State Pension: Could COVID Break The Triple Lock?
The new State Pension, payable to those retiring on or after 6th April 2016, is worth up to £179.60 per week (£9,339.20 per year) in the 2021/2022 tax year. Each September the Government determines how much the payments will increase by from the following April.
The Office for Budget Responsibility recently estimated that the State Pension could increase by 8.0% from April 2022. This would add a further £3 billion per year to government spending. The average annual increase in the last ten years has been 3.03%. How, therefore is an 8.0% increase possible, and why are increases usually so much lower?
The “Triple Lock” explained
The “Triple Lock” was introduced in 2010 and guaranteed that state pension payments would not lose value in real terms, increasing annually in line with inflation by a minimum of 2.5%. It uses the highest of three measures of inflation to determine the annual increase. These measures are:
- Growth in Wages
- Inflation as measured by the Consumer Prices Index (CPI)
- 2.5% (An inflation benchmark)
The impact of Coronavirus
The Coronavirus Pandemic has led to an artificially high estimated measure of growth in wages, and therefore a high measure of inflation under the “triple lock”. This would create the largest payment increase since April 2012, when it increased by 5.2%, and see pensioners receiving up to £193.97 per week (£10,086.44 per year).
The “Triple Lock” is a Conservative Manifesto promise until 2024, but there is increased speculation that it may be scrapped as a result of the COVID anomaly. A conclusive announcement will be made once the figures are confirmed in September 2021.
The State Pension is the foundation of the majority of people’s retirement income and a key component of retirement planning.
If you would like to find out more about retirement planning, and the importance of state and private pensions, please get in touch with a member of our team.