Self's assessment: The pensions triple lock
Nobody wants pensioners to live in poverty, and it would be a brave move by any politician to abolish the triple lock
There is a definite pre-election feel to the tax stories in the news at the moment. But despite my previous pleas, politicians of both major parties seem determined to keep promising jam tomorrow, without setting out how it will be paid for. However, in the Financial Times on 11 September, Rishi Sunak refused to commit to a manifesto promise to retain the pensions triple lock. He did, however, say that ‘the triple lock is the government’s policy and has been for a long time’.
Previously, both Sunak and Shadow Chancellor Rachel Reeves have promised to retain the pensions triple lock, despite the cost implications. There have been rumours that Sunak might cut working age benefits to offset some of the cost (as reported in The Telegraph, 1 July 2023), but that seems such an obvious robbing of the young to pay the elderly that it is surely unlikely to be implemented.
For those wanting a simple introduction to the pensions triple lock, the BBC published a summary recently, explaining that under the triple lock system the state pension increases each April in line with whichever of these three measures is highest:
- inflation, as measured by the consumer prices index in the September of the previous year;
- the average increase in wages across the UK; or
When inflation was low, the promise to raise pensions by at least 2.5% seemed a relatively modest way to ensure that pensioners’ incomes kept pace with their own cost of living, which is not necessarily the same as RPI or CPI. But in a time of relatively high inflation, where wage rises often lag behind price rises, the triple lock is now operating in a way which is significantly benefiting those at, or close to, state pension age. Meanwhile, those in their 40s and younger face waiting longer for an uncertain payout.
In its report published on 8 September, the Institute for Fiscal Studies set out in stark terms the overall cost of maintaining the triple lock, and the uncertainty it brings to the level of future state pension income.
The Financial Times has forecast that next year’s increase in the state pension is likely to be around 8%, following this year’s increase of 10.1%. Overall, by 2024/25 the state pension will be more than 11% higher than it would have been, had it simply been increased in line with earnings. All of this represents a significant part of total government expenditure, with total spending on the state pension currently around £112bn per annum. As The Guardian notes, the implication of the triple lock up to 2050 could be an additional cost of up to £45bn, based on the IFS figures.
Of course, nobody wants pensioners to live in poverty, and it would be a brave move by any politician to abolish the triple lock. But in addition to the cost implications, the IFS also highlights the uncertainty caused by the way the triple lock works: we know that pensions will go up, but we cannot predict what the rise will be over the medium term, and so those who wish to (and are able to) save additional amounts do not know how much they will need to accumulate. A particular issue is that the triple lock is applied on an annual basis, so that if inflation rises one year (as it did last year) and then wage rises follow the next year (as they did this year), the state pension will rise by the higher amount each year. Surely, as a minimum, it would make sense to apply the triple lock over (say) a rolling three-year period?
A more fundamental issue is that politicians are unwilling to set out what level they think the state pension should be. Setting a benchmark of, say, 30% of median earnings (compared to the current level of just over 25%) would give a clear target to aim for, with a rationale for increases each year to narrow the gap between the current and benchmark levels.
The uncertainty over the state pension is only part of the difficulty facing those wishing to fund a comfortable retirement. Auto-enrolment meant that many people started contributing to a personal pension over the last few years, but often at a level which will not lead to a meaningful income at retirement. And the cost-of-living crisis has meant that many people have reduced or suspended their pension contributions. Meanwhile, defined benefit schemes are now primarily found in the public sector, leaving the risk of pension saving almost entirely borne by the employee (or self-employed person) for everyone else.
For those fortunate enough to have pension pots of £1m or more, the announcement in March 2023 by Jeremy Hunt that the lifetime allowance would be abolished was welcome news. However, the abolition will not take full effect until 2024/25, and the Labour Party has already promised to reverse it. But it will not be as simple as just re-imposing the limit as it was – will we see a new round of fixed protection elections?
The basic problem is that pensions are a long-term savings vehicle, which over the last 20 years or more have been subject to numerous short-term changes. Unfortunately, it seems that uncertainty and complexity over the taxation of pensions will continue – to the next election, and beyond.
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If you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or Heather Self using the form below.
This article was originally published in the Tax Journal and is reproduced with kind permission.