What is the triple lock on state pensions and why does it matter?

Could the value of your state pension rise by more than inflation?

Since its introduction in 2010, the triple lock rule has played a crucial role in determining the value of the state pension each year. In its 2019 manifesto, the Conservative Government pledged to keep the triple lock in place for the duration of this Parliament, but could heightened inflation and wage growth force them to abandon this promise?

Below, we explain how the triple lock works, and why it will affect pensioners across the country.

The triple lock is a way of determining how much the state pension should increase each tax year. Essentially, the basic state pension will rise each year by the highest of these three variables:

• Year-on-year inflation figures recorded in September, based on the Consumer Prices Index. This is yet to be recorded  
• The average increase in wages across the UK. This is determined by comparing the average wage growth between May and July to the same three months the previous year. According to the Office for National Statistics (ONS), this stands at 8.5%  
• Or 2.5%. This acts as a safety net, ensuring that pensioners will never see a negative growth in their state pension.

Last tax year the Government kept the triple lock in place. It meant that the state pension rose by 10.1%, the UK’s rate of inflation in September.

This bumped up the full new state pension by nearly £19 a week and the full basic pension by over £14 a week.

If you’re unsure which pension you’re eligible for, make sure to read this article by our preferred financial advisers, Kellands Hale.

According to the Institute for Fiscal Studies (IFS), a research institute, if the state pension were to rise by the average earnings growth of 8.5% it would cost the Government an additional £2 billion.

For context, figures from the Treasury suggest that the UK Government expects to spend £124.3 billion on state pensions for this year. 

“These increasing public finance pressures caused by the triple lock, especially in periods of macroeconomic volatility as we have experienced in recent years, risk the sustainability of the state pension system,” said Jonathan Cribb, Associate Director at the IFS.

Some critics believe that keeping the triple lock is fiscally irresponsible, with further projections from the IFS suggesting that it could cost the Government between £5 billion and £45 billion in additional spending each year by 2050.

“For savers, this lack of certainty about future increases makes it difficult to plan their own retirement saving,” said Tom Selby, Head of Retirement Policy at AJ Bell, an investment platform.

Whether the Government scraps the triple lock remains to be seen. Last year, the state pension increase was announced during the Autumn budget in November.

This year’s Autumn budget will take place on Wednesday 22 November.