Everything you need to know about the State Pension triple lock

For the best part of a decade, the State Pension triple lock has ensured a fair annual rise in pension payments.

However, with the government having to find ways of funding the response to the coronavirus pandemic, there has been much speculation that the triple lock could be suspended, or even abolished.

In your complete guide to the State Pension triple lock, find out what it means for you, how it has benefited pensioners since 2011, and why it could be suspended this year.

What is the State Pension triple lock?

Before 2011, the State Pension rose in line with the Retail Prices Index (RPI) measure of inflation. However, as this was consistently lower than the annual rise in earnings, the coalition government introduced the triple lock in 2011.

The triple lock guarantees that the basic State Pension will rise by the largest of:

• 5%
• The rate of inflation
• Average earnings growth

Over the past decade, inflation has been low and wage growth has been weak, so the 2.5% minimum guaranteed by the triple lock has resulted in pensions rising faster than earnings. Here’s what the triple lock has meant to State Pension increases since 2012:

The triple lock means that the State Pension increased by 3.9% from 6^th April 2020.

People on the ‘new’ State Pension saw their pension rise from £168.60 per week to £175.20 per week in 2020-21. Those on the basic State Pension (who retired before April 2016) saw their weekly State Pension rise from £129.20 to £134.25.

Why the furlough scheme means the triple lock could be suspended

As we have seen, the triple lock ensures the State Pension rises by the greater of inflation, increases in earnings, or 2.5% every year.

Now, the Chancellor has acknowledged that a problem is coming in 2021/22 as the UK economy recovers from lockdown.

Forecasts from the Office for Budget Responsibility show the earnings are likely to fall by more than 7% this year, as a consequence of millions of furloughed workers receiving 80% of their wages. This will likely be followed by an 18% increase next year as these workers return to full pay.

Under the triple lock, pensioners will receive the minimum increase of 2.5% next year but would be in line to receive an 18% increase the following year.

The former pensions minister Ros Altmann said: “Given the potential distortions of earnings and inflation figures due to the exceptional crisis measures, it seems that review of the triple lock would be advisable.

“We do have the lowest State Pension in the developed world, so pensioners clearly need protection, but in light of the current emergency, it seems to me the time has come to recognise that the triple lock has outlived its usefulness – and indeed its operation has become increasingly unjust.”

So, what is likely to happen?

Former pensions minister Sir Steve Webb believes that the government could argue that a period of very low (or even negative inflation) was a justifiable reason to end the triple lock.

It’s more likely that it will be suspended for a year or two, or that a smaller increase – perhaps 1% or 1.5% – would be given over the next couple of years.

Protecting your retirement plans

While the Treasury have confirmed there are no plans to review the triple lock, it does appear increasingly likely that measures will be taken to mitigate any State Pension increase in 2021 or 2022.

The suggestion of scrapping it also highlights why it’s important to review your retirement plans to ensure a sustainable income stream that considers inflation.

As you enter retirement, your State Pension may be a relatively small part of your income. However, it provides a foundation to build on, delivering a reliable income. But you do need to keep in mind that changes can happen, which could have a negative effect on your plans. A smaller annual increase in the State Pension could be one such effect.

This is why it’s important to look at retirement finances as a whole. Understanding which sources are reliable and the steps taken to protect income from inflation as much as possible can help provide you with confidence that your finances will be sustainable throughout retirement.

As Andrew Tully of wealth manager Canada Life says: “The most important thing we can all do is take control of our own financial futures, as there are no cast iron guarantees that the State Pension will be around in its current form to provide a safety net when we retire.”

Get in touch

If you’re worried about your long-term retirement finances, please get in touch. Email admin@stonegatewealth.co.uk or call us on 01785 876222.