The triple-lock pension scheme is the government's commitment to retirees to protect their pensions during inflation. A large portion of the retired population lives in poverty. The UK government introduced this state pension programme to raise thor living standards in 2010.
The triple-lock pension guarantees an annual rise in the state pension. The yearly rise in the state pension in the United Kingdom is contingent upon the highest of three factors: inflation, salary growth, or 2.5 per cent.
The triple-lock state pension has been discussed amid concerns about its sustainability and affordability. There have previously been requests to abandon or change the triple lock, which became more prevalent during the Covid-19 outbreak, due to concerns that it would become too costly. Retirees and future pension recipients may be significantly impacted by the government's choice to maintain, modify, or repeal the triple lock.
Let's understand how the triple lock pension works, its implications for you and your retirement income, and what would happen if it were scrapped or amended.
What is a Triple-Lock Pension?
In 2010, the coalition administration instituted the triple lock pension. It guarantees the state pension increases each year by the metric highest from the below:
- 5%
- The average earnings growth
- The consumer price index measure of inflation
A 5% increase in average wages would translate into a corresponding 5% increase in the state pension. However, the state pension will still increase this amount even if neither average wages nor inflation rises by more than 2.5 per cent.
When Will the State Pension Be Raised?
The State Pension increases on April 6 of each tax year, subject to several factors.
The consumer price index (CPI) measure of inflation (calculated for September of the preceding year), average wages from May to July of the previous year, and 2.5 per cent determine how much the State Pension rises.
October saw the publication of the CPI inflation rate—6.7%—and the wage growth rate—8.5%—for the triple-lock pension.
Accordingly, in April 2024, the state pension will rise by 8.5%, which implies:
- The annual full state pension is GBP 11,501.
- Basic state pension – GBP 8,812.80
The current personal allowance of GBP 12,570 will remain unchanged until 2027–2028. Both the new state pension (as of April 2016) and the basic state pension (before April 2016) are subject to the triple-lock pension, which ensures they keep up with rising living expenses. The earnings component of the triple-lock was temporarily eliminated during the 12-month suspension in the 2022–2023 tax year.
What Does the Triple Lock Mean For Me?
The state pension triple lock assures that your retirement spending power won't decrease if you currently receive the state pension (as long as all three guarantees are in place). Additionally, it implies that your pension increases will outpace inflation and improve your purchasing power if inflation stays below 2.5%.
What Caused the Suspension of the Triple-Lock Guarantee In 2022?
The pandemic's aftermath raised concerns in 2021 about the distortion of earnings growth. Through the Furlough program, millions of workers saw a pay cut; however, when restrictions were relaxed, employers let their employees return to work with full pay.
According to the Office for National Statistics, this led to an artificial spike in average salaries, which rose 8.8% between April and June 2021. The triple-lock guarantee would have meant that the state pension would have increased by more than 8% in 2022. The government would have had to come up with an additional GBP 3 billion to pay for this increase.
Consequently, for the 2022–2023 tax year, the government intervened to halt the triple-lock pension. In other words, starting in September 2021, the state pension grew by 3.1%, per the consumer price index. This is higher than the other element of the triple lock, which is 2.5%.
When Will the Triple Lock Come to an End?
Since the triple-lock state pension has been expensive for the public, it has proven to be a burden for succeeding administrations.
The government has contemplated changing the triple lock many times. For instance, it might switch it out for a double lock in response to rises in either the CPI or wages, whichever is higher. The triple lock will likely change given the next general election in 18 months and the ongoing high inflation and cost of living concerns.
However, if the state pension increases at an accelerated rate, the government may find it increasingly challenging to defend this in the future.
Without the Triple Lock, What Would Happen to My State Pension?
The Conservatives put out a "double lock" proposal before the 2017 general election, which would have eliminated the 2.5% metric and instead determined state pension increases based on greater inflation or wages.
But after the election, this plan was dropped when the Conservatives signed an agreement with the Democratic Unionist Party. Triple-lock pensions contend that the policy guarantees that people will have adequate funds for retirement. Maintaining the value of the state pension lowers the amount of private savings required to supplement an individual's retirement income.
Present pensioners would not be significantly impacted immediately by removing the triple lock, mainly if a double lock were to take its place. The state pension would still increase in line with inflation; it would just not surpass it.
A more bleak situation would be if there were only one lock on the state pension, and it was solely based on earnings or the CPI, not both. In this scenario, pensioners' medium to long-term purchasing power may decline.
The worst-case situation would be the total removal of all locks and a return to the days when the Chancellor's yearly budget only determined how much the state pension might rise. Although unlikely, this cannot be ruled out.
Paradoxically, younger generations stand to lose the most from removing the triple lock. Those 10 to 20 years away from retirement might experience a greater impact.
How Can You Protect Yourself against Triple Lock Suspension?
It is advisable to not solely rely on government subsidies, as they are subject to change. As such, you must invest in the early years or maintain a separate retirement fund.
Investing early on is a wise decision. If you have more money, you may buy stocks in the market and sell them later for a profit. Then, to prevent personal spending, combine the funds into a different pension account.
You can seek the help of accounting services in London, where an expert will work with you to create a separate retirement fund and settle your accounts.
How Can Unicorn Accountants Help You?
Retirees with a triple-lock pension benefit from living their golden years without sacrificing necessities. Individuals should begin saving money from the early stages of employment. This will come in very handy when you retire. Along with that money, the government pension will serve as an add-on.
Nevertheless, before you decide, you must speak to a professional accountancy firm like Unicorn Accountants. These experts are well-informed of the government's up-to-date rules and regulations and can guide you to lead a better retirement scheme.