Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
It’s sometimes easy to forget just how valuable the State Pension is.
The guaranteed and inflation-proof income it offers is vital in providing a baseline for those in retirement. For most people it will be their biggest single source of income and very expensive - if not impossible - to reproduce any other way.
That doesn’t mean those surviving solely on a State Pension have it easy - it provides a baseline and nothing more - but the payment has been getting more generous, and that’s thanks to the ‘Triple Lock’.
This is the promise, first introduced in 2011, to raise the State Pension each year by the highest of either inflation, wages or 2.5%. The Triple Lock guarantees that increases in the State Pension will never lag any of these measures - not just over extended periods but in each and every individual year as well.
The Triple Lock effect: State Pension in 2025/26 and beyond
Its effect has been dramatic. The full State Pension has been set at £230.25 a week, or £11,973 a year, for the 2025/26 tax year after a 4.1% rise. That was the average relevant wage rise in the year before. Consider that as recently as the 2022/23 tax year it was just £185.15 a week - meaning it’s risen more than 24% in three years.
The chart below shows the effect of the Triple Lock on pensioner income since its introduction in 2011.
Note - what counts as a full State Pension has changed in that time. Prior to 2016, eligible retirees would receive the ‘Basic State Pension’, plus any extra additional State Pension entitlement they had built up. Those starting to claim their State Pension after 2016 have received the ‘New State Pension’ - a higher amount but with reduced possibilities to boost this with additional payments.
The chart simply shows how £100 of eligible State Pension income has increased with the Triple Lock.
The rachet-like effect of the Triple Lock is clear, always adding the highest available increase so that the State Pension accelerates away from any of the three components it comprises. The effect snowballs as the years pass so that £100 is worth £180.70 by 2025/26 if raised by the Triple Lock, compared to £158.13 if raised by wages, the fastest rising of the component elements.
How far could the State Pension rise in the future?
You can’t know for certain what the State Pension will be if you are still many years from claiming it. But some simple modelling can show us what the payment will rise to if different assumed annual increases are applied.
The table below shows the value of the full State Pension today, and then in future years if 2.5% annual increases are applied - the minimum allowed under the Triple Lock - then 3.5% and 4.5% increases.
Check the figures for the year you are expecting to claim the State Pension.
An increasing cost
The cost of paying a higher State Pension needs to be met by taxpayers. Our ageing population means that the cost is likely to rise even more quickly in the future as a higher proportion of the population reaches retirement age.
The chart below shows the cost of the State Pension as a proportion of GDP. It shows the cost rising rapidly since 2022 and peaking this year at 5.06%2. It is then predicted to fall in the coming years - based on assumptions of cost and growth - but that is uncertain.
The longer-term trend is clear. The Office for Budget Responsibility has forecast that the total pensioner spending could rise to around 8% of GDP by 2072/73 - and potentially even more if the economy continues to suffer weaker and more volatile growth.
The government has been cutting costs elsewhere in the system. The State Pension age has been rising, delaying the point at which future generations will be able to claim theirs. The government has announced that the State Pension age will increase from 66 to 67 in stages between April 2026 and April 2028. Then from 67 to 68 between April 2044 and April 2046.3
Further, or more rapid, rises cannot be ruled out but it would be hard to justify because improvement in life expectancy seem to have stalled.
Reforming the Triple Lock is another potential cost-saving measure - although all the major political parties promised to keep the measure for this parliament.
Planning for a State Pension squeeze
With the State Pension likely to come under increasing pressure, there is even more onus on individuals to fund their own retirement. Money paid into a pension normally benefits from tax-relief, while employees with access to company schemes can usually benefit from employer contribution made on their behalf.
Ensure you make maximum use of any help on offer to improve your retirement prospects.
And while you may not be able to control the future rises in the State Pension, you can make sure you have a full contribution history to ensure you get the maximum available - whatever that turns out to be.
Your entitlement to the State Pension is based on your National Insurance (NI) contributions. To get the full State Pension you need to have made NI contributions for 35 complete years by the time you retire.
Those working as employees are likely to have NI taken automatically from their pay, while self-employed people with earnings above a certain level will pay their contributions via self-assessment.
The government has an online service that lets you check on your NI record for any gaps and to see whether you’ll get the full amount.
Sources:
1 https://researchbriefings.files.parliament.uk/documents/CBP-7812/CBP-7812.pdf
2 Welfare spending: pensioner benefits - Office for Budget Responsibility
3 GOV.UK, 30.03.2023
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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