Pensions - Articles - Triple Lock debate intensifies

Millions of UK pensioners are on course for a potentially inflation-beating increase in their State Pension next April, however the rise will also push the full new State Pension above the frozen income tax Personal Allowance – putting the interaction between the Triple Lock and the tax system firmly in focus ahead of the Autumn Budget.

The Triple Lock, introduced in 2011 by the Conservative-Liberal Democrat Coalition government, guarantees that the State Pension rises each April by the highest of average earnings growth, September CPI inflation or 2.5%. It replaced a system under which the basic State Pension had for decades been largely linked to inflation, meaning that while pensioners were protected against rising prices, the value of the State Pension had gradually fallen behind average earnings. 

The key May-July earnings figures published by the Office for National Statistics today shows earnings rising 3.9%. Unless September inflation subsequently comes in higher, earnings are therefore likely to determine the April 2027 increase in the State Pension.

Earnings growth at 3.9%, means the full new State Pension would rise from £241.30 to around £250.70 a week - taking annual income to approximately £13,036. Someone receiving the full basic State Pension under the pre-2016 system could see their weekly payment rise from £184.90 to around £192.10. 

This particular calculation applies to those receiving the full State Pension, but it illustrates the wider tension: as the State Pension rises while tax thresholds remain frozen, more pensioners are pulled into the tax net and the Exchequer effectively takes back part of the increase it has just awarded. 

The State Pension is taxable income, although it is normally paid without tax being deducted at source. Pensioners with additional income from workplace or private pensions may therefore find more of their retirement income caught by income tax as the State Pension rises while tax thresholds remain frozen.

Maike Currie, VP Personal Finance, PensionBee, comments: “An inflation-beating State Pension rise will be welcome news for millions of pensioners, particularly those struggling with the cost of everyday essentials. But there is an increasingly obvious contradiction at the heart of the system: the Triple Lock is pushing the State Pension up while frozen tax thresholds are pulling more pensioners into the tax net.

“A rise of 3.9% next April would take the state pension above £13,000 and notably above the tax-free £12,570 Personal Allowance.So we increasingly have one arm of the government raising pensioners’ incomes while another claws some of that increase back through tax.”

The Triple Lock was introduced after decades in which the State Pension had fallen behind average earnings. Its role in rebuilding its value means PensionBee believes the debate should move beyond a binary choice between keeping the current system forever or simply scrapping it.

Currie comments: “The Triple Lock has done an important job. For three decades before its introduction, the State Pension was largely linked to price rises. While that protected its purchasing power, it meant pensioners progressively fell behind the earnings of working households. The Triple Lock helped reverse that decline and rebuild the value of the State Pension.

“But it was designed as a catch-up mechanism, not necessarily a forever policy. Because it always chooses the highest of inflation, earnings growth or 2.5%, over time this formula can ratchet the State Pension up faster than any one of those measures taken alone. Recent periods of volatility have highlighted the ratchet effect of the Triple Lock. The State Pension rose by 10.1% in April 2023, reflecting the previous September’s inflation rate, and by another 8.5% in April 2024, in line with earnings growth. Because each increase becomes part of the pension’s new baseline, these unusually large rises are effectively locked in and compound future spending.” 

The OBR estimates that, because inflation and earnings have proved much more volatile than initially anticipated, the Triple Lock has cost around three times more than originally expected. 

“After 15 years of the Triple Lock, calls for its reform are growing as the cost continues to rise and questions of generational fairness become harder to ignore. The UK has around one million young people not in employment, education or training, persistent child poverty and a generation of workers facing high housing costs and a heavy tax burden, while also being asked to fund an increasingly expensive retirement system,” says Currie. 

She adds: “However, pitching pensioners against young people is the wrong answer. We all rely on younger generations to work, build businesses and pay the taxes that ultimately support the State Pension. The challenge is to protect pensioners from poverty today without steadily passing an unsustainable bill to the working generation.”

“People make retirement decisions decades ahead, so you can’t move the goalposts overnight. Any reform of the Triple Lock needs to be clearly signalled years in advance so people understand what is changing and have time to plan,” .

But the debate over the Triple Lock should not happen in isolation. PensionBee believes policymakers need to take a more holistic view of retirement provision, considering the level of the State Pension alongside the State Pension age and the adequacy of private pension saving.

Auto-enrolment has successfully brought millions more people into workplace pension saving, but there are growing concerns that minimum contribution levels will not provide many workers with enough to maintain their standard of living in retirement. Millions more remain inadequately served by the system, including many self-employed and gig workers, and lower earners.

“The Triple Lock protects the baseline income of today’s retirees, but we also have serious structural gaps in private pension saving. Millions of tomorrow’s retirees risk reaching later life with nowhere near enough to maintain their standard of living,” 

That makes the question of intergenerational fairness much broader than whether today's pensioners should receive a particular increase in their State Pension.

“This cannot descend into a young-versus-old argument. We need a State Pension settlement that today’s pensioners can rely on, while making sure today’s 20-, 30- and 40-year-olds are building enough private pension wealth and can reasonably expect the State Pension to still be there when they retire.

“The Triple Lock has helped repair the State Pension. The next challenge is much bigger: designing a retirement system - State Pension, State Pension age and private pension saving together - that is both adequate and sustainable for the next generation.”