What the controversial triple lock means for state pensions

Rishi Sunak has revealed an expansion of the controversial triple lock scheme ahead of July's General Election, in the form of an "age-related tax-free allowance", said Sky News. 

At present, pensioners can receive £12,570 per year of their pensions before income tax is paid. However, if the Tories win the next election, the party has vowed that pensioners' allowances will increase in line with inflation, average earnings or 2.5%. This measure is "echoing the rules on annual state pension increases", the news website added. 

"It's a pitch for the grey vote", explained The Spectator's Katy Balls, as Sunak is offering a "tax cut" for pensioners through this quadruple lock scheme.

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But undoubtedly, such a measure will "raise questions of affordability" at a time where the existing triple lock has already faced attack for its expense. 

In April 2024, the state pension increased by 8.5% to £221.20 a week for the new state pension and £169.50 a week for the old basic state pension – the latter intended for those who reached retirement age before 2016. 

The payment has been set based on a triple lock calculation that is meant to ensure the value of the state pension isn't "overtaken by the increase in the cost of living or the working population's income", said BBC News.

What is the triple lock?

The triple lock is a policy introduced in 2010 by the coalition government. It was designed to help protect pensioners' incomes by increasing the state pension in line with average wages, inflation, or by 2.5%, whichever is higher.

The wage data is based on pay growth figures for May to July, released in September by the Office for National Statistics. This showed weekly earnings rose by 8.5%.

This was far higher than the Consumer Prices Index measure of inflation at the time of 6.8%, which has since fallen to 2.3% in the year to April 2024.

The Institute for Fiscal Studies (IFS) has warned the triple lock is "increasing public finance pressures" and risks the sustainability of the state pension system, creating "heightened uncertainty" for people retiring in the futur

Why is the triple lock so controversial?

There are "issues and challenges" around funding the triple lock, explained Unbiased.

Department for Work and Pensions spending on the triple lock has increased from £69.8 billion when it launched in 2010 to £104.9 billion in 2021/2022, making it a "politically emotive" subject that, considering the ageing population and falling birth rate, won't go away any time soon.

The IFS said the triple lock has added £11 billion to spending on the state pension in 2023/2024 and will cost an extra £2 billion in 2024/2025.

Economists often criticise the triple lock as being "too expensive to maintain", said The Times Money Mentor, with about 60% of welfare spending going towards pensioners. Critics also suggest there is "intergenerational unfairness". Should younger people "subsidise the income of older people at a time when they may be struggling with their own living costs"?

The controversy has been further exacerbated by the Conservative Party's new pledge to offer a so-called "triple lock plus", or quadruple lock, if they win the next General Election.

Speaking to Money Marketing, Lily Megson, policy director at My Pension Expert, said the new plan formed part of "last-minute policies from a party bracing for defeat", with Labour describing the plan as a "desperate move".

Once again, it is the cost factor that has come under the most scrutiny. The policy is "estimated to cost £2.4 billion a year by 2029-30", said The National, and will be funded "by clamping down on tax avoidance and evasion".

By how much is the state pension rising?

State pension payments rose by 10.1% in April. Those on the new full state pension saw their payments rise from £185.15 per week to £203.85. 

From April 2024, payments have risen to £221.20 per week or £11,502 per year, for people on the new full state pension.

While pensioners and those approaching retirement may be "cheering" the increase, said MoneyWeek, many will be "dragged into the income tax net" and may have to start paying tax on their income due to frozen tax thresholds. This is what the triple lock plus policy is intended to avoid. 

Personal tax thresholds have been frozen at £12,570 until 2028 so pensioners receiving the full annual state pension of £11,502 "will only need a small amount of extra income" to enter the tax net, added the financial website.

What is the alternative to the triple lock?

The government could suspend the triple lock if necessary. It temporarily removed earnings from the equation in 2022-23 due to a "post-lockdown spike in wages", explained NerdWallet, and increased the state pension by the inflation measure of 3.1% that year.

Former pensions minister Baroness Ros Altmann has called for a "double lock", which would guarantee an increase of either inflation or average wages.

A more "pessimistic scenario", added Unbiased, would be for the state pension to have only a single lock, linked either to wages or inflation, but this may mean pensioners' spending power is reduced over the medium to long term.

The worst-case scenario would be returning to when the state pension was "simply made at the whim of the chancellor", the financial website added.

The Organisation for Economic Co-operation and Development has proposed indexing pensions to an average of inflation and wage growth, while "providing direct transfers to poor pensioners to mitigate poverty risks".

Another "solution" would be to "make people work longer", said The Telegraph's Mattie Brignal, by raising the state pension age, which is currently at 66 for both men and women, and gradually rising. 

An increase to the state pension age has previously served as a "silver bullet" in order to "keep the state pension system ticking along", but is "deeply unpopular", especially with a "recent dip in life expectancy".

While neither party has plans to increase the state pension age, "in reality" there may be "little choice" in the future.