As we neared the Autumn Statement on 17 November 2022, speculation ran rife about what the future of the State Pension would hold. After all, strain on the public finances in 2021 led to the suspension of the “triple lock” system (guaranteeing that the State Pension rises by at least 2.5% each tax year). With the country facing rising inflation in 2022, many believed that the triple lock system would be suspended again in April 2023. The Autumn Statement, however, has put this to rest – for the moment – with the Chancellor proclaiming a commitment to retain the triple lock in 2023-24. Assuming inflation remains at current levels, therefore, the State Pension could rise by over 10% next year. Yet what does this mean for your retirement income and pension plan? Is the future of the “triple lock” system secure?
Why was the triple lock retained?
To quickly recap, the triple lock system uses the highest of three measures to determine how much the State Pension should rise in a new tax year: CPI inflation, average wages or 2.5%. Leading up to the Autumn Statement on 17 November, the Chancellor was facing a “black hole” in the public finances (estimated up to £55bn), and the future of the triple lock was uncertain due to its estimated extra cost of £11bn in 2023 if inflation holds at 10.1%. Suspending the triple lock further – especially after a precedent was set last year – was seen by many as a target for the government axe.
Why, then, has it been kept? One explanation is the political cost of change. The Conservative Party draws a lot of support from over-60s, and so pursuing a policy that would make many of them poorer (whilst also breaking a manifesto pledge) would likely lead to punishment by voters at the next general election. However, another more hidden reason is that the UK government may be hoping that its Energy Price Guarantee (EPG) will slow down inflation to below 10.1% in 2023 – thus, potentially, lowering the cost rise in the State Pension to the public purse.
Can the triple lock be sustained?
Increasingly, voices in the right-leaning press are arguing that the State Pension cannot be kept in its current form. It is worth noting that the triple lock has only been around for 12 years. There is significant demographic change also occurring in the UK which bears upon the issue. In 2022, the number of 0ver-65s in England and Wales surpassed children under 15 for the first time. An ageing UK population means that a smaller percentage of the population – taxpayers – support a growing number of retired people (who are living longer).
Alongside the State Pension, many public sector workers also receive “gold plated” final salary (or defined benefit) pensions which are widely regarded as more generous than those which predominate the private sector – i.e. pension “pots”, unfunded by taxation. Whilst pensioners have certainly suffered an income loss in 2022 (e.g. a real terms cut of £551 to average annual income), many working households are struggling as they face rising mortgage costs and child care costs whilst real wages decline (due to inflation). Added together, these factors create a complex set of issues for any chancellor to resolve.
Whilst it is possible that the triple lock will be kept, it is likely that it will face reform in future years. Perhaps it will one day be means-tested, or reduced if other pension income (e.g. that from final salary pensions) reaches a certain threshold. Maybe it will be limited to rising only by a set amount each year, such as 3%. Only time will tell.
What are my retirement planning options?
A good financial planning rule is to diversify your wealth appropriately (with professional help from an adviser). This not only applies to investments but also to retirement income. If you rely solely – or primarily – on the State Pension, then your income may be disproportionately affected by any government policy change to this specific area. Those with multiple income streams such as the State Pension, a pension pot, an annuity and/or final salary pension, however, may see less impact from a future budget or statement from the government.
The State Pension is still a valuable asset to build up to its fullest potential. In 2022-23, the full new State Pension offers £185.15 per week (no small amount). However, it is typically worth also building up your own retirement savings and investments. This will look different for each person depending on your financial goals and situation. It is not too late to start building up your own pensions even if you are later on in your career. Speak to a financial adviser to examine your range of options and make decisions based on the best available information.
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.