The State Pension is changing, and many people in receipt of it are asking what may lie ahead for their retirement income. The “triple lock” system, in particular, has raised fresh questions as the Government confirmed its suspension in the 2022-23 tax year (started on the 6th April 2022). Below, our financial planning team at WMM explains how the system works, how it has changed and what could lie ahead for the State Pension.
How the triple lock works
Income from the State Pension, in recent years, rises every tax year (April-April) in line with the highest of three measures:
- 2.5% (a flat rise).
- Inflation (measured in the previous September).
- Growth in average UK earnings (measured from May to July).
This “triple lock” system is designed to help ensure that the State Pension rises each year at least in line with the cost of living.
When COVID-19 brought an unprecedented shutdown to the UK economy from March 2020, the government introduced a range of measures to help support businesses and the wider population (e.g. furlough). These required huge amounts of borrowing – e.g. £297.7bn in the 12 months prior to March 2021 – which the government now faces increasing pressure to repay.
Moreover, one of the knock-on effects of furlough was that this distorted average earnings growth (point 2 3 above) as lockdown measures lifted, employers brought more workers back into the office and reinstated their normal wages. This pushed the growth figure to over 7.3%.
As such, this would have required the State Pension to rise by at least 7.3% in April 2022 – putting huge pressure on the public finances. To counter this, the government announced that the triple lock system would be suspended in 2022-23.
Instead, the State Pension has risen by 3.1%.
Possible roads ahead
This 3.1% rise feels like a blow to many retired people. Not only is it less than half of what they would have received under the triple lock system, but it mirrors the inflation rate in September 2021. In 2022, however, inflation has risen considerably higher.
In the 12 months to February 2022, the Consumer Prices Index (CPI) has gone up by 5.5%. The Bank of England (BoE), moreover, anticipates that this could go as high as 8% later in the year. This, naturally, raises a lot of questions. Will inflation be brought under control before the next tax year? If not, could the triple lock be suspended again?
A precedent has been set by the government, so these are legitimate questions. The current administration has clearly stated that they do not think the triple lock system should be around indefinitely. Rather, the commitment has been for the existing parliamentary term (i.e. up until 2024). Other major UK parties support keeping it, so the issue is likely to be debated fiercely in the coming general election.
It is a good idea to regularly review your income sources for your retirement. Your State Pension will likely be important, of course, but it will also help to have other pension schemes (e.g. a workplace and/or private pension) to help support your lifestyle. There are also other assets you can use, too, such as dividends and income from your ISA(s), rental income etc.
With a diversified retirement portfolio, you can help mitigate the risks associated with specific assets or income streams (e.g. your State Pension).
Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).