UK government not expected to suspend pensions triple lock policy
- UK Prime Minister Boris Johnson faces criticism over pensions triple lock, which could see some UK pensioners receive a 6% rise in payments during April 2022
- UK Chancellor Rishi Sunak not expected to suspend pensions triple lock despite the high costs to UK taxpayers, which could be over GBP 4 billion
- Triple lock calculations have been elevated due to COVID-19 and rapid inflation growth
- UK Government could also make amendments to lifetime allowance and tax relief
- The UK Chancellor and Prime Minister are reportedly in disagreement over other UK government spending proposals
UK Prime Minister Boris Johnson is facing political backlash over the pensions triple lock policy, as the effects of COVID-19 mean that pension payments could rise by 6% in April 2022. The elevated calculations have led many to question whether the UK government will suspend the pensions triple lock policy, given that it could become a high cost to the UK taxpayer.
This week, a spokesperson for the UK Prime Minister stated that Boris Johnson was fully committed to the pensions triple lock policy and will honour the Tory Manifesto pledge. There have, however, been conflicting reports stating that the Treasury will raid pensions to cover UK government spending during the coronavirus pandemic.
Recent data confirms that average UK earnings increased by 5.6% during February/March 2021 compared to the same period in 2020, whilst inflation reached 2.1% in May 2021. The unusually high figure comes down to many Britons being placed on furlough during Q1 of 2020, receiving 80% of their usual pay. Economists have forecast that UK earnings could rise to around 8% by July 2021.
What is the pensions triple lock policy?
The state pension is a lifeline for millions of Britons and acts as a primary source of income during retirement.
The pensions triple lock policy has been in force in the UK since April 2011 and ensures that UK pensioners receive an increase in their pension payments each year. Whilst UK pensioners benefit from the policy, many are concerned that next year’s growth will further impact the UK’s deficit.
UK state pension rules mean that each April will see an increase in pension payments based on what is highest out of these three elements:
Determined by the Consumer Price Index (CPI) in the year to the previous September.
Growth in average weekly earnings in the year to the May-July period the previous year.
Applied if this figure is higher than both inflation or earnings.
The policy was first introduced by the Liberal Democrats during the 2010 elections but was eventually included within the coalition deal with the Conservative party. The Tories have since adopted the policy as their own and have reiterated their commitment to keeping it in place.
However, the way the triple lock policy is calculated means there will be a significant rise in pension payments next April, potentially costing the taxpayer GBP 4 billion.
There were suspicions that the UK government may suspend the triple lock policy; however, a Conservative minister this week announced that UK Chancellor Rishi Sunak is unlikely to change his stance.
That being said, the UK government has the power to amend the pension rules if they see fit and can revise how earnings growth is calculated. Though any amendments seem unlikely, the UK government has recently suspended other policies, such as using national income to fund foreign aid.
Downing Street commented today, however, to say that the final figures for the pension increases remain unclear, with the final calculations taking place during an annual review later this year. It was acknowledged that there remains significant uncertainty surrounding the trajectory of average earnings and the accuracy of the reported 6% spike.
The fairness of the pension triple lock policy is a view that differs amongst the British public. It can be argued that many pensioners put in decades of contributions and should therefore be rewarded with annual increases to guarantee a comfortable lifestyle. Others believe that pensioners should endure the prospect of pension cuts where necessary.
Under the triple lock policy, pensioners have seen substantial benefits so far, avoiding UK government cuts. Under Margaret Thatcher’s government, the value of basic state pension fell from 26% in 1979 to 16% from 2000 to 2007. However, thanks to the triple lock rule, values have risen 17% to 19% of average earnings by 2020.
Whilst this value is less than 40 years ago, there’s no denying that pensions have seen gradual growth due to the policy.
How does a state pension work?
The UK Government makes regular payments to those who claim a state pension, but the amount received by each individual will differ, based on national insurance records.
In 2021, the current full state pension can see individuals receive up to GBP 179.60 per week. Individuals usually need a minimum of ten qualifying years on their National Insurance record to claim their state pension.
Some pensioners are required to pay tax on their state pension if their annual income surpasses their Personal Allowance threshold. The Personal Allowance in the 2021/22 tax year for many is GBP 12,570. Personal allowance can be affected by additional factors such as a Marriage Allowance or Blind Person’s Allowance.
A private pension, employment or self-employment earnings and investments from property all count towards an individual’s total income.
How could new pension rules affect you?
There are various other changes to pension rules being assessed by the UK government. Chancellor Rishi Sunak has been reportedly considering cuts to the GBP 1 million lifetime allowance (LTA), which places a limit on the benefits that can be taken from a pension to GBP 800,000. Instead, the Chancellor could bring in a single tax relief rate or new taxation rules on employer contributions. During the budget back in March 2021, the Chancellor stated that lifetime allowance would be frozen at GBP 1,073,100 until 2026.
Currently, tax relief coincides with income tax bands – for example, 20% for basic-rate taxpayers. However, the UK government could make this a flat rate of 30% for all taxpayers. This change would be positive for basic rate taxpayers, but higher earners who currently pay 40% or 45% tax would not receive the same previous benefits. The LTA change would particularly impact individuals who are in final salary pension schemes, such as teachers and doctors.
Withdrawing an income from your pension above the government’s specified level will incur an additional 25% charge and 55% charge for a lump sum on top of regular income tax.
The tax relief changes could impact around 5 million workers in the UK. Ian Browne from Quilter pensions highlighted that the UK government’s commitment to the Tory manifesto had left them with little room to readjust the UK’s public finances. The Conservative party has already agreed not to raise income tax, national insurance or VAT. As a result, changes to pension rules have become an unsurprising target.
Former Pensions Minister, Steve Webb, stated that the proposed pension changes could be a risky move for the Conservative party. Mr Webb highlighted that UK citizens now ‘plan for a generation’ through their pension savings and the unfairness of the UK government constantly amending pension rules to alleviate public finances.
Tom Selby, a senior analyst at AJ Bell, reiterated that the pension changes could be risky and that it also undermines the foundations laid by the government’s automatic enrolment initiative.
Further UK Government spending proposals
The UK Chancellor and UK Prime Minister have reportedly been divided on numerous recent spending proposals, which has sparked concerns about the future of pension payments. Tensions have recently mounted over an overhaul on UK social care, which is set to cost around GBP 5 billion a year. Government Ministers have been urged to develop a plan for the UK’s struggling social care system by numerous social care leaders, though a ‘make or break’ meeting scheduled for this week has since been postponed.
There is also discontent surrounding the funding of the GBP 200 million National Flagship, the successor to the Royal Yacht Britannia. The financing of the new national yacht is set to come out of the budget for the Ministry of Defence. UK Prime Minister Boris Johnson confirmed that the yacht would be commissioned to promote British interests as the country attempts to build international links post-Brexit.
The Labour party has encouraged the Conservative government to outline precisely how the National Flagship will help promote trade and further jobs within the UK, with some arguing that it is merely a ‘vanity project’. Whilst a full breakdown has not been revealed, a spokesperson for Mr Johnson stated this week that the yacht would boost British trade and drive further investment into the UK economy.
Mr Sunak is said to be examining the UK’s financial commitments and is keen to tackle the country’s GBP 300 billion deficit fuelled by the coronavirus before the Autumn spending review.