The triple lock was introduced in 2010 and its purpose is to ensure that the State Pension rises by the highest measure of price inflation (the Consumer Price Index), earnings growth or 2.5%.
The Government suspended the earnings element of the policy for 2022-23 following a higher rise in wage inflation following the pandemic, which could have seen a rise of 8%. Instead, the State Pension rose by 3.1%.
However, as a result of the triple lock policy being reinstated in the Chancellor’s Autumn Statement, the State Pension will now rise in line with September’s inflation rate – 10.1% – in the 2023-24 tax year.
Why is the triple lock important?
The triple lock aims to protect pensioners against the impact of inflation. For example, if the price of a pint of milk costs £1 and inflation rises by 10% then the price rises to £1.10. Pensioners receiving the State Pension would be protected by this rise in inflation.
The value of the State Pension should not be overlooked as this forms a critical part of a retirement income for many retired households. For those entitled to the full state pension, this will rise to £203.85 per week up from £185.15, or £10,600 up from £9,627 a year. For a retired couple, two state pensions would therefore provide the household with over £21,200 of risk-free income each year. This is providing you have paid full National Insurance Contributions (NICs).
For many, this will allow them to cover a good proportion of their expenditure, with any additional income requirements usually being generated from personal pensions, investments or maybe from a rental property.
Of course, there is the possibility that the triple lock could be scrapped depending on the state of the country’s finances in the future. If this were to happen, the value of the state pension could be eroded as a result. Therefore, it is more important than ever to have control of your retirement by planning as early as possible and to keep it under review as you move through different life stages. As someone moves into their 50s for example, at this age, retirement is no longer a distant concept, and time is short if your plans aren’t on track.
The Pensions and Lifetime Savings Association, in their Retirement Living Standards research, found that for a couple to retire on a “Moderate” standard of living (Outside of London), a household income of £34,000 a year would be needed. For a single person, or for someone who may have been widowed, this sum is £23,300 a year.
For many people, the State Pension will form the backbone of their retirement plans but if the value of the State Pension is eroded then it is vital you have prepared in other ways such as contributing to a personal pension to build up a retirement fund. By arranging a full financial plan, which is regularly reviewed, you are much more likely to achieve the type of retirement you want to enjoy.
At Armstrong Watson we work with you to help build your retirement plans with regular reviews so you can remain on track and enjoy your later years.
If you'd like to learn more about our pensions or retirement planning visit our pension pages or get in touch with martyn.pottage@armstrongwatson.co.uk
