What is the pension triple lock, and why is it important?
You may have seen recent headlines about the possibility of the pensions triple lock being scrapped in the near future. Whilst Boris Johnson has committed to honouring it, it’s still important to understand what it means and why it’s important for your retirement plans.
What is the pension triple lock?
The pension triple lock refers to the guarantee that the State Pension will increase each year. This was introduced in 2010 by the then Conservative-Liberal Democrat government.
Since the introduction, the State Pension has increased each year by whichever is highest out of the below three measures, hence the term ‘triple lock’:
Annual price inflation in September
Average earnings growth as of July
As a result, retirees over the last decade have experienced their State Pension increasing by a minimum of 2.5% each tax year. In fact, in many cases, the State Pension has increased by more than 2.5%. The below chart highlights which measures have been used each year since 2012.
The triple lock guarantee helps to preserve income in real terms. As the cost of living rises, a static State Pension would struggle to support the same lifestyle over the medium and long term. Annual increases help to maintain income in line with rising costs. A look at annual price inflation doesn’t seem like it would have a large impact. But look at this over a 30-year retirement and the effect can be significant.
Let’s say you retired 30 years ago in 1990, when the single person State Pension was £46.90 per week, adding up to £2,438.80 per annum. An average rate of inflation of 2.9% a year would mean you’d need more than double (£5,583.14) in 2019 to maintain the same lifestyle, according to the Bank of England’s inflation calculator.
As a result, the triple lock guarantee is important for pensioners when planning their retirement.
Why was scrapping the triple lock guarantee being considered?
Just a decade after being brought in, there were suggestions that the triple lock guarantee could be scrapped.
In March, the government unveiled a package of measures designed to support businesses and individuals through the Covid-19 pandemic. Many of these schemes have been extended through summer and autumn as the country still grapples with restrictions. These measures have been welcomed by many but have come at a cost.
According to the Office for Budget Responsibility, the schemes to protect businesses have amounted to £103.6 billion of taxpayer support. This includes £39 billion for the Coronavirus Job Retention Scheme, in which the government covered a portion of furloughed workers pay, and £16 billion in additional spending on public services.
Whilst the coronavirus crisis isn’t over, the government is having to look at ways to recoup the billions spent.
A Treasury document dated May 5 and seen by the Telegraph suggests that scrapping the triple lock guarantee was one of the options being explored. Another suggestion put forward by think tank the Social Market Foundation, called for a double lock instead, removing the minimum 2.5% increase, to spread the cost of coronavirus between generations.
Fortunately for retirees, Boris Johnson confirmed he would honour the manifesto commitments relating to the triple lock when quizzed by the Commons Liaison Committee.
Protecting your retirement plans
Whilst safe for now, it’s important to note that the pension triple lock isn’t guaranteed throughout your retirement. The suggestion of scrapping it highlights why it’s important to review retirement plans and ensure a sustainable income stream that considers inflation.
As you enter retirement, your State Pension may be a relatively small part of your income. However, it provides a foundation to build on, delivering a reliable income. But you do need to keep in mind that changes can happen, which could have a negative effect on your plans. This is why it’s important to look at retirement finances as a whole. Understanding which sources are reliable and the steps taken to protect income from inflation as much as possible can help provide you with confidence that your finances will be sustainable throughout retirement.
If you’re worried about your long-term retirement finances, please get in touch. Using a range of tools, we aim to show our clients how their income could change over retirement and what it would mean for their plans. It means you’re in a position to take steps to protect income where necessary.
The contents of this article represents the opinion of Ruby Red Financial Planning Limited only. This article is for information only and does not represent advice or recommendation. Please seek independent financial advice before taking any action.
These blogs are for informal purposes only. They are not intended to be seen as advice. If you wish to take acton then please seek independent financial advice first.