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The basic state pension looks set to become less generous

One of the first things our children learn is that if you spend all your money today, you’ll have none tomorrow
One of the first things our children learn is that if you spend all your money today, you’ll have none tomorrow One of the first things our children learn is that if you spend all your money today, you’ll have none tomorrow

THE first thing our children learn about money is that if you spend it all today, you’ll have none tomorrow – unless you can find a way of getting some more.

The government understands this too and now, some alarming new figures show that this could have a significant impact on our retirement.

A few weeks ago we discussed how difficult times for the stock markets might affect our workplace pensions.

Now the situation has evolved in such a way as to threaten the other main strand of our retirement income: our state pension.

We know that for the past few months, with the shutters down, the factories closed and the nation in lockdown, the government has largely paid our wages through the furlough scheme, to help preserve millions of jobs, and companies that might otherwise have been threatened.

Well, there’s no such thing as a free crossing, and soon it will be time to pay the ferryman. In fact, the price of the ticket has already been worked out.

In this year’s March Budget, Britain originally predicted spending this financial year to be £55 billion. Now, with the cost of the furlough at £14bn a month, and with other measures to keep the economy on life support, the number boffins at the Treasury have worked out that this year’s spending bill will be over £300bn – nearly six times as much as forecast.

That money will have to come from somewhere, and one of the schemes under scrutiny is the one that preserves the value of our basic state pension: the ‘pensions triple lock’.

The pensions triple lock was introduced in 2010. It raises the value of the basic state pension by at least 2.5 per cent each year, or by the rate of inflation, or by the increase in average earnings, whichever is the greater. It ‘locks in’ the spending power of your pension, aiming to ensure that you can purchase the same amount of goods as last year.

It’s a big cost for government, though, and we remember that, in 2017, Theresa May pointed out that this handy guarantee would cost £45 billion over 15 years.

As the current Chancellor Rishi Sunak looks for ways to save a few bob off that £300bn, any scheme that’s going to cost £45bn is bound to catch his eye.

The think tank The Social Market Foundation (SMF) have suggested that he scrap the triple lock altogether, so that the costs of lockdown would be spread across all generations - but this would be a highly unpopular move.

So once again it’s Theresa May to the rescue - of the state finances at least. The SMF points to her suggestion in 2017 of ‘downgrading’ the triple lock by removing that 2.5 per cent minimum increase, but keeping the other two. In other words, a double lock system. They say that would save the government £20bn over the next five years.

Now, this year’s state pension rose by 3.9 per cent, because that was the rise in average earnings, but the fact is that, without the triple lock minimum of 2.5 per cent, there could be many unkind years.

That’s why the charity Age UK says that axing the triple lock could hit pensioners’ spending power hard, and make hundreds and thousands of pensioners worse off. Some estimate that 700,000 people could fall into poverty by 2050, if it’s scrapped.

No financial expert would be surprised if the basic state pension were to become less generous in coming years. Think of the generation of women who expected to get their state pension at 60, but the age when they could get it was upped to 65 in 2010.

In the current situation, nothing is set in stone. The costs of the virus have split the stone apart.

We are not powerless in this; we simply need the right advice. The time for advance planning, perhaps by increasing the amount you are saving into your pension, is now.

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