Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
OFFICIAL numbers published this week could have a very big impact on the future incomes of pensioners.
In amongst a slew of labour market data on Tuesday was a figure for wage growth showing that regular pay, including bonuses was 8.5% higher in the period between May and July than in the same period a year ago1. A comparable figure is published every month but September’s reading has extra significance.
That’s because the September number is used to work out State Pension rises under the ‘triple lock’ - the government’s promise to raise the full State Pension each year by the highest of either inflation, wages or 2.5%. This year it’s the wages figure which is expected to be the highest meaning that - unless the government decides otherwise - the state pension will rise by 8.5%, taking the weekly Full State Pension to £221.18 from next April.
Note that the triple lock does not apply to all the elements of the State Pension. Those receiving the old Basic State Pension plus other top-ups will only see the Basic State Pension element rise with the triple lock.
A ratcheting effect
If the State Pension rises as planned, it means pensioners will see their payment jump from just £185.15 in 2022/23 to £221.18 in 2024/25 - a rise of more than 19% in two years. That’s because it has benefitted from a very high inflation figure last September, and a very high wages figure this September.
The rise would look even more dramatic if the government had not suspended the triple lock in the year after the pandemic, when the unwinding of the furlough scheme led to an artificially high wage rise figure.
Nonetheless, the triple lock has had a ratcheting effect on the State Pension, with the highest possible rise being applied each year and subsequent rises applying from an already high point.
You can see the effect in this chart, originally produced by the Financial Times based on official data. It shows the rise in the State Pension and each of the elements that make up the triple lock since its inception in 2011.
Source: Financial Times - DWP, ONS. 2024-25 estimated; financial years2
You can see the State Pension is beginning to rise much more quickly than any of the individual measures - and the difference will widen exponentially over time.
An increasing cost
The cost of paying a higher State Pension needs to be met by the government but it’s not only the rising value of the State Pension adding to the bill. Our ageing population means that the cost of the State Pension will rise even more quickly in the future, as a higher proportion of the population reaches retirement age.
The chart below shows the cost of overall pensioner benefits to the government, using forecasts to project the cost up to 2027. This includes the Winter Fuel Allowance and Pensioner Housing Benefit but the vast majority of the cost is taken up by the State Pension.
Source: OBR3
The escalating cost of the State Pension is causing some to question whether the triple lock is sustainable in the long term.
The Office for Budget Responsibility has forecast that pensioner spending could rise from 5.4% of GDP today to around 8% by 2072/73 - and potentially even more if the economy continues to suffer weaker and more volatile growth.4
The government has been cutting costs elsewhere in the system. The state pension age has been rising, delaying the point at which future generations will be able to claim theirs. The government has announced that the State Pension age will increase from 66 to 67 in stages between April 2026 and April 2028. Then from 67 to 68 between April 2044 and April 2046.5
Further, or more rapid, rises cannot be ruled out but would be hard to justify because improvement in life expectancy seem to have stalled.
Reforming the triple lock is another potential cost-saving measure - but so far neither the government or the opposition Labour party have been willing to commit to either keeping or reforming it.
This week, Prime Minister, Rishi Sunak, said, “We’re not going to speculate on the election manifesto now. I’ve got plenty to get on with between now and then. But the triple lock is the government’s policy and has been for a long time. I’m not going to get into our manifesto now, but the triple lock has been a long-standing policy for us.”
Angela Rayner, Shadow Secretary of State for Levelling Up, Housing and Communities, wouldn’t commit to keeping the triple lock when asked, following the latest wage figures. She said that: “What Labour have said is we’ll look at that in the run-up to a general election but we will not make unfunded spending commitments.”
Planning for a State Pension squeeze
With the State Pension likely to come under increasing pressure, there is even more onus on individuals to fund their own retirement. Money paid into a pension normally benefits from tax-relief, while employees with access to company schemes can usually benefit from employer contribution made on their behalf.
Ensure you make maximum use of any help on offer to improve your retirement prospects.
And while you may not be able to control the future rises in the State Pension, you can make sure you have a full contribution history to ensure you get the maximum available - whatever that turns out to be.
Your entitlement to the State Pension is based on your National Insurance (NI) contributions. To get the full State Pension you need to have made NI contributions for 35 complete years by the time you retire.
Those working as employees are likely to have NI taken automatically from their pay, while self-employed people with earnings above a certain level will pay their contributions via self-assessment.
The government has an online service that lets you check on your NI record for any gaps and to see whether you’ll get the full amount.
Sources:
1 Office for National Statistics, 12.09.2023
2 Financial Times, 7.09.2023
3 Office for Budget Responsibility, 12.09.2023
4 GOV.UK, 30.03.2023
5 Office for Budget Responsibility, July, 2023
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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