Blog » What is the State Pension triple lock, and can you afford to live without it?

What is the State Pension triple lock, and can you afford to live without it?

February 13, 2023
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

With inflation and price rises dominating the media, you would be forgiven for thinking the value of the State Pension is being continuously eroded. Of course, a rising cost of living puts pressure on this benefit, meaning many pensioners are at risk of a financial squeeze. So how does the State Pension retain its value?

The triple lock is designed to protect the pensioners’ spending power. Let’s look at this value-maintaining measure and how it helps you protect a comfortable and secure retirement.

What is the State Pension triple lock?

In 2010, the UK government introduced a measure to ensure the State Pension goes up along with price rises and income increases for the working population. This guarantee uses three metrics to measure inflation, hence the term “triple lock.”

Around 20% of pensioners rely on the State Pension as their main source of income. For these people, the triple lock is crucial so they can maintain a reasonable lifestyle.

So, how does it work?

The Department of Work and Pensions assess the State Pension annually to ensure it is protected against inflation. They use the highest of three metrics to reach a figure in this assessment:

Consumer Price Index (CPI)

CPI is one of the methods the government uses to measure price rises. State Pension annual increases and adjustments to many other items are linked to CPI.

Average earnings

The Office for National Statistics (ONS) produces average weekly earning figures for UK workers. The government uses this data to assess how pensions should rise at a similar pace to the working population’s average income.

Minimum 2.5%

This percentage guarantees the State Pension rises by at least a minimum amount. It would have provided a real-term rise for most of the years since the triple lock was introduced. However, CPI has increased sharply in the past 24 months, so using it would result in pensioners receiving an income cut.

Although the triple lock’s original concept was to use the highest of these three indicators as the basis for State Pension increases, that has not always been the case. In 2022, the triple lock was suspended due to irregular spikes in average earnings.

The suspension took place because the government considered such rises in the pension to be unaffordable. Instead, the increase would be based on CPI or the minimum 2.5% – effectively a “double lock.” In this particular instance, the rise was in line with the CPI rate, meaning most pensioners could maintain the lives they had, but might have had to go without some of the nicer things in life.

Impact of the State Pension triple lock

Unarguably, the triple lock provides considerable benefits for many pensioners. Indeed, for some, it is crucial to ensure they can cope with increasing financial pressures. Also, much of the money allocated to pension increases gets spent locally, stimulating the economy.

However, critics of the pension-protecting measure, including the International Monetary Fund (IMF), consider it to be too expensive and ultimately doomed to failure. They cite the triple-lock suspension following the COVID-19 pandemic as being an example of why a future government may need to reassess the triple lock’s long-term affordability.

What is the State Pension triple lock?

Undoubtedly, the cost of providing the State Pension has risen considerably since the triple lock’s introduction. In 2010, annual pension spending was £69.835 billion. By 2022, this figure had soared by almost 50% to £104.521 billion.

In the same period, average wages in the UK have advanced by around 27.5%, while the CPI has had an accumulative increase of around 36%.

Mature lady researching on laptop | State Pension triple lock

Although the triple lock may have been sustainable during the relatively stable inflation period between 2010 to 2021, it may be less so during periods of economic uncertainty. Therefore, you might find you do not have the luxury of your State Pension receiving such three-pronged protection. It could either change completely, or experience similar suspensions as witnessed in 2022. Is this the same case elsewhere? Let’s look at the state pensions of some of our neighbours and economic partners.

How does the triple lock compare to other countries?

The triple lock was introduced by the coalition government in 2010, in recognition of the State Pension’s dwindling value. As such, it is unique to the United Kingdom. You might be thinking UK pensioners are in a privileged position to have such a guarantee, and that is correct to a certain extent. However, when compared to many other countries, the UK’s State Pension falls short.

A comparison of 2021 pension rates showed the UK lagging behind many EU countries. That year, the maximum State Pension rose by the minimum guaranteed by the triple lock (2.5%) to £179.60. You can see how far short this comes up compared to the following nations:

  • Denmark – £398.87
  • Netherlands – £260.84
  • Ireland – £214

Indeed, according to the Organisation for Economic Co-operation and Development (OECD) data, the UK is only one position short of having the least generous pension of all thirty-five OECD countries. Given these figures, the triple lock may not seem as such an extravagant measure.

What now?

Although it has been reinitiated for 2023, you cannot be sure that the triple lock will be around permanently. Consequently, it has never been more crucial to plan for the future than it is today.

An excellent way to assess your current financial situation and get a clear picture of the future is to speak with a regulated financial advisor. Not only will they help you get value for money and assist you in making the right decisions, they can help put you on a track towards financial security and independence.

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