The Government’s suspension of the pensions triple lock, breaking a manifesto pledge in the process, has caused controversy.
And it’s all down to Covid.
In normal times, the triple lock ensures that the state pension will rise in line with whichever is highest of 2.5 per cent, average earnings growth year-on-year for the May to July period, and inflation, as measured in the year to September.
The uplift is confirmed in November and implemented every April, at the start of the new tax year.
The triple lock applies to both the basic state pension (pre-April 2016) and the new state pension (post-April 2016).
The suspension – purportedly for one year only – is down to earnings growth being distorted by the pandemic.
Reduced wages because of furlough, followed by staff returning on full pay, caused an artificial surge in average UK wages. Average total pay increased by 8.8 per cent between April and June, according to the Office for National Statistics.
So, for the 2022/23 tax year, this element of the triple lock has been dropped, taking it down to a double lock.
The Government insists it will be restored, but some are sceptical.
The state pension will now increase in line with the consumer price index, which came in at 3.1 per cent.
The full state pension for the 2021-22 tax year is £179.60 a week, or £9,339.20 for the year. A 3.1 per cent increase will take the state pension in 2022-23 to £185.20 a week, or £9,630.40 for the year. The full basic state pension for the 2021-22 tax year is £137.60 a week, or £7,155.20 for the year. The increase sees it rise to £141.80 a week, or £7,373.60.
The abandonment is down to affordability.
The Department for Work and Pensions estimates that the total state pension bill for 2021-22 will be £104.86 billion against £69.83 billion in 2010, before the triple lock came into force.
The Times Money Mentor noted: “Arguments against the triple lock have also pointed to intergenerational unfairness.
“The triple lock typically means above-inflation rises, and this compounds over time.
“Critics say it is unfair that younger people should subsidise the income of older people at a time when they may be struggling with their own living costs.”
Nevertheless, the triple lock could be even more important to future generations. Younger people are less likely to have the security of a final-salary workplace pension and will be more dependent on other sources of income (including the state pension). They are also likely to retire at a later date than older generations, as the state pension age is rising to 68.
Those in favour of maintaining the status quo say the poorest pensioners will be hit hardest.
Former pensions minister, Baroness Ros Altmann, told FTAdviser: “It is important that we do not keep using pensions as a political target to raid. Abandoning the earnings link sets a dangerous precedent. The nation has a hugely divided pensioner population. Some may be very well off, but millions are not. The oldest pensioners tend to be the poorest and the majority of these are women.”
While this is theoretically a suspension, the Government needs to cut spending in the long term to reduce debt. The population is ageing and there are fewer people of working age to pay the tax to fund the state pension. Hence, it is getting more and more difficult for the country to afford.
This means ensuring a decent standard of living in old age will fall more on the individual.
Proper financial planning and saving for retirement becomes crucially important in this environment.