The State Pension is a regular payment from the government that most people in the UK can claim in later life to help with their retirement expenses. The value of State Pension payments rises every year, thanks to a policy known as the ‘triple lock’.
If you’ve never heard of the term ‘triple lock’, here’s an overview of what it is and how it works.
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What is the triple lock and how does it work?
The triple lock is basically a safeguard that ensures that the UK State Pension doesn’t lose value in real terms over time.
Introduced in 2011, it guarantees that the State Pension rises every year by whichever of these three measures is the largest.
- rate of inflation (in the year to September)
- average earnings growth (in the three months to July)
- 2.5%
Before the triple lock was introduced, the State Pension rose in line with the retail prices index (RPI) measure of inflation, which tended to be consistently lower than annual rises in earnings or 2.5%.
So now, with the triple lock, if average wage earnings were to rise by 4%, the State Pension would also go up by 4%. That’s what happened in 2020. The state pension rose by 3.9% to match the average earnings increase experienced by workers in the three months to July last year.
This year, the State Pension will rise by 2.5%. With inflation for last September coming in at just 0.5% and average earnings in the three months to July dropping by 1%, it means that 2.5% is the highest figure.
The increase will take effect from April 2021.
How does the ‘triple lock’ benefit pensioners?
It’s easy to see why the State Pension needs to increase every year.
Your retirement could last for 20 years or more. If the State Pension is a significant part of your retirement income, 20 or more years is a long time to be living on a pension that could essentially be losing value.
The triple lock ensures that the State Pension rises at least in line with inflation and that pensioners can therefore cope with the rising cost of living as they get older.
Could the triple lock system be taken away?
The triple lock has proven to be an expensive burden for successive governments since its introduction.
In the past year there have been calls to scrap the system in order to recoup funds to pay for the huge coronavirus bills incurred by the government.
Before the Budget was introduced on 3 March, there had been speculation that the triple lock could be abolished or replaced with a revised version. A ‘double lock’ that would see state pension rise but by a smaller margin was rumoured.
In his Budget speech, Chancellor Rishi Sunak did not mention any revisions to the state pension triple lock. That essentially means that the lock will remain in place for at least the next year.
But things could always change down the road.
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What can I do to secure my retirement income?
We don’t know what will happen with state pension in the future. The triple lock system that currently ensures a generous increase in state pension payments every year might not last forever.
The fact that it only adds up to about £9,100 a year means that you cannot rely on it too much anyway.
That’s why it’s a good idea to start reviewing your finances early and explore other ways of securing your retirement income.
This might mean saving as much as you can in your workplace or personal pension plan.
Or it could mean looking for a better way to grow your retirement savings. For example, with savings rates being historically low, there might be greater potential for you to grow your money in a stocks and shares ISA.
Though the stock market has its risks and past performance is not a reliable indicator of future results, investing in shares has historically led to higher long-term returns for investors.
For more on how to financially secure your future, check out our article offering six retirement planning tips for 2021.
