The UK State Pension will increase by 2.5% this year as a result of the triple lock mechanism.
This is certainly welcome news for pensioners across the country, many of whom see the State Pension as a critical component of their retirement income. But what happens after that? Will the State Pension keep rising year after year? Let us find out.
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What is the triple lock and how does it affect State Pension?
The triple lock, which was introduced in 2010, is a mechanism the government uses to determine how much the State Pension will increase each year.
It sees pension payments go up annually by whichever of these variables is the highest:
- CPI inflation (in the year to September)
- Average earnings growth (in the three months to July)
- 2.5%
The increase in 2021 is 2.5%, as a result of the pandemic keeping both inflation and earnings growth close to 0%.
This means that pensioners receiving the full new State Pension will now get £179.60 instead of £175.20. Those on the basic State Pension will get £137.65 instead of £134.25 from April 2021.
Will the State Pension keep rising year after year?
Yes. As long as the triple lock mechanism is in place, State Pension payments will rise year after year.
In 2021, the inflation rate of the CPI is expected to be 1.5%. Wages are forecast to rise by 3.1% (according to Statista) as thousands of UK workers return from furlough and normal economic activity resumes.
As per the triple lock, pension payments would therefore rise by 3.1% in 2022. But don’t read too much into these figures as they could change.
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Why is the triple lock under fire?
The goal of the triple lock is to ensure that pensioners’ income keeps pace with rising living costs.
If the pension rate was only linked to average earnings, but inflation was higher than average earnings, pensioners could end up increasingly struggling to buy what they needed. The triple lock helps to guard against that.
At the same time, the pandemic has resulted in an unexpected scenario. More specifically, it has led to an imbalance in the rate at which wages and inflation change.
For example, average earnings have dropped amid the pandemic due to furloughs, job losses and business closures. However, as normalcy returns, earnings growth could experience an artificial but nevertheless dramatic increase.
Because this figure could be bigger than the rate of inflation and 2.5%, it means that State Pension payments could skyrocket to unaffordable and unsustainable levels in the next few years.
There have been calls for the triple lock to be abandoned to help pay for some of the costs of dealing with the pandemic. The Centre for Policy Studies (CPS) says that the triple lock is a drain on public funds and should be repealed.
Before the announcement of the Spring budget, rumours were rife that the chancellor could scrap the triple lock in favour of a different version that guarantees a much smaller increase in State Pension payments.
Ultimately, the chancellor did not make any revisions to the triple lock.
How can I prepare for the future?
For now, the triple lock remains in place. State Pension payments are therefore on course to continue rising.
Of course, things could always change down the road. The triple lock could be replaced with a more modest system. This could halt the generous increase in pension payments that pensioners currently enjoy.
Having a backup source of retirement income could help soften the blow.
You can accomplish this, for example, by saving into a workplace or personal pension. This way, you’ll be better prepared to get the retirement you want, regardless of what happens to the State Pension. The earlier you begin saving, the larger your retirement pot will be.
And if you are looking for more information on pensions, check out our comprehensive guide on how pensions work.
