What the UK state pension triple lock means for your retirement planning

retirement pension

The more one learns about investing for retirement, the more questions one seems to have.

One issue which has vexed Britons for ages, and which gained new potency during the snap general election campaign earlier this spring, is the U.K. state pension ‘triple lock.’

Here’s what you need to know about the triple lock’s status — and what it could mean for your retirement planning.

The triple lock in brief

The triple lock is known as such because it relies upon three metrics to ensure adequate annual increase to the basic state pension: the prevailing inflation rate, the prevailing rate of worker earnings increases, or 2.5pc.

Critically, the rate of increase is fixed to the highest of those three metrics at any given time. In the current low-growth environment, wherein inflation and wage increases are anaemic, the 2.5pc figure serves as an important support for pensioners whose purchasing power is under threat.

The triple lock was proposed in legislation in 2010 and instated in 2011. According to the Institute for Fiscal Studies, pensioners’ incomes have grown at about twice the rate of workers’ wages. Pensioners who came of age after 6 April 2016 earn £159.55 per week under the scheme. Older pensioners earn about £122 per week.

The triple lock is unpopular with fiscal conservatives, however. In the most recent fiscal year, it cost the U.K. government £6 billion. It will account for a sharp rise in the pension scheme’s share of GDP — to nearly 7pc after 2065.

During the general election campaign, Conservatives pledged to scrap the triple lock by 2020 and move to a simple, lower-cost ‘double lock’ scheme that removed the 2.5pc floor. In the current macroeconomic environment, this move would significantly lower the scheme’s rate of increase.

The triple lock after the snap election

Before the snap general election, the Telegraph asked a simple question: ‘what would happen to your state pension if the “triple lock” was scrapped?’

Now that the election results are in and the Conservatives remain in power, albeit by a diminished margin, we’re set to find out.

The Telegraph reports that the removal of the triple lock would shave approximately 1.2pc of the pension scheme’s GDP share by 2066, stabilising the government’s fiscal position.

Pensioners would bear the brunt, of course: the triple lock added approximately £106 per year to pensioners’ earnings since 2010, and would likely account for similar increases going forward. If you’re nearing pension eligibility age, that’s real money you’d be missing.

Future uncertainty? What might happen to the U.K. state pension scheme moving forward

The recent election by no means settled this matter. Labour’s unabashedly pro-triple lock platform very nearly won control of Parliament. Should Labour overtake the Conservatives in the next election, it’s quite likely that the party will move to reinstate — and possibly retrench — the triple lock, negating the current 2020 phase-out. They’ve publicly pledged to maintain the triple lock through 2025, possibly offset by a rise in the pension eligibility age.

However, as recent history shows, nothing is uncertain in politics but uncertainty itself. Much can and likely will change between now and the next election. It’s down to pensioners — and younger members of the voting public, all of whom after all have an indirect stake in the stability and fairness of the U.K.’s pension scheme — to remain informed on the matter.

Further reading

Curious to know more about what the state pension triple lock’s status might mean for your retirement planning? The BBC has a short video primer on the subject, produced in the run-up to the snap general election this spring. The Financial Times provides helpful political context here as well.