For anyone who is close to – or who has already reached – state retirement age, the amount provided by the state is crucial. At just £175.20 a week, or just over £9,100 a year (for the tax year 2020/2021) the full state pension may not be enough for most people to live on, but it can make an important contribution to their retirement plans.
But with falling tax revenues thanks to the Covid crisis and a steadily growing number entitled to claim state pension, the treasury needs to tighten its belt. State pension age, the age when you can start claiming your state pension, has just been put up to 66 in a bid to relieve the demand, but this will of course only delay matters.
So it is hardly surprising, when the government needs to watch its spending, that there has been speculation about the future of the triple lock.
What exactly is the triple lock?
The triple lock has become key to government pension policy.
It was introduced in 2010 under the then coalition Government and guaranteed to increase the state pension every year by first, inflation, second in line with average earnings or thirdly by a minimum of 2.5% per year, whichever was higher.
It was intended to make sure a pensioners’ income would steadily grow and would be in no danger of being eroded in real terms by steady increases in the cost of living. It is very popular with pensioners, who know that their state pension will at least keep pace with inflation, rather than be whittled away by it.
It is therefore also popular with MPs, who realise that a steadily growing proportion of their votes comes from the retired population – but there have been concerns that it can no longer be sustained.
Is the triple lock at risk?
There has been widespread speculation that Chancellor Rishi Sunak has been preparing to scrap the state pension triple lock following concerns that it will become unaffordable.
Pensioners could be forced to pay the bill for the coronavirus financial crisis with a freeze on the state pension triple lock. It could mean £1,900 less in their pockets next year.
Lockdown restrictions have forced millions of workers to take a pay cut on the furlough scheme and many others have been hit by, or are still facing, redundancy. There were 695,000 fewer people employed in August compared to March, according to payroll data.
Average earnings look set to fall, and independent forecasters have projected a 1% fall in wages for 2020, according to the Treasury. The state pension could be frozen under current rules if wages are expected to shrink. The triple lock has started to look much less secure.
But there is some good news.
A pension boost
The state pension has been guaranteed a boost next year, the Government has confirmed, protecting retirees from the worst of the economic damage caused by the pandemic.
A bill is being introduced in parliament that will avoid a freeze on the state pension next April. So the third key of the triple lock – the 2.5% increase – is still going to be in play. But the benefits don’t stop there. Keeping the triple lock in place will protect pensioners from the fall in wages and inflation this year – and dramatically boost the state pension when wages return to previous levels next year, meaning higher payments from April 2022.
But it may not be time to relax just yet…
Even if it will be going up, the state pension on its own will not be sufficient to see us through a comfortable retirement.
The current inflation figures suggest the increase next year will be small, with the ‘new’ basic state pension set to rise from £175.20 to £179.60 a week – representing £228.80 a year.
The ‘old’ basic-rate state pension may rise by £3.40 a week from £134.25 to £137.60 (if you have reached state pension age before April 2016 and get the full basic state pension)
The rise – representing 2.5% – will be confirmed later by the government, but is all but certain after inflation figures for September came in at just 0.7% according to the Office for National Statistics
If you are an employee, you will almost certainly have an employer’s pension plan working for you under Automatic Enrolment rules. But the returns you actually enjoy when retirement comes may still not be as great as you wish.
A private pension plan could be the answer. It works independently of your state pension, and any pension you may get from your employer.
You will be responsible for making regular contributions to your funds – but the government wants to ease the burden on the state in your old age, so it provides generous tax relief.
Thanks to tax relief every pound in your pension fund costs you much less than a pound to put in – helping ensure that a pension can be one of the best investments you could ever make.
Getting the help you need
It’s never too early to start making the most of a private pension, but like any other financial arrangement, it pays to get professional help. There are many pension providers and finding the provider and the plan that is right for you will be much easier with help from a Continuum Advisor.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Pension strategy, you should seek independent financial advice before embarking on any course of action.
The value of an investment. can go down as well as up, income is not guaranteed
The Financial Conduct Authority does not regulate taxation advice.
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