Pensioner guarantee: Full flat rate state pension will rise to £9,300, and old basic rate to £7,200 a year
The state pension ‘triple lock’ will boost pensioner income by 2.5 per cent next April, after what looks set to be a grim winter dominated by Covid-19 and economic hardship.
The triple lock means annual state pension rises are decided by whatever is the highest of price inflation, average earnings growth or 2.5 per cent.
Confirmation today that September’s headline inflation rate was 0.5 per cent, while wages declined 1 per cent over the summer, means that third element will apply.
The Government has so far stuck to its popular state pension pledge to older voters.
However, as the working age population struggles with wage cuts and rising job losses it is likely to face mounting pressure to abandon the guarantee.
From April, pensioners are set to get an increase of £4.40 a week to £179.60 if they receive the full ‘new’ state pension introduced in 2016, or a rise of £3.40 a week to £137.65 if they are on the full ‘old’ basic rate.
That’s around £9,300 or £7,200 a year respectively – find out why they are different here.
Financial experts have already warned a big correction in pay levels after the Covid-19 crisis could mean a massive increase in the state pension in April 2022.
This could provoke even greater opposition to the triple lock if the nation hasn’t yet bounced back from the pandemic. Meanwhile, the outcome of Brexit remains an unknown until we see the shape of future trade deals with the EU and the US.
The Institute for Fiscal Studies points out that the latest increase means the basic state pension has risen 41 per cent over the past 11 years, compared to 25 per cent if it had been linked to inflation or 22 per cent to earnings growth.
It cites estimates putting the extra cost at £5.6billion if calculated up to the current year, plus a further £3.2billion if the policy remains unchanged by 2024–25.
Lifetime allowance set to rise
The total you can put in your pension and get tax relief currently stands at £1,073,100.
But this limit is set to increase in line with September’s 0.5 per cent inflation rate to £1,078,900 next April.
Defenders of the triple lock insist it is a vital safeguard against pensioner poverty and that the state pension isn’t as generous as similar schemes in other countries.
And any move to axe it would cause a backlash among elderly voters, who paid contributions for their state pension throughout their working lives.
Pandemic could bring forward date when triple lock is abandoned
‘The triple lock ensures that state pension payments do not fall in real terms during periods of economic turmoil,’ says Carl Emmerson, deputy director of the Institute for Fiscal Studies.
‘There are good reasons to want to do this. But these pensions will subsequently also be increased more quickly in line with the bounce back in earnings.
‘Periods of turmoil such as this thus lead to a ratcheting up in the value of state pensions while living standards of the working age population suffer.
‘At some point this will prove unsustainable. The current pandemic has highlighted this and, I suspect, brought forward the date at which the triple lock is abandoned.’
Pledge could face the chop as Government seeks to curb spending
‘Retirees are set for an inflation busting state pension boost next year,’ says Ian Browne, pensions expert at Quilter.
‘This is despite a challenging economic backdrop in which many workers are taking a cut to their pay packet, are working fewer hours than they would like, or have lost their jobs altogether.
‘But even more contentious is the fact that once the furlough scheme ends later this year and if wages recover, in its current form the triple lock will provide an artificially large boost to state pension income in 2022/23 when we could be in the clasp of a deep recession and when the government is struggling to control the deficit.
‘Given the Treasury’s final tab for the Government’s Covid-19 response is likely to surpass £300billion, there is still the potential the triple lock to face the chop next year as the Chancellor goes hell for leather in reducing the deficit.’
Rishi Sunak: Chancellor recently said Government would stick to triple lock pledge to voters in last year’s election
Government facing calls to spread pandemic costs across generations
‘While it may have seemed reasonable when it was first introduced, the world has shifted dramatically since then – with no-one foreseeing the dramatic impact of a global pandemic,’ says Maike Currie, investment director at Fidelity International.
‘Under the policy, retirees will see a significant rise in their state pension, while a chunk of the working population faces a major fall in their income as Covid-19 continues to wreak havoc on consumers earnings, businesses and by extension, the broader economy.
‘Unsurprisingly, many are calling for the triple lock to be reviewed, or even removed, and greater efforts from the Government to ensure the cost of the pandemic is spread equally among different generations.
‘It seems unlikely we’ll see any immediate changes to the pledge this side of Christmas, but as we move into next year and the dust settles these calls are likely to get only louder.’
Fallout from pandemic could see triple lock changed, not axed altogether
‘Millions of people on working age benefits are set to see their incomes fall in April,’ says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
‘Disability benefits, employment and support allowance, jobseekers’ allowance and universal credit are linked to inflation – so will be boosted 0.5 per cent in April 2021.
‘However, at the same time, people on universal credit could lose the coronavirus increase, which is worth £20 a week, which would leave around four million families worse off next year.
‘The crisis has seen wages suffer too. When you take inflation into account, by September they were down 0.8 per cent in a year.
‘As more people move off the furlough scheme, we’re likely to see average wages recover. However, for those who are moved off furlough and into unemployment, this is hardly an improvement.’
Triple lock: Which element was used to boost the state pension over the years? (Source: Aegon)
‘Next year, assuming furlough is at an end, wages are expected to rise significantly, so the triple lock would give state pensioners a huge pay rise at a time when the working population is still likely to be clawing their way back from the economic effects of the crisis.
‘Many people have been calling time on the triple lock for years, but worries over its distorting effect on income between pensioners and workers in the fallout from the pandemic could tip it over the edge.
‘This doesn’t necessarily mean some sort of guaranteed rise would be axed altogether. We could see the removal of the 2.5 per cent underpin, or a smoothing of earnings, so the government could technically keep the lock while reducing its power.’
Guarantee is a valuable protection for low income pensioner households
‘Scrapping the triple lock would not be a wise short term fix,’ says Chris Noon, partner at Hymans Robertson.
‘ It is unlikely to provide suitable cost savings in the medium to long-term, removes an important safety net for pensioners and would risk a widening gap between incomes for working and pensioner households.
‘It is more likely that, as consumer confidence eventually returns and we see employment rates begin to recover, inflation and salary increases will outstrip the 2.5 per cent guaranteed by the triple lock in 2022 and possibly in the years beyond this.
‘Therefore, keeping the triple lock is important as it will retain a valuable protection to low income pensioner households.
‘If the Government is looking to restrict future state pension increases, a fairer approach may be to adjust the earnings increase criteria to account for increases over a longer period, which would align employment and pensioner income increases more closely.’
UK state pension remains one of the least generous in the western world.
‘The inflation busting increase to state pensions will be a welcome boost for the many retirees who are looking to balance household budgets during the coronavirus pandemic,’ says Andrew Tully, technical director at Canada Life.
‘It further highlights the value of the triple lock with pensioners getting an increase well above both earnings growth and inflation.
‘Despite what many may consider to be a generous uplift in the state pension, the UK system remains one of the least generous in the western world.
‘Any future attempt to reduce the value of the uplift by moving to a double-lock or some other mechanic would risk a serious retirement rebellion from millions of voters and any Government would be foolish to ignore that.’
State pension is arguably still not high enough
‘The security of the 2.5 per cent measure within the state triple lock is showing its worth and will help protect the income of millions of pensions from next year,’ says Becky O’Connor, head of pensions and savings at Interactive Investor.
‘But the fact that it has kicked in could mean there is a risk the Treasury decides to tinker with this valuable protection.
‘Millions of people rely on the state pension to cover their living costs and it’s already arguably not generous enough.’