The triple lock – a safeguard that ensures pensions don't lose value because of inflation – has raised state pension spending by around £11bn a year but the Institute for Fiscal Studies (IFS) said in a new report that is is creating an uncertain outlook for savers.
Under the triple lock, pensions rise each April by whichever is highest, whether its pay growth or inflation. However, current high inflation has seen the cost of the scheme sky rocket since 2022.
Average earnings growth data from May to July 2023 year-over-year, due to be released on Friday, is therefore likely to determine next April’s increase in UK state pensions.
“Maintaining the triple lock could increase spending by anywhere between a further £5bn and £45bn per year (in today’s terms) by 2050. This range is so large because of the uncertainty over the path of the state pension that the triple lock creates, which makes it very difficult for either the government or future pensioners to plan their finances,” the IFS said in a press release.
An IFS report, which is part of the Pensions Review in partnership with abrdn Financial Fairness Trust, also highlighted that if the triple lock had not been in place since 2011, and instead the state pension had risen in line with inflation, a full new state pension would now be worth around £180 per week, 11% less than its current value of £204 per week.
Furthermore, the IFS report said a reasonable range for the value of the state pension in 2050 is between 26% and 32% of mean full-time earnings.
However, in today’s terms, this would mean a range of £10,900 to £13,400 per year – a difference of £2,500 per year, the IFS noted.
Heidi Karjalainen, one of the authors of the report and a research economist at IFS, said: “The triple lock makes it especially hard to know how much you might receive from a state pension and how much the state pension will cost the state in the future.
“An additional real risk is that retaining the triple lock for too long increases state pension spending so significantly that it leads to insurmountable pressure for a much higher state pension age.
"This would particularly affect people with poorer health who struggle to remain in employment until they reach state pension age.”
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