HAVE you heard of ‘earnings bounceback’?
It’s the brand new financial buzzword, but not in a good way - it strikes terror into the heart of the most battle-hardened government economist.
Now, economists are not known for waxing lyrical, so when they go to the bother of coming up with a natty new term, we should pay attention. We should know there’s ‘weevils in the ship’s biscuits’. Something is very, very wrong.
Earnings bounceback has already got Chancellor of the Exchequer Rishi Sunak out in a cold sweat. This week he said it could mean that planned increases in the state pension would be unachievable within two years.
Here’s why. If you have enough sense to read this column regularly, you will know that the spending power of the state pension is protected by the ‘triple lock’.
This guarantees a rise in its value every year by either the rate of inflation, the growth in the average wage, or 2.5 per cent – whichever is the greater. It’s a brilliant guarantee that helps protect the tenner in your pocket against price increases and the rising cost of living.
Like all brilliant guarantees, it’s an expensive luxury. Remember Theresa May nearly had a fit in 2017, when the Treasury told her the lock would cost £45 billion over 15 years? It even stopped her dancing, for a while.
Since then, and despite manifesto promises, the Tories have taken their pruning shears and they’ve been circling the triple lock, looking from every angle for ways to clip it back.
Now the lockdown crisis has thrown another spanner in the works – or given them the excuse they need, whatever way you want to look at it. That spanner is this very prospect of ‘earnings bounceback’. Here’s how it works.
Many of us have been on 80 per cent of our normal wage under the Coronavirus Job Retention Scheme. With our earnings down, and inflation at only 0.6 per cent, next April’s state pension increase is likely to be the default 2.5 per cent.
That’s manageable enough, I hear you say. And you’re dead right.
It’s the following year, 2022, that’s got the Chancellor all in a tizzy. The increase for 2022 will be based on the figures for the months now coming up, where we all move back on to full pay.
When you think about it, the return to full pay will see many people’s wages rising by 25 per cent. (If you’re on 80 per cent now and you’re going back to 100 per cent, you’re adding a quarter to today’s income, geddit?)
Under the rules of the triple lock, that would theoretically trigger an increase of a quarter in the state pension in April 2022 – a state pension that was already costing £100 billion two years ago.
Rishi has rightly called this an ‘anomaly’, an unexpected situation that has never been seen before.
The air is blue in Westminster with speculation as to what could happen next. Some experts believe that, rather than scrapping the triple lock completely, they might modify or suspend it for a few years, to avoid any large jumps in the state pension.
Mind you, income tax was just supposed to be for a few years too, when it was brought in as a temporary measure. That was in 1799, to fund the Napoleonic Wars.
On the other hand, our boy Rishi will want to keep the pensioners sweet, since the vast majority of them vote Conservative.
Pension watchers have noted that in the past decade, the only certainty is uncertainty. This makes it very hard for us to predict what retirement will be like, in 20 or 30 years’ time.
One thing that is certain, though, is that we can’t leave our retirement to chance, or at the mercy of government promises.
As the Chinese proverb goes: “When there’s a lot of bull in the ring, you need to take the bull by the horns.”
In this case, that means asking for advice on how to secure a better pension income - and a better retirement – today.
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com
