The Government has announced a significant change to the State Pension triple lock, although the change will not take effect until April 2030.
Under the current system, the State Pension increases each year by the highest of:
The Government has confirmed that this system will remain in place for the rest of the current Parliament. From April 2030, however, the formula will change.
The important change is the removal of what might be called the earnings ratchet.
At present, suppose wages rise sharply in one year - perhaps by 6% - while inflation is only 2%. The State Pension increases by 6%. If wage growth then falls back the following year, that increase isn’t reversed. The pension has effectively been permanently rebased at a higher level.
Over a long period, repeatedly taking the highest of wages, inflation and 2.5% means the State Pension can gradually increase faster than both prices and average earnings.
From April 2030, the State Pension will instead increase each year by at least the higher of inflation or 2.5%, with an earnings safeguard intended to ensure that its value is maintained relative to average earnings over time.
So the earnings link isn’t disappearing. What is disappearing is the mechanism under which a particularly strong year for wages can permanently ratchet the State Pension upwards relative to earnings.
The numbers become significant when compounded over decades.
The Government estimates that the revised system could reduce State Pension expenditure by around £15 billion a year by the end of the 2030s, rising to approximately £50 billion a year by 2050, compared with retaining the existing triple lock.
Those are savings against projected expenditure rather than cuts to the cash amount of anyone’s pension. The State Pension will continue to increase each year under the proposed system.
There is another important consideration: the State Pension is taxable income.
It is paid gross by the Department for Work and Pensions, but counts towards an individual’s taxable income alongside private pensions, employment income, rental profits and other taxable income. With the personal allowance currently at £12,570 and tax thresholds frozen, increases in the State Pension can bring more pensioners into the income tax system or increase the tax payable by those with other sources of retirement income.
To support taxpayers who need to file a tax return for the first time, but with only pension income (state and private), bank interest and demutualisation dividends we have a low cost service to help them stay compliant.