In his first speech to the Labour Party conference as Prime Minister, Andy Burnham signalled that the State Pension triple lock will remain in place for this parliament but be replaced with a double lock in 2030. We thought this would be a good opportunity to look at the current rules that define how the State Pension is increased each year, and how the proposed changes underline the importance of making other pension provision to supplement the State Pension.
How the State Pension is increased
The State Pension is increased annually each April, and under current rules, the amount of increase each year is the highest of three measures, hence the term “triple lock.” This calculation mechanism was introduced by the Conservative/Liberal Democrat coalition government in 2011, and has been used for each year since, although the earnings element was suspended for the 2022 increase due to the Covid-19 pandemic.
The first of the three measures used is the annualised rate of the Consumer Price Index (CPI), the most widely used measure of inflation, reported for the preceding September. The second is the average increase in total wages, including bonuses, across the UK for May to July of the previous year, as measured by the Office for National Statistics. The final test is a fixed 2.5% increase.
Changes from 2030
The government have signalled that they will remove one of the three pillars of the triple lock from 2030, when the link to average earnings will be removed. In any given year, the State Pension would rise by the higher of CPI Inflation or 2.5%.
At face value this sounds like a significant step, but the pension would still rise at least in line with prices, so it would lose value only relative to earnings. Looking back, the average earnings measure has not always been the highest of the three. Between April 2017 and April 2026, earnings set the increase five times, CPI set it three times (including 2023, when inflation led to a 10.1% increase, and 2022, when the earnings element was suspended) and the 2.5% minimum applied twice (including 2021, when earnings growth was negative). In half of those 10 years, the proposed change would have made no difference to the increase received.
The difference will matter most in years when wages grow faster than prices. The 2.5% floor still protects against very low inflation, which means the pension will not fall in real terms in any single year, although the earnings link removal would no longer guard against the longer-term drift.
Reinforcing the need to make other provision
The announcement of the intention to replace the triple lock with a double lock from 2030 is the latest in a series of changes to the State Pension. The age at which the State Pension becomes payable has also been adjusted, with the State Pension age increasing in steps to age 67 by April 2028 and a further increase to age 68 is scheduled between 2044 and 2046.
These changes are designed to meet the pressure that longer life expectancy places on public finances. In addition, the changes to the calculation method would let the State Pension fall behind average earnings whenever earnings outpace prices. Together, these changes show that relying on state provision alone will not fund a comfortable retirement.
Making the most of pension savings
The changes to State Pension should be a clarion call to review existing private and workplace pension provisions that are in place. Auto-enrolment provides that all employees aged 22 and over, who earn at least £10,000, are enrolled into a workplace pension scheme. Under auto-enrolment a minimum of 3% of qualifying earnings is paid in by the employer and a minimum 5% of qualifying earnings, gross of tax relief, paid by the employee. Contributions at these levels may, however, not be sufficient to generate enough income to achieve a modest standard of living in retirement. Additional pension contributions, where affordable, can benefit not only from tax relief, but also from tax-efficient growth.
The level of pension savings may well be critical to the success of a retirement plan; however, it is not the only factor that needs to be considered. For a personal or workplace pension, how well the pension investments perform is a defining factor that determines the value of the pot at retirement. Whilst modern pensions have to offer a default investment strategy, this provides a set timescale for changes in asset allocation and risk, which may not have any bearing on your intended retirement date. Furthermore, most pensions either exclusively invest in passive funds, or allocate a high proportion of the strategy to funds that track an index. As a result, the potential for outperformance that could be generated by a strategy that invests in actively managed funds, is missed. Active funds can also underperform, and therefore careful fund selection and regular review of portfolio asset allocation are highly recommended.
The importance of reviews
As you head towards retirement, the importance of reviewing your retirement savings increases with each passing year. You can easily check your State Pension entitlement using the GOV.UK website, and this will help you understand when you will receive your State Pension and an estimate of your weekly pension in retirement. By reviewing your personal pension arrangements at the same time, you can more readily understand whether you are on course to meet your goals in retirement and can take action to improve your position if necessary.
Our experienced advisers can take a holistic view of your retirement provision and advise whether you are on track to meet your retirement goals and undertake an impartial review of existing workplace and personal pension arrangements. Speak to one of the team to start a conversation.
