 3.1% in the year to September 2021. This is obviously higher than 2.5%, the other element of the triple lock.
Will the triple lock be scrapped?

For now, the triple lock is staying. The Prime Minister, Rishi Sunak, promised that despite high wage growth figures in July it would remain in place.

The triple lock has long been criticised by some economists, who believe it is too expensive to maintain. Around 60% of the total UK spend on welfare payments goes to pensioners.

New analysis from The Times shows that by 2025 spending on the state pension will cost Britain more than education, policing and defence combined.

Meanwhile research from the the Institute for Fiscal Studies (IFS) shows that an additional £11bn per year is being spent on state pensions as a result of the triple lock.

If the triple lock is kept in place, the state pension could potentially be worth between £10,900 to £13,400 per year by 2050 in today’s terms, according to estimates from the IFS – an additional £45 billion.

The current Conservative government have pledged to keep the triple lock in place if they win the election. Opposition parties, including Labour, also support the policy.

Arguments against the triple lock have also pointed to intergenerational unfairness.

Critics say it is unfair that younger people should subsidise the income of older people at a time when they may be struggling with their own living costs.
State pension triple lock: increases since 2011

Financial year State pension rise Based on
2011/12 4.6% RPI
2012/13 5.2% CPI
2013/14 2.5% 2.5%
2014/15 2.7% CPI
2015/16 2.5% 2.5%
2016/17 2.9% Earnings
2017/18 2.5% 2.5%
2018/19 3% CPI
2019/20 2.6% Earnings
2020/21 3.9% Earnings
2021/22 2.5% 2.5%
2022/23 3.1% CPI
2023/24 10.1% CPI
2024/25* 8.5% Earnings
Source: House of Commons research *based on the assumption that earnings growth will be higher than September’s inflation figures, released in October
What would happen to my state pension without the triple lock?

Before the 2017 general election, the Conservatives proposed a “double lock” policy, which would determine state pension increases by the higher of earnings or inflation (scrapping the 2.5% measure).

However, this proposal was subsequently scrapped after the Conservatives signed a deal with the Democratic Unionist Party following the election.

Supporters of the triple lock say the policy helps ensure that people have enough to get by in retirement. It preserves the value of the state pension, reducing the amount of private savings needed to top up someone’s retirement income.

The triple lock may be even more important to future generations. Younger people are less likely to have the security of generous final-salary workplace pensions and will be more dependent on other sources of income (including the state pension).

They are also likely to retire at a later date than older generations, as the state pension age is rising to 68.


How else can I prepare my finances for retirement?


While the triple lock is a generous benefit, it is widely accepted that the state pension alone is not enough to fund a comfortable lifestyle in retirement.

Here are ways to boost your retirement savings:

1. Save through a pension

A pension is the best way to save for retirement, due to the generous tax relief on offer. For every £100 you pay in, the government tops this up by at least £20.

If you are employed, your employer will also pay into your pension on your behalf, giving your savings an extra boost.

You may have a:Defined-benefit pension: also known as final-salary schemes, these pensions are typically found in the public sector. You will get a set annual income in retirement. The amount will depend on how long you were with your employer, and your average salary during that time. Defined-contribution pension: these are commonly found in the private sector. You pay a portion of your salary into a pension set up by your employer. The money will be invested in the stock market. Your retirement income depends on how much you have saved into the pension and how your investments have performed.

You can also pay into a defined-contribution pension if you are self-employed. You might want to read: What is the best pension for self-employed workers?

Or you could contribute to a personal pension on top of any workplace scheme.

With personal pensions, you have a choice between:A ready-made plan, where the provider selects your investments. We list the top-rated ready-made pensions.
Or a self-invested personal pension (SIPP), where you make your own decisions.

Here are eight simple ways to give your pension pot a boost.

We also help you understand how much you should pay into your pension.

2. Invest through an ISA

ISAs can help you to grow your savings and boost your income in retirement.

One of the main types of ISA is a stocks and shares one.

While you won’t get tax relief on any money you pay in (unlike a pension), all returns and withdrawals through an ISA are tax-free. By contrast, you may have to pay income tax when withdrawing money from your pension.

If you want to retire early, an ISA can be a useful way of bridging the gap before you can access your pension. We explain how the ISA trick works.

There is also a Lifetime ISA, which combines the features of both a pension and an ISA.

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