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    Financial planning | Tax & estate planning

    State pension: the triple lock

    The state pension’s “triple lock” has featured heavily in the press over the last few weeks. So, what is it and why is it so prominent?

    For a refresher on the state pension, click here to read our Knowledge Base article on the topic.

    A September debate around the “triple lock” is certainly not new, it happens every year around this time, as the State Pension payments from next April are determined by the September figures for either CPI inflation or earnings growth – whichever is highest out of these two figures is used – or, if both are below 2.5%, 2.5% is used.

    The contention this year is centred around earnings growth, as it’s expected to be the highest of the three figures.

    So, why are people’s earnings going up after the year we have all had? Due to the pandemic, pay rises over the last twelve months look to be about 8%. There are two possible reasons for this:

    • Unfortunately, younger and lower paid workers were disproportionally affected by the pandemic. Employment for those people hasn’t recovered, so those now working tend to have higher salaries than those that now aren’t. No one is necessarily earning more, but the average person now has a higher average wage. It’s a statistical anomaly.
    • The furlough scheme supressed the wages of millions this time last year. Now less people are making use of the scheme, with more people back earning a full paycheck.

    These two factors have combined to give the government a bit of a headache. Do they honour the “triple lock”, suspend it for this year only (or come up with using a two or three year average perhaps), or break the link altogether?

    On the surface, the official line seems to be one of commitment to the triple lock, however, there have been calls for its suspension given the pandemic’s strain on public finances and the need to balance the books. A final verdict from the chancellor is not expected until November.

    Some may argue the “triple lock” shouldn’t be honoured as such an increase is clearly out of step with reality, however, if we want to persist on linking the increase to specific data points, then why not?

    Anomalous results should come as no surprise. Our State Pension is already one of the least generous in Europe – and how might this increase be spent? Some of it is likely to be given back in tax, some saved, some spent in the local economy, and some could even be used to fund future care costs – a whole other topic given the recently announced National Insurance increase in the governments proposed social care reform.

    Perhaps a general review of the state pension and its effectiveness given the number of pensioners living in poverty, which is upwards of 2 million according to Age UK (The State Pension triple lock | Discover | Age UK), is long overdue.

    This blog is intended as an informative piece. If you have any further questions, please don’t hesitate to get in touch with us using the form below or by reaching out to your usual Equilibrium contact.

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