The State Pension is currently £9,110 per year. Assuming you are lucky enough to own a home and have repaid your mortgage by the time you come to retire, this still doesn’t leave you a lot for luxuries after you’ve accounted for bills, food, and basic living expenses. I don’t know about you, but I picture a different sort of retirement for myself.
To make matters worse, reports are circulating suggesting the government may have to either suspend or scrap the triple lock which is the device that protects the State Pension from decreasing in real terms over time.
How does the State Pension triple lock work?
The triple lock was introduced in 2010 and means that the State Pension increases by the greatest of average earnings, prices (as measured by the Consumer Price Index), or 2.5%. This tax year the State Pension increased by 3.9% in line with average earnings.
All being well, I plan to retire in about 25 years’ time (and hopefully I’ll be alive for a further 25 years). But 25 years ago, the cost of goods was very different to today. According to the Office of National Statistics, the average price of a pint of lager in 1995 was £1.66. Granted it has been a while since I visited my local pub, but the cost of a pint is now considerably more.
The triple lock protects you against this inflation and stops that £9,110 State Pension standing still while prices increase over time. But the triple lock is a costly burden for the government. More often than not since its introduction, both inflation and average earnings have been below 2.5% and the taxpayer has to fund the increase. This has led to calls to make it a double lock and remove the 2.5% third pillar.
The coronavirus effect
The government faces a different challenge this year. Under the furlough system, the government is paying 80% of wages up to £2,500 for nine million workers. If and when pay returns to 100%, this could result in a large bump to average earnings that could be very expensive for the government.
This has led to suggestions the government may suspend or even scrap the State Pension triple lock. While the government has denied this and stated they will honour their manifesto commitments, I’m certainly not going to depend on it.
I take full advantage of my company’s pension matching contribution under auto enrolment as well as making my contributions via salary sacrifice to be tax efficient. In addition, I have an ISA and a Lifetime ISA to save for my retirement. I view the State Pension as a top-up to my private savings and not the other way around.
And I don’t want my money sitting in a 1% Cash ISA losing value in real terms. Historical studies have shown that stocks and shares return between 7% and 10% over time. While they carry more risk, I’m happy to ride out any short-term volatility.
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