If you’re a person of a certain age or watch the news, you’ll have heard of the state pension triple lock.
Depending on your news outlet, the tone is either supportive and positive or fearful and divisive.
So what is the state pension triple lock and what does it do?
State pension triple lock
The state pension triple lock uses three factors to decide how much it goes up by, inflation, wage growth or a flat 2.5%, whichever is highest.
This is the triple lock.
Imagine you’re saving money for when you’re older and not working anymore. The government does something a bit similar for people who are retired or getting close to retirement.
This is your state pension.
Now, the triple lock is like a special promise the government made to people who are getting the state pension.
They said they’ll increase the amount of money they give you every year, and they’ll do it in one of three ways – whichever is the highest.
First, they look at how much prices have gone up in the country. If prices have gone up, they’ll increase your pension by that amount, so you can still afford things even if they’re more expensive.
That’s inflation.
Second, they see how much the average wages have gone up. If wages have gone up, they’ll increase your pension by that percentage, so you can keep up with how much other people are earning.
That’s wage growth.
And third, there’s always a little bump – at least 2.5% – even if prices and wages haven’t gone up by that much.
This is like a safety net to make sure your pension doesn’t fall behind.
So, that’s the triple lock!
It’s a way to make sure the money the government gives you when you’re older keeps up with the cost of living and how much people are earning.
How does the government decide which increase to use?
The government uses a simple rule to decide which increase to use for the state pension through the triple lock.
They look at three different things and choose the one that gives the pensioners the most money.
- Inflation: They check how much prices have gone up in the country. If prices have increased, they’ll use that percentage to increase the state pension. This helps pensioners afford things even when the cost of living rises.
- Average wages: They also look at how much the average wages have gone up. If wages have increased, they’ll use that percentage to increase the state pension.
- 2.5% minimum: There’s always a minimum increase of 2.5% each year. So, even if prices and wages haven’t gone up much, the pension will still increase by at least 2.5%. This is like a safety net to make sure the pension doesn’t fall behind.
The government looks at these three things every year and picks the one that results in the biggest increase for the state pension.
This way, they try to make sure pensioners get a fair boost in their pension payments to help them live comfortably.
Why is there an issue with it?
If you’re reading this in 2023 or 2024, you’ll know that we’re experiencing high inflation and high wage growth.
Locking pensions into this means they will become very expensive over the next few years.
Some estimates say that pensions will cost more than education, defence and policing combined by 2025.
That’s not sustainable.
The government has committed to keeping the triple lock until 2024. After that, it is unlikely that it will continue in its current form.
There will need to be some mechanism in place to ensure pensions keep up with the cost of living, but perhaps a fairer one or cheaper one.
What form that mechanism will take is unknown right now.
I certainly wouldn’t want the job of having to come up with a replacement that’s for sure!
