The triple-lock state pension

Catherine Alexander
Partner

The triple lock was introduced to the UK state pension in 2010 as a guarantee that it would not lose value in real terms and that it would rise at least in line with inflation. The guarantee means that each year, the state pension would increase by the highest of the following three measures:

• Average earnings

• Inflation as measured by the Consumer Price Index (CPI)

• 2.5%

Therefore, if average earnings were to increase by 3% for example, the state pension would also rise by 3%. But if neither average earnings or inflation rises by over 2.5%, the state pension will still grow by this amount.

A full new state pension, which can be received by those who reached the state pension age from April 2016 onwards, is currently worth £203.85. A full basic state pension, which can be received by those who reached the state pension age before that date, is £156.20. The triple lock has increased the amount of state financial support to pensioners: had the values of the basic state pension and the new state pension instead been determined by inflation or earnings growth since 2011, they would both now be around 11% lower.

However, this increased level of support means that the triple lock policy has also increased the total cost of the state pension for the government. The government now spends an additional £11 billion per year on state pensions as a result of the triple lock policy according to the Institute for Fiscal Studies (IFS). Therefore, the triple lock can generate considerable uncertainty for individuals regarding the state pension they might receive in the future. With costs estimated to reach as high as £45m, the IFS has warned that the triple lock could increase the cost of providing the state pension to such a great extent that it could also lead to other reforms to control spending, such as a much higher state pension age, which would hit poorer and less healthy people approaching pension age.

If you are not yet drawing your state pension and are still working, it is a good idea to save as much into workplace or personal pensions as possible, with the state pension providing a supplement to your private pension savings. If you have a defined contribution pension, either through your workplace or one you have set up for yourself, you might be able to make extra contributions to it. This will help you build up a bigger pot, which you can then use to provide income in retirement. Making extra pension contributions in the years before retirement brings an immediate boost in the form of tax relief. You should also make sure that you are in line to maximise your state pension when you come to taking it, you will need at least 35 qualifying years of National Insurance contributions to get the full new State Pension. You can check your state pension forecast for free at gov.uk and make sure you are not missing any qualifying years - even if you are, you are able to make voluntary contributions or claim back missing years in certain circumstances, so it is important to check.

If you would like to speak to one of our advisers about your retirement planning please do get in touch.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.