In the United Kingdom, the State Pension are protected by three measures of guarantee – known as the triple lock. The coalition Government introduced the triple lock guarantee back in 2010 to ensure that Pensions retain their value.
In this article, we'll explain what the Triple Lock is, and why it matters. Let's get started!
The triple lock scheme exists to protect the value of our pensions in the future. It guarantees that the value of a basic state pension will rise proportional to either:
These three thresholds secure an increase in State Pensions and keep them sheltered from the economic downturn.
Think of it a little bit like a skydive. If average national earnings fell and inflation rose, that would be like your first two parachutes failing to open. The third lock (the minimum threshold of 2.5%) acts as a reserve parachute, ensuring that pensions will not depreciate.
Historically, the State Pension triple lock has worked successfully and helped to reverse the relative decline in the state pension relative to earnings. The lock was particularly fruitful during the 1980s and 1990s.
The triple lock status post-pandemic is set to boost the value of state pensions in the short-term future since the pandemic has skewed growth figures in employment earnings. Employees on furlough schemes will return to back work. Therefore, statistics are likely to show an increase in employee earnings, which does not accurately represent the UK’s employment landscape. The Government has propped up employment figures during the year and a half to mitigate any economic downturn.
While Penfold’s disposition is sunny, there has been speculation about the usefulness of the triple lock state pension scheme in the future.
The main criticism is, with the UK’s state pension age slowly rising, the investment in tax from younger generations will end up being disproportionate to the finances they can claim when they retire due to any deficit in the pension bill. The national state pension age has recently passed a milestone, now standing at 66 for both men and women and, if it carries on at the rate it has been, it’ll tick over to 67 by 2028.
When millennials reach the retirement age, it wouldn’t be inconceivable for the official State Pension age to be close to 70. Speculation about a new model for the scheme, resembling more of a ‘double lock’ situation, has been underway. This would see the value of state pensions dictated similarly, in proportion to the status of prices or earnings, whichever experienced the highest growth. The only difference would be the lack of that third lock: the minimum 2.5% increase.
If any legislation changes to the State Pension are made now, anybody seeking to claim their pensions in 10-20 years will be affected. With the State Pension system continually being reviewed, it would be prudent to contribute towards a personal pension scheme as early as possible to avoid falling short financially further down the line.
You could set up a personal pension plan for as little as £1 a month to safeguard your later years and ensure that your life after work is happy and comfortable. And, if you do end up having spare funds, you can enjoy spending your investment on luxuries that you may not otherwise have been able to enjoy.