Tax treatment depends on your circumstances and is subject to change
The State Pension is a cornerstone of the welfare state. Since the early 20th century, a retirement pension has been provided as a financial support for individuals after finishing work. It has seen many changes to its processes, value and regulations over the years, but arguably the most devastating change has been the suspension of the triple lock system. So why has this happened and what affect could it have on your retirement?
The State Pension offers a regular weekly amount of money as a financial support when work income ceases. While it is not free (we pay for the State Pension through National Insurance contributions) it is designed to allow an individual to acquire those essential commodities in retirement.
The concept of a pension has been with us a long time in Britain. Before the 19th century, pensions tended to be given out exclusively to elite individuals such as civil servants, favourites of the monarch or the clergy. Military pensions were also popular.
The State Pension as we know it has its roots in the poor laws. A form of welfare to the poor, elderly and needy, the 1601 Poor Relief Act meant councils were compelled to support the vulnerable members of their communities. This support was random and dependant on the wealth and generosity of the community in which you lived.
In the 19th century, pensions became more focused on occupation, whereby the elderly received funds via friendly societies, guilds, trade unions or private funds. Then, in 1909, Lloyd George and Churchill introduced the Old Age Pensions Act, and the first State Pension was paid on 1st January 1909.
Various Acts followed that brought the pension age down from 70 to 65 and 60 for men and women respectively. The major change came in 1946 with the National Insurance Act. Up until this time, there was no contribution needed to receive a pension – the amount you received depended on the results of a means test. This new act meant all workers paid into National Insurance and, by default, received a State Pension.
In the second half of the 20th century, various acts were put in place that protected the pension system from abuse. It became regulated so the amount received was not dependant on social status.
In the year 2002, the state second pension (SERPS) was abolished and the S2P was introduced which offered more support to individuals on low incomes.
One of the problems of having a set rate State Pension is it does not keep up with inflation. To remedy this, the triple lock system was introduced by the coalition government in 2010. It focused on three areas of inflation and stated that pensions would increase by the greatest of the following:
This in effect meant that your State Pension would increase with inflation in order to offer an appropriate income through retirement. It would also stay in line with what the working population received. Sometimes, an increase to the pension value may in fact be higher than inflation (if it is set at 2.5%).
During the Covid 19 epidemic a large proportion of the population could not work due to lockdown. To deal with this situation the government introduced furlough. This system offered a reduced wage so businesses could keep afloat during difficult times and employees could keep their jobs.
When furlough was removed, wages returned to pre-Covid levels which were statistically recorded as a rise in pay of 8%. Under the rules of the triple lock system this would mean pensions would have to rise by 8% too. This was deemed to be unfair.
The government has therefore announced that because of the special circumstances we have all experienced, the triple lock system will be suspended for 2022-2023. This is good news in that the government have not discarded the whole system totally and wish to return to it in future years. It should also be noted that the pension value will rise with inflation or 2.5% – whichever is greater. This in effect is a double lock system. Your pension should still rise in value throughout your retirement in line with inflation.
The problem the triple lock system so cleverly solved was the issue of a pension losing value over a period of maybe 25 years. The double lock means pension value will still rise with inflation and so buying power for pensioners will continue to be in line with inflation but not necessarily in line with the general population.
However, following Covid 19 – and also Brexit – economists do forecast a time when we may well experience a period of high inflation. As much as the government needs to adhere to this policy, it is an expensive one and finances ultimately come back to the taxpayer. We may have to see an element of give and take in the near future in order for the government to balance the books.
The best thing you can do is monitor your personal pensions and State Pension. You do not need to necessarily increase contributions – you can make your funds (personal pension and occupational pension) more efficient by streamlining how your contributions are invested.
Keep an eye on your personal pension. Check out those annual reports you receive from your pension provider. Could performance be enhanced by transferring monies to another fund? Would another provider offer you more significant benefits? Here at Pension Access our regulated financial advisers can help when you wish to review your personal pension.
Don’t lose money you have already saved. During our working lives we are likely to work for many different companies in various roles. Each may have triggered pension funds in different locations. Spend time tracking down pensions you have had previously. You can do this easily by clicking here.
The State Pension rate you will receive is dependent upon how much you contributed during your working career. You can check out what you will receive when you retire by clicking here. If you are below the maximum rate, you can always make voluntary contributions. This could at least bring you up to the maximum State Pension pay-out.
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
