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Financial Planning

Is the triple-lock pension unsustainable?

The coalition Government introduced the triple-lock pension in 2010 as a guarantee to increase the State Pension each year in line with inflation, average earnings or a minimum of 2.5% – whichever is higher. With a general election on the horizon and questions surrounding what changes the next Government might make to pensions, the idea of a double-lock has been mooted. We ask who is benefitting from the current system, and what might a double-lock scheme mean for savers?

It gives State Pensions a boost

There is no doubt that triple lock has certainly benefited those in receipt of their State Pension, as the minimum 2.5% annual increase has recently exceeded both average earnings and inflation. The Institute for Fiscal Studies said in its recent assessment that between April 2010 and April 2016 the value of the State Pension has been increased by 22.2%, compared to growth in earnings of 7.6% and growth in prices of 12.3% over the same period.

The costs of a triple lock

But the Government’s Actuarial Department (GAD) calculated that, during 2015/16, the cost of applying the 2.5% minimum increase was £6 billion more than if the State Pension had just increased in line with average earnings.

With an ageing UK population, the cost of the State Pension will continue to rise and represent a greater percentage of GDP in the future. Simply put, the country just can’t afford it. As the Chancellor faces the challenge of tightly controlling Government expenditure to reduce the Budget deficit, retaining the triple lock will be too much of a burden and result in tax rises in other areas to compensate.

The State Pension may not be as generous in the future

A shift to a double lock would see the removal of the minimum 2.5% annual increase, with future increases subject to average earnings or inflation. This would ultimately reduce the burden on the Treasury over the long term, if increases in average earnings and inflation remain below 2.5% moving forward.

I suspect that we will see further changes to the State Pension in the future, with the timescale of increasing the State Pension age accelerated, as the Treasury seeks to manage the future costs of maintaining this benefit. With this in mind, I would encourage savers to consider how much they are saving towards their retirement, as the State Pension is unlikely to be as generous as it has been under the triple-lock regime, and the age from which it will become payable will no doubt increase.

If you would like to discuss saving into your pension and planning for retirement, please contact us. Our expert financial planners can help.

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