How likely changes to the State Pension triple lock could impact on your financial planning

As you’ve probably noticed recently, there has been a lot of conjecture about the future of the “triple lock”.

The triple lock is a legislative undertaking to ensure that retirement income from the State Pension rises at least in line with inflation on an annual basis.

However, one impact of the pandemic is that the triple lock calculation used to determine the annual increase could result in a percentage rise that could be unacceptable to the chancellor, Rishi Sunak, as he tries to steer the economy back on track.

Because of its importance when it comes to retirement planning, I thought it was worthwhile devoting a blog to the subject.

How the triple lock works

For many years, the annual increase to the State Pension was often based more on political expediency rather than any fixed information or data.

That changed in 2010 when the then-chancellor, George Osborne, introduced the triple lock to provide a degree of certainty when it came to working out the percentage increase pensioners would receive.

The expression comes from the three figures used to calculate the annual State Pension increase. The annual increase will be the higher of:

• The increase in national average wages
• The rate of inflation using the Consumer Price Index (CPI) measure
• 2.5%.

The chart below shows State Pension annual increases since 2011/12 and how the triple lock has worked since its introduction.

Source: Daily Telegraph and House of Commons Library

The pandemic will impact on the triple lock

In April 2021, the State Pension increased by 2.5%. Effectively, the triple lock did the job it was designed to do by ensuring that, even with low inflation and wage increases, pensioners would still get a decent increase.

It’s looking like a very different story for the next increase in April 2022.

The figure is calculated in October and usually announced in the chancellor’s Autumn Statement. Wages have gone up rapidly since the economy started re-opening as the pandemic eased. The figure for the quarter ending in June 2021 showed an increase of 7.4%.

Under the terms of the triple lock, the State Pension would increase from £9,339 (2021/22) to £10,030 (2022/23).

It also means a big fiscal and political headache for one of George Osborne’s successors as chancellor, Rishi Sunak.

Two headaches for the chancellor

A 7.4% increase will mean the Treasury having to find the money – estimated to be close to £7 billion – for the increase this year. Not only that, but that £7 billion would become an annual commitment, together with further increases on top of that each year going forward.

The massive amounts of money spent during the pandemic means financial resources are already looking precarious, so a rise of 7.4% is likely to blow a big hole in calculations.

That’s the chancellor’s fiscal headache. The political headache comes from the popularity of the triple lock since its inception, especially among the UK government’s growing voter base of over-65’s.

According to Ipsos Mori, in 2010, 44% of people over 65 voted Conservative. By the December 2019 election, that figure had increased markedly to 65%.

Other factors might have also contributed to this. For example, compared to other age groups people over 65 are very pro-Brexit, so the prime minister’s “get Brexit done” election slogan could well have resonated.

But the fact remains that the government will want to consider carefully upsetting pensioners.

So, what will the chancellor do?

It’s now the job of the chancellor to come up with a solution to the triple-lock problem that keeps everyone happy.

In reality, that’s probably impossible. The conflicting voices mean, regardless of what he does, he will upset some people.

If he accepts the sanctity of the triple lock, pensioners will clearly be happy, but the Treasury won’t, and it could create big fiscal problems going forward.

On the other hand, he may decide that a rise of 7.4% isn’t sustainable and suggest an alternative calculation. This would make financial sense but would concern pensioners and poverty campaigners and provide opposition parties with an open goal.

The current signs are that the chancellor and prime minister will consider two alternative formulae proposed by the Treasury, both of which would result in a rise of around 2.5%. But, at this stage, no one can safely predict what the outcome will be.

How changes to the triple lock could impact on you

If you’re already getting your State Pension, the removal of the triple lock won’t have a massive impact. Previous increases to the State Pension will be maintained, and it’s almost certain that some kind of “lock” will remain in place to ensure your pension continues to keep pace with rising prices.

But the impact is likely to be more severe if you are still working and have not yet retired.

Given that the State Pension is probably not sufficient for you to live comfortably on, it’s prudent to see it just as a handy guaranteed income underpin rather than the centrepiece of your income in retirement. Even more so with the State Pension Age set to increase over time to age 68, and a recent suggestion from an influential think tank that it rise to age 75.

Given the uncertainty, maximising the amount you save into your pension should be one of your top financial priorities. A healthy pension pot should provide you with a good income and will mean that you’re less reliant on the State Pension to maintain a decent standard of living.

The Annual Allowance freeze will have an impact too

One other financial impact of the pandemic it’s worth touching on is the freeze in the Personal Allowance from 2022 to 2026, announced in the last Budget statement.

After rising to £12,570 in April 2022, it will stay at that figure until at least 2026.

Normally, the Treasury would raise personal allowances in line with CPI. So, the freeze means that, subject to wage increases, most of us will pay more tax, in real terms, each year.

Get in touch

I hope you’ve found this outline of possible changes to the State Pension triple lock useful.

If you’d like to talk through your own pension arrangements or think I can help you with the issues outlined here, please do get in touch.

You can email me at graeme@macfp.co.uk or call me on 01349 832849.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.