Expert Gareth Shaw offers advice on building entitlement to the state pension
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The state pension is set to increase to £185 a week despite the rumoured end to the Government’s triple lock pledge.
Introduced in 2010 by the Coalition Government, the triple lock is a method of calculating how much the state pension rises every year.
Rising pension pot amounts are determined by the highest of three options: the country’s average earnings, the rate of inflation or 2.5 percent.
This month it was confirmed that average earnings were now the highest at 8.8 percent, while inflation stands at 2.4 percent.
Due to the financial crisis resulting from the pandemic, the Government is reportedly considering scrapping the triple lock for one year in order to save money, with The Times reporting it will introduce a three percent rise.
If this change was to be implemented, a pensioner on the full state pension of £179.60 would be given an extra £5.40, which would raise their pot to £185.
Furthermore, a pensioner on the basic state pension of £137.60 would receive an increase of £4.15, resulting in a weekly payment of £141.75.
Due to the rise in wages, which have been artificially inflated following the reopening of the economy, experts have called on Chancellor Rishi Sunak to take alternative measures to address the pension issue.
State Pension: Payment to hit £185 a week despite reported end to triple lock (Image: GETTY)
According to pension experts LCP, if the Treasury were to “water down” the triple lock by introducing a lower measure of earnings growth, around £850million in state pension spending for each one percent taken off the increase would be saved.
The pension consultants recommend the Government use a measure of underlying earnings growth over the last year, getting rid of the pandemic’s impact.
Office for National Statistics (ONS) figures suggest this would reduce the forecast figures by 2.4 percent and 3.8 percent, saving the Treasury £3 billion per year.
On top of this, LCP is recommending the Government use earnings growth over a two-year period instead of one to save money.
Steven Webb, a partner at LCP, is cautious of the “political judgement” facing Mr Sunak but believes changes can be made while keeping the “spirit” of the triple lock.
“Average earnings are well above their level a year ago, partly because some furloughed workers are back on full pay and also because some lower paid jobs have been lost altogether,” he explained.
“These figures pile pressure on the Chancellor as he will want to stick to his triple lock policy but not pay a huge increase to pensioners, especially at a time when many working age benefits are about to be cut by £20 per week.
“This is ultimately a political judgment for the government, but the most likely option remains to look for a measure of earnings growth which strips out the effect of the pandemic.
State Pension: How much are you entitled to? (Image: GETTY)
“This could save the Chancellor several billion pounds a year whilst still allowing him to claim he had kept to the ‘spirit’ of the triple lock promise”.
Other experts, including Jon Greer from Quilter, have shared similar views to Mr Webb regarding the triple lock.
Specifically, Mr Greer believes the Government needs to change tact when dealing with state pensions out of “intergenerational fairness”
He said: “To give pensioners an almost double-digit boost to their incomes, purely as a result of a technicality which stemmed from millions of people in the UK reducing their hours or stopping work altogether would seem obtuse from an intergenerational fairness perspective.
“Two potential fixes have been floated: tweak the lock by moving to a two-year average figure for earnings growth or to scrap the earnings link entirely.
“Those in receipt of the state pension will be hoping for the former as it may provide a bigger boost to their income next year, but a cash-strapped Chancellor might well choose the latter.
“Using a two-year average figure will save the government £4.1billion compared with if they continued with an 8 percent increase.
“Using a 2.5 percent figure would save £5bn compared to the 8% increase. The extra £0.9bn saving may well appeal to Sunak.”
The Government’s actual planned increase to the state pension will not be confirmed until the publication of July’s earnings figures next month.