Protecting the value of the State Pension

triple-lock

Since the Government’s announcement to hold a snap General Election on 8th June, the triple lock on the State Pension has been under the spotlight.

What is the triple lock?

The triple lock is a guarantee to protect State Pension increases. The triple lock means that the State Pension will increase each year by the higher of:

·         Average Earnings

·         Inflation

·         2.5%

Why was it introduced?

Some concerns had been raised around increasing pensioner poverty and the triple lock was introduced in 2010 to protect pensioner income levels.

What are the alternatives?

Some suggestions have been to remove the third lock of 2.5%, but keeping the double lock of earnings and inflation, which will reduce the costs but still provide some protection for future State Pension payments.

The security of the triple lock provides some comfort – but there are costs associated with providing this security. One way of reducing the Government costs has been to increase the State Pension age so that fewer people qualify for State Pension payments. The State Pension age is due to increase to 66 for all by October 2020 and then to 67 by 2028 – and some expect these increases to be brought in earlier, particularly if the triple lock is maintained.    

How have pensioner incomes been affected?

Recent figures have seen pensioner incomes exceed incomes for those of working age.


Separate studies by the Office for National Statistics show that since 2007/08, the economic downturn, the median income for retired households has increased by 13.0% and by 2015/16 was £2,500 higher than it was in 2007/08. Over the same period, the median income for non-retired households has decreased by 1.2%, a drop of £200.      

There are a few factors driving this change:

·         More income being received from private pensions or annuities.

·         More pensioners carry on working, with almost one in five pensioner families now having one or more person in employment.

·         Higher average income from the State Pension, due in part to the effect of the triple lock.

·         A fall in average disposable income for non-retired households after the economic downturn, reflected largely by a fall in income from employment (including self-employment).

The elements which make up income for retired households have changed over recent years with private pensions playing a growing part.

office for national statics

Looking at pension guarantees

As you approach retirement, you may want to consider income guarantees which offer additional security, but they do come at a cost. The triple lock is a Government decision and has national impact but the considerations are similar – making sure that the cost of the guarantee is worthwhile – but in the case of the triple lock the key difference is that the Government foots the bill.

If you choose to include guarantees on your personal pension benefits, you need to understand how much the guarantee is costing, how much the guarantee reduces your pension payments – so that you can then make a personal decision as to whether the cost of the guarantee is worthwhile.

Our advisers can help you to review your pension options and evaluate the most suitable solutions to help you reach your goals.

 

This article is for information only, based on our understanding of legislation and HM Revenue & Customs practice as at May 2017 and is not to be taken as Financial Advice. Origen are not tax specialists and should you have any concerns with regards to your personal tax situation, we would recommend seeking advice of an accountant.  CA1276    Exp 05/18

[ Date Posted: 16/05/2017 11:40:18 ]