June 29th 2023 – GOBankingRates – View the article here.
The state pension increased by a record 10.1 percent earlier this year thanks to the triple lock.
Prime Minister Rishi Sunak this week confirmed his commitment to the state pension triple lock but several experts have told Express.co.uk the policy may soon become unaffordable. The state pension currently increases each April in line with the triple lock policy, which ensures payments increase by the highest of 2.5 percent, the rise in average earnings or the rate of inflation.
High levels of inflation over the past year meant payments increased 10.1 percent this April, with the full basic state pension now at £156.20 a week and the full new state pension at £203.85 a week. Another big increase could be on the way next year, with the Bank of England predicting inflation will be at seven percent when the inflation measure for the triple lock is taken later this year, in September.
Experts have spoken to Express.co.uk about how long the policy will be sustainable and what could replace it.
Neil Rayner, head of Advice at True Potential, warns high levels of inflation could make the triple lock an “unsustainable burden” for the Government to finance.
He said: “If inflation remains higher than the Bank of England’s two percent target over the next few years then it’s not difficult to imagine a future Government scrapping it [the triple lock] completely.
“It is already placing a burden on Government finances, as the cost of providing pensions escalates rapidly.
“This becomes especially challenging when economic growth is sluggish and as we continue to see a significant increase in the number of retirees relative to the working-age population.”
In contrast, Karen Barrett, CEO of Unbiased.co.uk, said it’s very unlikely there will be changes to the triple lock with the current cost of living crisis and the General Election coming up soon.
She commented: “While the Government switched to a double lock during the pandemic due to unusually high wage growth, this is unlikely to happen in the foreseeable future.
“Millions of pensioners are struggling to make ends meet and keeping the triple lock will offer a welcome boost to their finances.”
She also warned people should take the seven percent inflation forecast with a “pinch of salt” as inflation data is currently defying expectations.
Many analysts were predicting inflation would fall again in the most recent figures, but it stayed at 8.7 percent.
Sam Dallow, co-founder of Counting King, also warned the seven percent prediction may prove to be incorrect and it could be higher than this.
He said: “Inflation rates are influenced by things like supply and demand, Government policies, and global economic trends.
“While it’s possible for inflation to be higher than predicted, it’s hard to say exactly how high it could go. There are many economic factors and policy decisions that come into play.”
What could replace the triple lock policy?
Mr Dallow said a double lock policy could be brought in, using the two measures of a certain percentage or average earnings growth.
He said: “Another possibility is a more targeted approach, where support is focused on specific groups of pensioners who may need it more, like those in lower-income brackets or facing particular challenges.”
Mr Rayner said the Government needs to make sure people are proactive in not over relying on their state pension for their retirement income.
He explained: “A cultural shift is required to get people saving. For the next generation of pensioners this means raising the contribution rate of auto-enrolment and potentially a new auto-saving scheme that would bring us more in line with the savings rates of other developed nations.”
Martin Hartley, group CCO of emagine Consulting, said the triple lock could be replaced by a “more sustainable” single lock policy, using solely the metric of inflation or average earnings growth.
He also said the Government could bring in a means-tested approach to make the system fairer.
Alastair Hazell, founder of The Calculator Site, said another option to replace the triple lock is a ‘smoothed earnings link’.
He said: “It’s essentially a policy where pensions increase in line with average earnings over several years, helping to avoid any sudden spikes or drops.
“An alternative approach could also be a ‘double lock’, where the pensions rise by either inflation or wages, whichever is higher.”