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You may have noticed in the news that a “suspension” of the state pension triple lock has been announced. The move has broken a Conservative manifesto pledge in 2019 to maintain it, but arguably helps save on public spending (which has spiralled since the outbreak of COVID-19 in 2020). In this article, our financial planning team examines how this suspension could affect your retirement plan. We hope you find this content useful. If you’d like to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Why the triple lock matters
The state pension is heavily relied upon by most UK pensioners. About 15m people in the UK have no retirement savings at all, and 31% of people will likely need to depend completely on the state pension to fund their lifestyle. Currently, the state pension rises each year under the triple lock system – by 2.5%, in line with inflation or in line with average earnings growth.
A problem has arisen, however, due to an artificial rise in wage growth during the pandemic. After people were furloughed in 2020, earnings started to recover – leading to annual earnings growth which is higher than normal. The state pension was, therefore, set to rise by 8% to match this in April 2022, which would lead to a huge surge in government spending. As such, the Government has now announced they will water down the increase – i.e. from 8% to 2.5% next April, leaving many people worse off in retirement.
How has the change happened?
Politics has, of course, determined this suspension of the triple lock and what form it will take. The Government faces many headwinds with the idea. First of all, it will be hard to avoid criticism in the press that it breaks a manifesto pledge. Secondly, the move could be costly at the ballot box. Older people are far more likely to vote than younger people – and 67% of over-70s voted Conservative in the 2019 general election. Thirdly, there could be opposition from the Government’s backbenchers which makes legislation hard to push through.
On the other hand, the Government is under pressure to balance the books after soaring public borrowing to combat COVID-19. The Conservative manifesto was put to voters in 2019, before the virus swept through the globe and became the defining political conversation. Chancellor Rishi Sunak and Boris Johnson have, therefore, argued that moving to a kind of “double lock” is warranted in the circumstances. Backbenchers may also fall in line, despite some protestations. After all, there is precedent with prior Conservative governments. In the 1980s, for instance, the link was broken between the state pension and earnings under Margaret Thatcher.
Implications for retirees
Now that the triple lock has been suspended for a 2.5% rise in the next financial year, this will effectively mean a lower “pay rise” for recipients of the state pension in 2022. This may not sound too important, but it matters when you factor in the rising cost of living. Currently, the Bank of England (BoE) has an inflation target of 2%. If prices in the economy rise above 2.5% (as they came close to in June, at 2.5%) then retirees might not be able to make their state pension stretch as far when buying food, clothes and other important items.
Perhaps the biggest concern is that the Government introducing a suspension to the triple lock shows that the state pension is not guaranteed. Another crisis may come in the future, putting more strain on the public finances. People are also living longer – leading to more strain on the state pension budget. In the future, it is conceivable that UK governments move more of the responsibility for retirement savings to individuals and employers, rather than the state. One distant, possible outcome is that the state pension becomes “means tested”, similar to benefits like pension credit and housing benefit today.
This is not guaranteed to happen, of course. The UK lags behind many other developed nations in its state pension provision – trailing Luxembourg, Portugal and Turkey, for instance. It may be that future governments shift their policy focus to try and catch up. However, you cannot assume this will happen. Individuals would do well to build up their own retirement savings as much as possible – reducing their reliance on the state. Not only does this give you a greater sense of control over your own future, but it also opens more opportunities for you in retirement. For those currently in retirement receiving the state pension, consider speaking to your financial adviser about how this recent change to the triple lock system may impact you.
Conclusion
The triple lock debate highlights two important steps to consider. Firstly, speak to your adviser about how to get the most out of your state pension. Secondly, make sure you are building your own retirement savings.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk