Instead, the state pension will increase by whichever is higher: Consumer Price Index (CPI) inflation OR 2.5%. However, a link to earnings will be retained to make sure the state pension keeps up with wage growth long term. This means the state pension will continue to grow, just not quite as fast as it did.
It’s worth saying these changes aren’t due to happen until 2030, so the triple lock remains in place until then. The recent publication of September’s inflation data is the final part of the triple lock puzzle, and it looks likely that from next April state pensioners will get a 3.9% increase in what they receive. This is in line with average earnings. This increase should be confirmed in the Budget.
This article is for information only and not personal financial advice. ISA, pension and tax rules can change, and benefits depend on circumstances. Investments can go up and down in value so you could get back less than you invest. If you’re not sure what’s right for you, a financial adviser can help.
How much could future changes cost?
For those worried about the shift causing a gap in their retirement planning over time, the earlier you can prepare the better. Taking steps to boost your pension contributions when you can afford it can help you bridge the gap, with tax relief playing a big role. You could increase contributions either to your workplace pension or to a self-invested personal pension (SIPP) which will give you greater investment choice.
HL calculations show that if the new approach increased the state pension by 3% per year compared to a 3.5% increase under the current system, then a 40-year-old today would be faced with a shortfall of around £144,000 - just under £7,600 on average per year - if they drew the state pension between the ages of 68 and 86.
If they wanted to secure that level of guaranteed income through an annuity, the latest data from the HL annuity portal shows this could be done with a pension pot of around £88,000. To achieve that amount we estimate that a 40-year-old would need to contribute around £120 extra per month to their pension until they reach state pension age.
These figures are examples only and are not personal recommendations. Actual outcomes will depend on factors including investment returns, charges, inflation and individual circumstances. Remember that annuity rates can go up and down and can also be added and withdrawn at any time. And pension savings are generally inaccessible until age 55 (rising to 57 in 2028).
Small steps can help close the gap
If that feels like a lot, then remember tax relief plays an important role. That £120 contribution would cost a basic rate taxpayer £96. For a higher rate taxpayer, the cost would work out at £72 per month.
The state pension is, and will remain, a firm foundation on which to build your retirement income. However, the reality is it is only going to cover the basics no matter how it is uprated. If you want to maintain the lifestyle you enjoyed while working, then it’s important to make the most of your pension.
Taking small steps such as boosting contributions whenever you get a pay rise or promotion can be really useful. Another thing to look out for is if your employer is willing to increase their contribution if you increase yours. This is known as an employer match and can materially increase how much goes into your pension and bring you much closer to your retirement goals.
For impartial guidance, you could also consider Pension Wise, a free government service for people aged 50 or over with a UK personal or workplace pension.
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