Unlock the State Pension?
As of 8th April, the basic and new State Pension have increased by 8.5%, in line with last year’s growth rate of the Average Weekly Earnings (AWE) index, and for individuals who have retired on the new State Pension on or after 6th April 2016 after 35 years of contributions, the pension benefit is now paid at £221.20 per week.
This represents the second-ever largest increase in the UK, following the highest ever rise of 10.1% in 2023, the latter in the wake of the previous year’s record inflation numbers.
These historically high increases are due to the “triple lock” system, whereby the government is committed to uprating both the basic State Pension and the new State Pension by the highest of earnings growth, as measured by the Average Weekly Earnings (AWE) index for the previous May to July, inflation, as measured by the Consumer Price Index (CPI) as of previous September, or 2.5%.
Why was the “triple lock” introduced?
Historically, the State Pension in the UK has always been a lower percentage of the average salary in the economy compared to other pension benefits provided by most developed economies, particularly by countries on the Continent. Hence, a first reason was to boost retirees’ income and reduce the risk of too many pensioners living in poverty in their retirement years.
Previously, the pension uprating system was linked exclusively to inflation, and when, in April 2000, the State Pension increased by only 75p a week for a single pensioner, following a low-price inflation of 1.1% the previous year, uproars of discontent for the derisory increment came from all quarters. Still, the gestation period of the “triple lock” was quite long, and it came into effect only in 2011. It has been applied every year since, except for a temporary suspension of the earnings link in the 2022/23 financial year.
What is the future of the “triple lock”?
Someone retiring on the new State Pension on or after 6th April 2016 after 35 years of contributions would have been entitled to an annual new State Pension of £ 8,093.80. For the financial year 2024/25 the amount is £11,502.40. This represents an increase of 42% over just a few years.
It has been estimated that in the 2023/24 financial year pension payments amounted to £124.3 billion, or approximately 5% of the size of the UK economy as measured by its Gross Domestic Product (GDP).
No wonder doubts have arisen about the long-term financial sustainability of the current pension arrangements. For instance, the Office for Budget Responsibility (OBR), the government’s public finances watchdog, has recognised the “triple lock” as a possible fiscal risk, due to its “ratcheting up effect” on the cost of providing pension benefits.
Short-term, the “triple-lock” does not appear to be under any danger of being removed, as the main political parties seem to be broadly in agreement about keeping it. However, this might change if the projected fiscal burden of pension costs on public finances were to deteriorate, particularly given increased longevity.
In any event, the State Pension is only one of the three main pillars on which to build one’s retirement, the other two being occupational and personal pensions, which also present their own complexity and challenges.
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Disclaimer
Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested. Past performance cannot be relied upon as a guide to future performance. KLO Financial Services Ltd are registered in the UK, company number 08711328. We are authorised and regulated by the Financial Conduct Authority, reference 710272. For any information please visit our website www.klofinancialservices.com