The State Pension can be a hugely valuable part of your retirement income. Assuming that you have made sufficient National Insurance contributions (NICs) to receive the full amount, the State Pension can provide a guaranteed source of income that forms the bedrock of your retirement plan when you reach State Pension Age. In 2023/24, this is 66, rising to 67 by 2028.
In particular, the State Pension can be useful thanks to the “triple lock”, an important piece of legislation.
Chancellor Jeremy Hunt confirmed in his Autumn Statement in November 2022 that the government would be committing to the triple lock in 2023.
So, find out exactly what the pension triple lock is, how it works, and what might happen this year.
The triple lock keeps the State Pension in line with the cost of living
The pension triple lock is a government commitment to ensuring that the State Pension keeps pace with the rising cost of living.
Without it, the spending power of the money you receive from the State Pension would decrease, meaning it would not go as far in buying goods and services from one year to the next.
So, since 2010, the government has committed to increasing the State Pension by one of three (hence “triple”) metrics each year. This is the highest of:
- Inflation in the year to September, based on the Consumer Prices Index (CPI)
- Average earnings growth from May to July, year-on-year
- A flat increase of 2.5%.
This change then comes into effect the following April.
Last year, the highest of these was inflation, reaching 10.1% in the 12 months to September 2022 as data from the Office for National Statistics (ONS) shows.
This meant the new State Pension increased in April 2023 from £185.15 a week (£9,627 a year) to £203.85 a week (£10,600 a year).
The State Pension could rise by 8.5% in 2023
Although not yet fully confirmed, the data for 2023 now indicates how much the State Pension may rise by in April 2024 for those at and over the State Pension Age.
According to ONS data, average wage growth between May and July 2023 was 7.8% excluding bonuses. Including bonuses, this was 8.5%, and it is unclear at this stage which of these two figures the government would use in the calculation.
Meanwhile, the ONS measured inflation in the 12 months to September 2023 to be 6.7%.
Based on these figures then, assuming the government did commit to the triple lock, that would mean using average wage growth, translating into a State Pension uplift of 7.8% or potentially 8.5%.
From April 2024, this would see payments rise from £203.85 a week to:
- £219.75 a week (£11,427 a year) using the 7.8% figure
- £221.20 a week (£11,500 a year) using the 8.5% figure.
Of course, it is currently unconfirmed which of these two figures the government will use.
There was previously uncertainty as to whether the government would commit to the increase
Crucially, before the Autumn Statement last November, there was uncertainty as to whether the government would commit to the triple lock. This is because there is a recent precedent for this decision, with the government having suspended the triple lock in 2021.
In the wake of the Covid-19 pandemic, average earnings fell when many people found themselves furloughed or out of jobs. Then, when people returned to work, this saw average earnings growth increase at a greater rate than it might have done otherwise.
As the Guardian reported at the time, this would have resulted in an increase to the State Pension of 8%. So, on the basis that this would have been artificially inflated, the government instead suspended the triple lock, choosing to increase the amount by the higher of inflation or the flat 2.5%.
Ultimately, inflation was 3.1% in September 2021, meaning the State Pension increased by this figure, rising from £179.60 to £185.15 a week in April 2022.
Of course, as the chancellor committed to the triple lock during his Autumn Statement in November 2022, it is fairly likely that we will see the full increase this year.
Even so, it is possible that the government will not always commit to it in future years.
It is possible that the triple lock could be removed in future
With the backdrop of this uncertainty in mind, it is also worth noting that there is some debate as to whether the triple lock should stay in place moving forward.
According to research carried out by the Institute for Fiscal Studies (IFS), the policy adds £11 billion a year to public spending.
Furthermore, due to the uncertainty about how much the State Pension may rise each year, this means that increases could cost anywhere between £5 billion and £45 billion by 2050.
In turn, it is more difficult for the government to accurately plan public spending. It is also trickier for you to plan for retirement, as you do not know exactly how much income you can expect to receive from the State Pension.
As a result, there is a possibility that the triple lock could be reconsidered in future. In fact, inews reported in September that both Labour and the Conservatives had refused to commit to maintaining it after the next general election, which should take place around 2025.
So, there is no guarantee that the triple lock will remain in place, even if the government upholds it this year.
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If you would like to discuss your plans for later life with an experienced financial planner, then please do get in touch with us at DBL Asset Management.
Email firstname.lastname@example.org or call 01625 529 499 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.