What the scrapping of the Triple Lock means for your retirement
The ‘triple lock’ means that the state pension has risen by whichever is the highest of inflation, earnings growth, or two and a half per cent in a year. But if it had risen in line with wages, which have risen hugely after the pandemic, it would have gone up by eight per cent this year. As it is it will rise by a more modest 3.1 per cent, in line with inflation.
Although Pensions Minister Guy Opperman stressed that the scrapping of the double lock was ‘temporary’, it illustrates the fragility of the incomes of those relying on the state pension. A policy that seems like a certainty could change at any time, leaving you vulnerable at retirement, and with inflation now running at 4.2 per cent, those relying on this government payment will feel poorer in the coming months.
How the state pension works
At present, the full state pension is £179.60 a week, although you only get this amount if you have paid enough national insurance over time. You can check on this and buy extra national insurance ‘credits’ to ensure you receive your full state pension if not, at https://www.gov.uk/check-state-pension.
For those who are carers, or staying at home to look after children, there are some other ways to ensure you continue to accrue credits. See https://www.gov.uk/national-insurance-credits for more details.
But even if you receive the entire amount, £179.60 a week is under £10,000 a year. Most people will require more than this to live on even now, and if the state pension does not rise in line with the higher of inflation, wages or 2.5 per cent going forward, this problem could be exacerbated.
How much extra do you need?
A survey carried out by consumer advice service Which? in February 2021, found that a two-person household needs £26,000 to retire comfortably1. It defined ‘comfortably’ as including short-haul holidays, some recreation and leisure, and said that couples would need a pension pot of £155,000 each on top of their state pension to provide this if they use pension drawdown.
For those who are single, the figure is higher, Which? says. A single-person household will need £19,000 a year to retire comfortably, which means a pot of £192.290 alongside the state pension.
For a third, ‘luxury’ level of retirement, which Which? defines as having extended or long-haul holidays, health club memberships, expensive meals out, and a new car every five years, a couple would require around £442,000 in a drawdown plan.
How inflation might affect this
Which? figures, however, rely on inflation being at one per cent, rather than the Bank of England target of two per cent, which means that you could end up needing considerably more than this, particularly if the state pension does not increase with inflation due to uncertainties around the Triple Lock.
To illustrate this, if inflation increased at two per cent a year over the next 20 years, you would need over £38,000 of income a year to buy the same lifestyle as can be bought with £26,000 today2.
The good news is, that if you invest in a private pension, your retirement savings are likely to keep pace with inflation. Even once you begin to take money out of your pension you will be able to leave the remainder invested, ensuring it has time to grow.
Ensuring you take the right level of risk with your pension investments is important, which is where expert financial advice comes in. With the future for the state pension uncertain, it is more important than ever that everyone thinks carefully about their retirement plans.