By Kevin Hollister - Founder & Actuary at Guiide
The triple lock rules mean that the payment increases each year, by whichever is the highest out of:
• Earnings – the average percentage growth in wages (in the UK)
• Prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5 per cent
This means that even if inflation (or earnings) are lower than 2.5%, UK based retirees (there are restrictions on increases for many living abroad) receive an increase above inflation. For UK based retirees that’s great news, but will it bring into focus how affordable is the triple lock in the long term?
Affordability
There may be many younger people, who may feel hard done by this increase in pensions. Currently they may be seeing retirees receive an above inflation increase, when their own incomes may have reduced considerably due to furlough, redundancy or reduced hours during the pandemic.
Intergenerational fairness may certainly be an issue for debate, but other more immediate factors may bring this into sharper focus also.
It is no secret that the Government has had to borrow at an unprecedented rate in order to support employees and businesses through the pandemic.
Once the economy hopefully returns to something more like normal, spending cuts must be on the agenda and the triple lock may become to be viewed as unsustainable.
Secondly, if the economy returns to normal by September 2021, this may lead to higher than usual earnings growth, from the low levels 12 months previously.
If so, this may lead to a quirk in earnings growth levels and disproportionate increase linked to earning growth.
This would not be the reasoning behind this measure, which exists to underpin increases to reflect real economic growth.
Again at this point the Government may consider if the triple lock should be continued in future, perhaps replaced as a double lock initially, with the higher of 2.5% and inflation being used.
Over the longer term any increase above inflation does not seem in line with the reasoning behind any increase, which is really to protect the spending power of the pension income.
Given this, the 2.5% underpin itself may come under pressure, especially if inflation stays at lower levels.
State Pensions place in overall retirement income
In our retirement modelling tools, we include the State Pension in addition to any pension pots, savings pots and anything else that can be used to provide the total retirement income wanted.
For those targeting a basic level of income, which increases each year with inflation, the State Pension plays a large part in providing this level. Only a small level top up is required above the basic state pension past state pension age.
For many retirees spending levels actually decrease in real terms as they get older. Given this many prefer a higher flat income in the early years, rather than a lower one which increases with inflation.
For these retirees wanting a flat income, then even at higher target levels of income, the State Pension with the current triple lock increase makes up an ever increasing part of the total income in later years.
In essence the total income wanted stays flat, but as the State Pension part of this total increases, income from other sources can decrease year on year after State Pension age.
Therefore for many people the State Pension and increases applied to it are a very important part of their retirement planning and income. Losing these increases, or having them reduced in any way may lead to many falling into difficulty in later years.
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