UK Investment Guides Loader

UK Government likely to make changes to the 'triple lock' pension system

written by Bella Palmer
pension-system

The triple lock system was introduced in 2010 to guarantee a minimum increase in the rate of basic state pension each year

The controversial policy is a decade old but there's growing speculation that the UK Government is going to make some changes.

The financial policy guarantees a minimum increase in the rate of basic state pension each year, described by charities as an important source of income for the elderly and retired workers.

The system however means that pensioners could significantly benefit financially in the coming years, whilst those of working-age households may continue to suffer the impact of the coronavirus pandemic.

It's led to speculation over the future of the contentious system, which has long been criticised for being overly generous and unfair.

Critics have argued that younger workers have typically not reaped the benefits of a rise in average wages and the like, whilst pension holders have continued to receive increase of at least 2.5 percent.

The triple lock system was introduced in 2010 to guarantee a fair rate of pension. It ensures that basic state pension payments keep up with inflation and wage growth.

Under the system, pension rises each tax year by a minimum of either 2.5 percent, the rate of inflation (CPI) or the rate of average earnings - whichever is the highest.

Over the last five years, the basic state pension has increased primarily in line with a rise in average earnings - which has been greater than inflation rates and the 2.5 percent guaranteed minimum.

This April, the latest tax year, saw the rate increase by 3.9 percent as a result of an average earnings rise in the UK last year.

The system is said to ensure pension holders receive an appropriate increase each year and has been praised by some charities as saving thousands of pensioners from falling into poverty.

There are however critics of the scheme who argue that it promotes intergenerational unfairness - with working-age households not reaping the same benefits in recent years.

During the election campaign in November 2019 though, the Conservative Party pledged that it would not scrap the guarantee - though its future is less certain now as a result of the coronavirus pandemic.

The coronavirus pandemic has significantly affected the economy in recent months - which could potentially benefit state pension recipients under the Triple Lock system.

As reported by the Mirror, average earnings fell the fastest on record in April, in part due to the introduction of furlough.

This would likely mean that next year, the state pension would rise by either the 2.5 percent guaranteed minimum - as both average earnings and inflation are likely to be negatively affected by coronavirus.

However, it has been suggested that the following tax year, April 2022, could be financially problematic. This is because the furlough scheme has artificially depressed wages and once this ends later this year, wages will bounce back.

As a result, this will appear as a huge rise in pay in 2021 compared to wages earlier this year.

This 'rise' would mean pension holders, under the triple lock, would technically be entitled to a significant increase in pensions in 2022 - with some estimates suggesting it could increase by up to 21 percent.

It's been said that this major increase doesn't reflect a real increased experienced by working-age households - who have either been furloughed, made redundant or experienced financial loss during the coronavirus pandemic.

Critics have additionally argued that such a significant rise in pensions would not be affordable for the UK Government - particularly following economic issues and unexpected costs this year.

It's been reported that the coronavirus crisis will cost the country almost £300 billion this year, with critics claiming that the triple lock system is an unnecessary cost.

There are arguments being made on both sides of the debate, with critics favouring either temporarily suspending the triple lock system or abolishing it entirely.

The think tank Social Mobility Foundation (SMF) has called for an end to the system to allow the cost of the ongoing pandemic to be spread more evenly between all generations, as reported by the Express.

On the other hand though, charities have argued that it's an important source of income for pensioners so it shouldn't be axed.

As reported recently by consumer site Which?, a study conducted by the Pensions Policy Institute estimated that around 700,000 people could fall into poverty by 2050 if it's scrapped.

The government could decide to suspend or scrap the system, keep their promise to pensioners and suffer the financial costs, or devised an alternative option to prevent such a significant rise - whilst guaranteeing pensioners a fair increase in pension.

According to the Telegraph though, Chancellor Rishi Sunak is likely to place the system somewhere in the middle - with plans expected to be announced for the suspension of the triple lock system this month.

A HM Treasury spokesperson said: "Decisions on tax and pensions policy are for the Budget but there are no plans to abolish the triple lock."

The spokesperson further added that "this government will always look after pensioners.”

Important:

This article is for information purposes only.

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

You can tell friends this post!