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.
Working out how much to increase the State Pension by next year is turning into a headache for the Government.
Under current policy, there shouldn’t really be a decision to make. The ‘Triple Lock’ introduced in 2010 was meant the take decisions about State Pension increases out of the hands of ministers by ensuring it rises automatically by the highest of three possible metrics: the rate of inflation; the rate of wage rises; or 2.5%.
As things stand, it is the increase in wages that is highest - and by some distance. Pensioners are in line to receive an expected 8% boost to their weekly payment from April 2022, because that’s the rate at which average pay is forecast to have risen by when the rate is determined for the purposes of the Triple Lock. That would take the current full State Pension (for those who retired after 2016) from £179.60 to £193.97.
If you’re thinking of your own stagnant salary in the past year and wondering how on earth average pay has risen 8% during a pandemic and resulting economic shock, you would have a point. In fact, pay packets are very unlikely to have risen by that much. The 8% figure is, most economists agree, artificially high because of a quirk in the statistics caused by the pandemic.
Last year, many jobs were either lost as the pandemic struck or saw the wage they pay reduced to the 80% level supported by the furlough scheme. That was particularly true in low-paid sectors like retail and hospitality. The removal of some low-paid jobs from the statistics meant the average wage of the jobs that remained moved automatically higher, while the end of furlough this year is likely to further boost the growth rate for earnings this year compared to last.
So the dilemma for Government is whether to honour the Triple Lock and apply the 8% rise, or try to explain the unusual circumstances and give pensioners a more modest pay rise. The stakes are high because, according to the Office for Budget Responsibility, the cost to the Treasury of an 8% rise, compared to a 4.8% rise that was previously expected, would be £3bn a year - a cost that repeats every year into the future.
Conversely, the political cost of not applying the rise would be high as well. The reason the Triple Lock was introduced in the first place was as a sop to pensioners - a powerful voting block - who had balked at previous miserly increases to their income. Even with an 8% rise, the UK State Pension is low versus other countries. At its current level, the UK State Pension is worth just 29% of the average UK wage while the average across OCED nations is 63%.
Speaking today, Chancellor Rishi Sunak suggested that the Government must balance the interests of pensioners (and all of us who would benefit from a higher State pension in the future) with those of taxpayers. That would suggest the Treasury would rather a lower rise is applied and that the Triple Lock is abandoned, at least temporarily.
The Government has until the Spending review in the Autumn to decide whether to honour its promise.
And finally, look out for Investment Director Tom Stevenson’s latest Investment Outlook report next week. I will be hosting a pre-recorded webcast with Tom which will be published with the report on Wednesday 14 July. If you have a question you would like to ask in advance you can do so here.
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. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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