I am in my 30s and each year I’ve seen the triple lock policy means that the state pension goes up by quite large amount – often by more than my salary. I’m not against the state pension going up, but I wonder if I will ever see the benefit that those in their 60s and 70s are seeing now. How long will this policy be guaranteed for? And is the system likely to be hugely different by the time I retire in three decades’ time?

Shane, Derby

Tom Selby, AJ Bell Head of Retirement Policy, says:

Let’s start with how the state pension works and what the triple-lock is before getting our crystal ball out.

Anyone who reaches state pension age from 6 April 2016 onwards builds up an entitlement to the ‘new’ state pension. You need a 35-year National Insurance (NI) contribution record to qualify for the full new state pension, and at least a 10-year NI record to qualify for some.

For every year below 35 years’ NI contributions you have built up, a deduction will be made to the benefit you receive from state pension age. In most cases you will build up years of NI naturally through your career, but it is also possible to claim NI credits  in certain circumstances, such as if you take a career break to care for your child or an elderly relative.

The UK state pension age is currently 66. It is scheduled to rise to age 67 between 2026 and 2028, and again to age 68 between 2044 and 2046.

The full new state pension is worth £203.85 per week (£10,600.20 per year) in 2023/24. The ‘old’ state pension, paid to those who reached state pension age before 6 April 2016, is worth £156.20 per week (£8,122.40 per year).

The old state pension amount is lower than the new state pension because under the old system, people could also build up entitlement to additional state pension, usually referred to as ‘SERPS’ or ‘S2P’. Depending on your circumstances, this could have entitled you to a much higher state pension than the basic amount.

THE STATE PENSION TRIPLE-LOCK

The ‘triple-lock’ is a political pledge to increase the old and the new state pension by the highest of average earnings growth, consumer prices index (CPI) inflation or 2.5%.

Any additional state pension entitlements built up under the old state pension system usually increase in line with CPI only. Other benefits, such as pension credit, also tend to rise in line with CPI.

Since the triple-lock was first introduced over a decade ago, the earnings growth figure used in the calculation has been the three months to July in the prior year, while the inflation peg has been determined by CPI in September in the prior year.

If this approach is followed for next year’s increase, the old and new state pension will increase by 8.5%, in line with average earnings growth in July.

This year, the state pension rose by 10.1%, in line with CPI in September 2022 and well in excess of average earnings growth.

We only know at the moment that the current Government is committed to the triple-lock for the rest of this Parliament. We will need to see each party’s manifesto to get a better idea of whether that commitment is likely to continue into the next Parliament.

WHAT COULD IT LOOK LIKE IN THE FUTURE?

It is impossible to predict what the state pension will look like in the future – and the triple-lock only adds to the uncertainty. There is a danger the costs of the triple-lock will eventually be recouped by faster rises in the state pension age, which would create tensions about the intergenerational fairness of the system.

Part of the problem is the triple-lock is a policy without a stated aim, randomly ratcheting up the real value of the state pension in relation to earnings when inflation is high, inflation when earnings are high, and both when earnings and inflation are below 2.5%.

Its existence is essentially the Government admitting the state pension is too stingy, but without ever saying what it should actually be worth. What is absolutely certain is that, at some point, the triple-lock will have to be scrapped, otherwise the state pension will eventually be worth more than average earnings.

TIME TO REVIEW THE SYSTEM

The uncertainty you describe is one of the reasons I believe an independent commission will be needed to review the UK state pension. This review will need to consider a variety of factors, including life expectancy and wealth in different regions of the country, to determine what the state pension should be worth and for how long in retirement people should receive it.

But without that certainty, it is hard for young people in particular to plan their retirement. I still believe the state pension will exist when you reach retirement – but I cannot say that for certain. What’s more, I cannot confidently tell you how much you will receive if the state pension still exists or when you will receive it.

This is another reason why taking responsibility for your own retirement is crucial. That means saving as much as you can in tax-efficient vehicles like pensions today, taking advantage of matched employer contributions (where available), tax relief and tax-free investment growth over the long term.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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