It'll soon be time to pay the ferryman
POSSIBLY the most popular measure taken during the past year of the pandemic was the furlough scheme, where many of us had 80 per cent of our wages paid by government, and some employers even chipped in the additional 20 per cent to ensure our income was not impacted by developments that were, let's face it, no fault of our own.
Sooner or later, however, there comes a time to pay the ferryman for taking you to the other side. In this case, the cost of that could substantially and negatively impact our state pension, when we eventually retire.
The problem was highlighted by the Office for National Statistics (ONS) in the past week, in its latest jobs data.
Between supporting jobs and fighting Covid, the Government has racked up total debts of £355 billion in the last financial year April 2020 – April 2021, according to the Office for Budget Responsibility (OBR). This year they'll still be paying the tail-end of those costs, and will have borrowing of ‘only' £234 billion.
These are the highest figures seen outside of wartime, and furlough and other job support schemes cost £100 billion of that. The pandemic also slashed the amount the Government collected in tax, as unemployed or furloughed workers were paying less to the taxman since lockdown began. Shoppers who weren't spending as much on fuel and food also drove down VAT revenues as well.
Lower tax incomes have driven up Government borrowing, which brings us back to our ferryman carrying us out of the pandemic – now it's recoup time.
One of the larger expenses on the Government's menu next year will be the pensions triple lock, which was introduced in 2010 as a means of protecting the spending power of our state pensions.
The triple lock increases our state pensions every year by one of three measures: either the rate of inflation, the increase in average earnings, or 2.5 per cent, whichever is the greater. It ensures that pensioner income is not eroded by inflation, and the gradual increase in the cost of living.
However, they almost immediately switched from measuring inflation by the retail price index (RPI) to the consumer price index (CPI), which is typically around 0.7 per cent lower.
The triple lock alone is predicted to add £4 billion to the current costs of the state pension, because of that little phrase ‘the increase in average earnings'.
Average earnings dropped for so many of those on furlough last year, and so as incomes become restored this year, the ONS says that will drive average weekly wages up by a relatively massive 5.6 per cent, much higher than the inflation rate, which in May moved up to the current 2.1 per cent.
There's also the fact that low-paid workers were more likely to have lost their jobs in the past year, we all know the travails of the hospitality and personal care sectors, which contributed to what the ONS calls the “compositional effects” of lockdown.
It all means that we need to be looking for ways to preserve the spending power and the value of our future pension income, and we must act now, as these things can take time.
One way could be to make additional voluntary contributions (AVCs) to our workplace pension, to compensate for any potential devaluation in our state pension. Who knows what the Chancellor Rishi Sunak will decide, bearing in mind that £4 billion increase in his state pension budget, at a time when he is under such pressure to save a few pounds.
It would not be the first time that Downing Street has had its eye on the triple lock. Of course, cutting it in some ways would be an unpopular decision, but when you've got £355 billion to pay off, well, as they say, you can't make an omelette without breaking eggs.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com