September inflation has been confirmed as 3.5%, meaning the state pension will rise 3.9% next April under the triple lock.1
From April 2030 the triple lock will be reformed, changing how future state pension increases are calculated.
HL calculations show how a difference of just 0.5 percentage points in annual state pension increases could leave someone aged 40 today with around £144,000 less over an 18-year retirement.2
But boosting pension contributions by £120 a month could help bridge the gap, with tax relief reducing the cost to £96 per month for basic-rate taxpayers or £72 for higher rate taxpayers.
The final piece in the triple lock puzzle has clicked into place. Pensioners are in line for a 3.9% boost to their state pension from April, after today’s inflation figure (3.5%) was outstripped by average earnings. This would put someone on the full new state pension on course to receive £250.70 per week from next April – up from the current £241.30 per week. Someone on a full basic state pension would receive £192.10 per week – up from £184.90.
However, change is coming. From April 2030, the triple lock will be reformed, with future increases based on the highest of inflation or 2.5%, alongside a mechanism to maintain the state pension’s link to earnings growth.
This means the state pension will continue to rise, but potentially not as quickly as under the current system. Many people may be concerned about how to fill any gap, but planning ahead can make a real difference, with tax relief playing a valuable role.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said:
“We don't know exactly how much the triple lock reforms will affect future state pension incomes, but for those concerned how the latest changes may impact your retirement income it pays to be organised and plan ahead. Even relatively small increases in your pension contributions now could make a big difference to your retirement income in the long run and cover any shortfall.
“To illustrate what this could mean, HL has modelled a scenario where the reformed system delivers annual increases of 3% per year, compared to a 3.5% increase under the current system. Under these assumptions, someone aged 40 today could be faced with a shortfall of around £144,000 over an 18-year retirement. That’s an average shortfall of almost £7,600 on average per year.
"That might sound like an enormous amount to make up, but our calculations show that it could be more manageable than you think. If you 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. We estimate that a 40-year-old could build that additional pot by contributing around £120 extra per month to their pension until they reach state pension age.
“If that seems a bit steep, then remember tax relief plays an important role. A £120 contribution would cost a basic-rate taxpayer £96 a month, while a higher-rate taxpayer could pay as little as £72 per month. If you’re in a workplace pension, you’ll also get the benefit of an employer contribution which would bring down the cost even further.
“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 increased. If you want to maintain the lifestyle you enjoyed while working, 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. If your employer will increase their contribution if you increase yours, then that can also really pay off long-term.”
Notes to Editors
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