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This content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated advice regarding your investments and financial goals, please consult an independent financial adviser here at Suttons IFA in Manchester and Cheshire.

If you’ve still had the heart to watch the news lately, you may have heard that the state pension “triple lock” system has come under the spotlight. The outbreak of COVID-19 and lockdown in the UK has led to huge financial pressure upon the Treasury, which is now seeking ways to start balancing the books. 

With the UK national debt now larger than its gross domestic product (GDP) for the first time since 1963, addressing this is certainly now urgent. The Governor of the Bank of England, Andrew Bailey, has also highlighted how close the UK was to financial collapse in March 2020 when the financial markets seized up, prompting a £200bn rescue package. With all of these financial pressures going on, some kind of reform to the public finances seems inevitable.

Here, our Manchester-based financial planning team here at Suttons IFA examines the possible implications for the state pension “triple lock”.


What is the “triple lock” and why is it in the spotlight?

To briefly recap the triple lock, this is an ongoing government policy since 2010 which ensures that state pension payments rise with the cost of living. The state pension goes up each tax year in line with one of these three measures (whichever is highest):

  • 2.5% 
  • Average earnings
  • Prices measured by the CPI (Consumer Prices Index)

The Conservatives promised to maintain this system over the next 5 years of their time in government. Yet this was in December 2019 – before the global implications of COVID-19 had become apparent. With the situation now dramatically changed, the current system arguably needs urgent reform.

This is particularly due to the state-paid wages which began across the country from March 2020, when 9m furloughed employees began taking payments from the government. Since the government pays 80% of these workers’ wages, once they are back on their 100% wage (assuming their job is still available) then average earnings will see a huge rise. 

Since the state pension is linked to the highest of the three aforementioned measures, this could amount to an 18% rise in the state pension (according to the OBR) in 2021-22. To place this in context, the old and new state pension rose by 3.8% this year – so this would place a huge financial burden on the exchequer. 


What might happen to the triple lock?

At the time of writing, it seems highly likely that Chancellor Rishi Sunak will announce plans to suspend the state pension triple lock in July 2020. This, the government believes, could save up to £8bn per year. Instead, there is speculation that a “double-lock” system may be introduced instead, which could help prevent pensioners from gaining disproportionate advantage from a post-furlough bounce back for wages.

Other possibilities remain on the table. Of course, it’s possible that the current triple lock system is kept in place at least until the 2020 Autumn statement. Another idea floated by Sir Steve Webb (former Pensions Minister) is that pensions could be “frozen”, or an amended triple lock may be put in place where the state pension rises by 1.5% per year (instead of 2.5%). With inflation currently so low (about 0.5% in May 2020), this certainly seems a possibility.


How will my financial plan be affected?

For those approaching retirement most of you, our clients, are building up your personal resources via your SIPP, ISAs and general investment accounts so that you are not reliant on the State Pension to provide for your desired lifestyle in retirement. The State Pension is likely to commence on your 67th or 68th birthday and will act as a useful source of income from that age into your later life, particularly if you and a Partner will be in receipt.

However, given that, in 2020, about one in three UK retirees rely solely on the state pension to fund their retirement costs, a suspension or abolition of the triple lock system could have important implications. In 2019-20, for instance, the full new state pension stood at £168.60 per week and rose by £6.60 to £175.20 per week this year – a yearly increase of £343.20. For many people, this may not affect their lifestyle much in retirement in the short term, yet over 10+ years it begins these relatively small annual increases are valuable.

For those currently receiving the state pension, it’s important to note that your weekly state pension payments will almost certainly not be affected in the short term. This will be the case even if the triple lock system is suspended or completely scrapped in July 2020. What might happen, however, is that your current weekly payments remain fixed in 2021-22 and possibly in the following years. As such, it will be a good idea to keep an eye on the Chancellor’s announcements this Summer.

In any case, consider consulting your financial adviser in July/August 2020 to review your financial plan.