The State Pension triple lock has lifted millions out of poverty but once again its future is under threat. The Treasury is worried that costs will spiral out of control due to Covid-19, making the pensioner income guarantee unaffordable.
If the government does scrap the triple lock, it will cost retired people dear. This underlines the importance of saving for retirement in a balanced portfolio of stocks and shares. That way your pension income will not be at the mercy of politicians.
The triple lock was introduced in 2011 to help pensioner incomes keep up with living costs. It does this by guaranteeing that each year the State Pension increases either in line with earnings, inflation, or 2.5%, whichever is higher.
The triple lock is on the line
So this year, the State Pension increased by 3.9%, in line with a relatively high increase in wages before the pandemic struck.
Due to Covid-19, the Office for Budget Responsibility (OBR) calculates workers’ earnings will fall by 7.3% on average. Inflation is currently just 0.5%. This means the next State Pension increase is likely to be based on the default rate of 2.5%. That is far more than anybody else will get.
Next year, the OBR says that if the economy recovers rapidly, earnings could rebound by 18.3%. If that happens, pensioner incomes will also rise by 18.3%, even though they did not fall this year.
This would mean hard-pressed taxpayers dipping into their pockets to fund an inflation-busting increase for retired people. Retaining the triple-lock would cost taxpayers an incredible £34bn more than a simple inflation link for the next two years.
If you want to look forward to a comfortable retirement without these kind of worries, the best thing you can do is build money under your own steam.
Avoid triple lock trouble
Ideally, you should treat the State Pension as a basic safety net, but look to generate most of your retirement wealth from pensions and tax-free ISAs. If you build a balanced portfolio of FTSE 100 stocks and shares, that should generate most of your income needs in retirement. Then you do not have to worry about the State Pension triple lock at all.
Here’s another reason why investing in shares is the way to go. Even if it survives, the triple lock does not guarantee you riches in retirement. For the over 70s who retired under the old State Pension, it protects a maximum basic pension of just £134.25 a week. For those in their 60s retiring under the new State Pension, it currently a maximum of £175.20 a week.
That works out at just £9,110.40 a year, barely a third of the average full-time salary. You may get less than that, if you have not made 35 years of qualifying National Insurance contributions.
Nobody wants to be on the poverty line in retirement. To avoid that fate, I’d stop relying on the triple lock and start investing my long-term wealth in FTSE stocks and shares.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.