What Does the Pension Triple Lock Suspension Mean For You?
The pension triple lock has been suspended over concerns that it would cost the Treasury a potential 8% rise in state pension payments to retirees. While a smaller increase is still assured, the decision could have wider implications for the triple lock – and pensioners – going forward.
The pension triple lock, which determines how much the state pension rises each year, is being temporarily suspended by the government to block a potential 8% uplift in state pension payments.
Since its introduction in 2011, the so-called triple lock guarantee has been in place to ensure state pension payments increase by a meaningful amount each year. Under the normal rules, the guarantee means recipients of the state pension will see their payments increase by the highest of either consumer prices index (CPI) inflation, average earnings or 2.5%.
However, with a post-lockdown surge in demand for workers causing wages to spike sharply, the government has moved to quash the record 8% uplift in the state pension that this would have delivered.
The last rise in the state pension, which came into effect in April 2021, was for the minimum 2.5%, while the highest recorded increase since the triple lock was restored is 5.2% in April 2012, thanks to an equivalent rise in inflation.
Why has the triple lock been suspended?
Rumours that the pension triple lock may be suspended have circled for many months. And it is the enormity of the additional costs that the government would face following such a hike in the state pension that has led to this decision.
Back in July, the Office for Budget Responsibility suggested that an 8% uprating from the triple lock would add around £3bn a year beyond what had been anticipated to the government’s spend on the state pension.
Perhaps unsurprisingly, given the hit Treasury coffers have suffered at the hands of Covid-19, it is an expense that policymakers were keen to limit and have done so by rejecting what work and pensions secretary Therese Coffey called “skewed and distorted” earnings figures.
The announcement of the suspension of the triple lock came on 7 September, the same day that the rises to National Insurance were announced to pay for health and social care improvements.
Despite the economic case for making the move, support for the suspension of the triple lock is low, with a NerdWallet survey of 2,000 UK adults finding that just a quarter (25%) of respondents agree with it. Support was highest amongst the youngest 18-24 year age group (40%) and lowest among those aged 45 to 54 years old (19%).
Overall, more than a third of respondents (35%) said suspending the triple lock on state pension has left them worried about the impact it will have on their future retirement income.
How much will the state pension rise by instead?
In a statement to the House of Commons, Dr Coffey said the next increase in the state pension – which would come into effect from April 2022 – will now be determined by the higher of either the CPI inflation rate or 2.5%. Essentially, the triple lock has now become the double lock.
The latest measure of CPI inflation saw the rate drop to 2% for the year to July, though the Bank of England is predicting it could reach 4% in the final quarter of the year.
The CPI inflation rate for the year to September 2021 will be announced on 20 October 2021. This figure or 2.5%, whichever is higher, will be used to determine the April 2022 state pension increase.
If the full new state pension of £179.60 a week paid to those who have hit state pension age since April 2016 increased by the minimum of 2.5%, this would equate to a weekly rise of £4.49.
For those on the old basic state pension of £137.60, an uplift of 2.5% would add £3.44 to their payment each week.
Had the 8% increase been applied, pensioners would have received £14.37 per week more for the new state pension and £11.01 more for the old basic state pension.
Will the pension triple lock return?
The government said that earnings would only be excluded from the pension triple lock for the state pension rise due to be implemented in April 2022. It suggested that the full triple lock guarantee would be back in place for the remainder of parliament, which ends in 2024.
The big question is whether the triple lock will continue into the next parliament. The main problem is that it is a hugely expensive commitment for any government to carry. The guarantee increases spending on the state pension by £0.9bn for every one percentage point that it rises, so even the minimum uplift of 2.5% adds around £2.25bn to the annual cost – and total government expenditure on the state pension is already £105bn each year.
Fear of voter reprisals has always made the government wary of altering the triple lock to try to rein in such liabilities. But now that such a seed has been planted, a government that has numerous pandemic-related financial black holes to fill might feel emboldened to make some more permanent changes to the triple lock.
What could all of this mean for you?
While an 8% rise in the state pension would undoubtedly have made a big difference to some pensioners, it’s important to remember that an uplift that, at the very least, will keep pace with inflation will still be forthcoming next April. The suspension of the normal triple lock pension rules is only for one year too.
The bigger concern would be if any permanent changes are made to the pension triple lock over the longer term. A double lock or a single lock are potential options that could be explored. It seems highly unlikely in the short term, but one day there may be no lock at all, with any changes to the state pension amount left to the discretion of the government.
What this teaches us is that the pension rules can change – the increases to the state pension age in recent years, and those slated for the future, are a further example of this. It therefore makes sense to request a pension forecast so that you can see what the state pension is likely to pay you and to make sure that you understand the age at which you will be able to receive your state pension.
There are signs that the move to suspend the triple lock on state pensions has eroded public confidence in the government’s pension policy, particularly among the over 65s. According to the NerdWallet survey, 36% of UK adults said that the government’s decision to suspend the triple lock has made them less trustful of government pension policy, a figure that rises to 52% among those aged 65 and over.
If you are yet to retire, the natural conclusion is not to overly rely on what the state pension might deliver. Making your own pension provision by contributing to a personal pension or workplace pension is vital if you want a better chance of enjoying a decent income in retirement.
This message appears to be sinking in with 19% of respondents to the NerdWallet survey stating that they were likely to make greater private pension provision as a result of the triple lock suspension, with almost half of those aged 18 to 24 years (47%) looking to take positive action.
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Research methodology: The research was carried out in September 2021 for NerdWallet by market research company OnePoll. Ten questions were posed to a sample of 2,000 nationally representative UK adults about their thoughts on pensions. The results were broken down by age, gender, region and whether respondents had a pension.
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more
Richard Eagling is former editor of Business Moneyfacts and Investment Life & Pensions Moneyfacts. He has been reporting on financial issues for over two decades and is a regular press contributor. Read more