OUR state pensions are, once again, under fire from a government intent on cutting costs.
Under present government policy, the state pension might have to be increased by over 10 per cent next April. How likely is it that they’ll allow that, at a time when they have a £40 billion hole in the public finances to fill?
And so the writing would seem to be on the wall for the most important pension protection we have left: the pensions triple lock.
Former Chancellor Rishi Sunak is back – this time in No 10 – and will be taking his pruning shears to many parts of the public finances - and the triple lock is an easy target.
If Sunak does cast a cold eye on the state pension and the triple lock, it will hit those who depend on it as a main, perhaps their only source of retirement income.
Sunak claims to understand the financial predicament facing the people of Britain. However, he is a former hedge fund manager and he and his wife, Indian tech heiress Akshata Murty, are worth £730 million between them. Is it possible they may struggle to relate to those who have to ‘heat or eat’ this winter?
The triple lock was introduced by the Conservative/Lib Dem coalition government in 2010 to protect our state pensions against inflation. Each year the pension is supposed to increase in line with whichever of the following three things is highest: inflation, the average wage increase, or 2.5 per cent.
Theresa May and her Chancellor Philip Hammond warned of the potentially huge cost of the triple lock, saying in 2017 that it would cost £45 billion over the following 15 years.
In his introductory address last week, Rishi Sunak said ‘the aftermath of Covid still lingers’. Perhaps he meant that this year, as wages recover to pre-furlough levels, the wages link has been suspended as it would have meant an increase in the state pension of 8 per cent.
As we said, now the problems for the government will continue, this time due to the link to inflation: this would be a costly luxury next April, as it currently stands at 10.1 per cent. Recent events have focussed the government’s attention on the inflation link: in 2020/21 the triple lock cost the government £5.6 billion more than if a rise in the state pension had only been linked to average earnings.
The government also has to consider that it will be paying our state pensions for longer than ever before: the current retirement age is now 66 (and this will gradually increase from 2026) while the average life expectancy is now 81.65 years, giving us each at least 15 years drawing the state pension. And this is only the average life expectancy; many of us will live for much longer. Consequently the turning point for the state pension is expected in 2025-26, when outgoings are expected to exceed incoming National Insurance contributions for the first time.
Could it be worth thinking ahead now, perhaps setting up a personal pension to complement your other pension income, or consider stepping up your contributions to your workplace pension, if you have one?
The current minimum contribution to a workplace pension is 8 per cent of your income, including your employer’s contributions. However, experts such as the Association of British Insurers and Scottish Widows are urging us to pay in at least 12 per cent, to secure a comfortable lifestyle in retirement.
And if you’re self-employed or under 22, there’s an even more chill wind blowing from Downing Street: you currently do not automatically have a workplace pension at all.
If you’re not ‘rich like Rishi’, is now the time to secure your future, to make a financial plan starting with a short conversation with a financial adviser?
:: 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
