Has COVID-19 put the pension triple lock at risk?
Savers are fearful about the safety of their retirement income amid reports the pensions triple lock guarantee could be ditched to help pay the costs of COVID.
Prime minister Boris Johnson is said to be locked in a bitter row with chancellor Rishi Sunak over how to cover heavy borrowing costs due to the pandemic.
There are fears that in a bid to raise new revenue – or at least keep costs down – the pensions triple lock could be suspended for a year or two. This is just one of a number of suggestions rumoured to be up for discussion, along with a host of tweaks to pension taxation.
What is the ‘triple lock?’
The triple lock ensures the state pension will increase in line with either the rate of inflation, wages, or 2.5% – whichever is highest.
As this is a key manifesto pledge, the prime minister would face a massive backlash if he dared renege on it.
Why is this pledge at risk?
Strong growth in earnings and spiralling inflation has prompted concerns that remaining wedded to the guarantee will be problematic – and could leave the Treasury with an additional pension bill of £4bn.
Steven Cameron, pensions director at Aegon, said: “There is some debate about the future of the triple lock given the government’s focus on balancing the books. The possibility of a strong rebound in earnings as the economy recovers from the pandemic – and also higher inflation – mean that pensioners could be in line to receive a bumper increase next year.”
This would happen just at a time when many employees may be simply catching up on lost earnings.
Cameron adds: “The government could find itself with the difficult decision of whether to stick to the triple lock and grant state pensioners a particularly large increase in April 2022 – or break its manifesto commitment.”
What will this mean for retirees' incomes?
While the prime minister’s spokesman has insisted the government is “fully committed” to the triple lock, pensioners have been left wondering whether or not their retirement income is safe.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The triple lock is the bedrock of people’s retirements, so any questions over its future are bound to raise the alarm.”
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This is a view shared by Becky O’Connor, head of pensions and savings at Interactive Investor, who said: “The idea of the triple lock was always to ensure that pension incomes kept pace with everybody else’s, and continued to offer them the same standard of living from that income. This is a really important benefit for millions of people, and any changes to it could have far-reaching consequences not just for today’s pensioners, but for future generations as they grow older.”
Steps you can take to protect your income
Savers are being urged to take action now to lessen any potential financial hit.
O’Connor said: “If you are surviving on a low income in retirement it’s important to make sure you are taking advantage of benefits such as pension tax credit and marriage allowance. Budgeting wisely is critical for those on low fixed incomes – keep a money planner so you can see any larger expenses coming well in advance.
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“Ensure you are on the cheapest deals for your biggest outgoings, such as energy bills and food. And make sure you take advantage of freebies such as free eye tests, free bus travel, the winter fuel allowance, cold weather payments and money off your council tax if you live alone.”
Government may find another way around the triple lock
Pension experts are keen to point out that the government is adamant it will not alter the terms of the triple lock.
O’Connor said: “It would be difficult for the Treasury to do so, from a legal perspective. It would also be very unpopular to make the state pension less generous with a key cohort of older voters.
“What seems more likely is that in a year where there is an anomaly in the figures used to determine the state pension rise, an average of previous years’ data could be taken instead. This would have the effect of smoothing out any weirdly high numbers, such as wage growth following the pandemic.”
Other options being considered to get public finances back on track
For now, at least, the triple lock seems relatively safe, with reports the government is looking at other measures to generate revenue. But what are those measures?
One idea involves reducing the pensions lifetime allowance from its current level at £1,073,100 to £900,00 or even just £800,000. This allowance is the amount savers can accrue in their pension pot before facing charges.
A second idea involves equalising the rate of tax relief on pensions – this would involve higher-rate relief being reduced.
A third idea involves bumping up taxation on employer contributions.
Fears these measures could discourage people from saving
While such proposals have the potential to raise billions of pounds for the Treasury, pension experts are worried about the potential impact.
Liz Alley, director of financial planning at wealth manager Brewin Dolphin, said: “Reducing the lifetime allowance would be terrible news for those in their 40s and 50s who’ve been diligently saving every month into their pension to provide for themselves and their families in later life. If you reduce the amount people can save without incurring tax penalties, you will discourage pension saving. This might ultimately mean more people falling back on the state for help in their later years, once their pension has been exhausted.”
O’Connor added: “We need more – not fewer – incentives to invest for retirement. Tax relief and employer contributions are two benefits that make pensions the best way for most of us to put money aside for the future. If the government chops away at them, workers face poorer outcomes in retirement. This could translate into more pressure on public services from a less financially secure older population in years to come.”
Any changes to pension tax reliefs are expected to be announced in the autumn budget.