The trouble with the triple lock

This week, in the first major pensions development since the election was called, the Conservative party announced plans to link the state pension to the personal allowance.

This policy – dubbed “triple lock plus” – would ensure that an individual’s annual income from the state pension would always come below the threshold at which they must pay income tax.

The new state pension, paid in full, is worth approximately £11,500 a year, while the level at which individuals become liable to pay income tax is £12,570. The triple lock’s effect of increasing state pension payments could see this gap close even further over the next few years.

The most recent figures from HM Revenue & Customs showed that there were 6.74 million taxpayers of state pension age during the 2021-22 tax year, an increase of 4.3% on the previous year.

The Conservatives’ proposal means that Labour, the Conservatives and the Liberal Democrats have all now committed to retaining the triple lock. For the duration of the next parliament at least, it will rise every year by a minimum of 2.5%, or in line with average earnings or inflation if either of these are higher.

However, nothing is free – and the Conservative party’s own estimates show this change could cost the next government £2.4bn a year by 2029-30. State pension payments already amount to the equivalent of 4.6% of economic output, and this is expected to rise next year to above 5%.

Other policy options

Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, said: “[This] announcement will help many pensioners who have workplace or private pension income keep more of it by ensuring future increases in the new state pension do not in themselves result in pensioners paying more income tax than they do now. This is likely to be welcomed by pensioners.

“However, it is also important that the main political parties commit to improving the workplace pensions of younger workers by increasing the value of automatic enrolment pension contributions, gradually, over the next decade, from 8% to 12% of salary, with most of the rises falling on the employer.”

Kirsty Anderson, retirement specialist at Quilter, said that the Labour party would likely have little option but to raise the personal allowance to keep those whose only retirement income is the state pension out of paying tax.

“Frozen thresholds continue to raise tax revenues through the backdoor due to fiscal drag,” she added. “Unless thresholds are changed meaningfully the whole nation will suffer an ever-bigger tax burden.

“Increasing the personal allowance just for pensioners may be popular with pensioners but the rest of the tax-paying public may feel that separate more beneficial rules for pensioners further increases intergenerational inequality.”

In a new policy paper published this week, the Pensions Policy Institute’s senior policy analyst John Adams set out other options that could replace the triple lock.

The Organisation for Economic Co-operation and Development (OECD) recently proposed linking state pension increases to an average of CPI inflation and average earnings, with additional help targeted to pensioners on low incomes.

“However, this approach would have the effect of reducing the state pension as a proportion of average earnings and could play into concerns that younger generations have of the state pension being eroded before they get to receive it,” Adams stated.

Other options suggested included a “double lock”, which would remove the 2.5% floor. Adams said this would be “more palatable for the working population” as it would reduce the risk of pensioner incomes increasing faster than wages.

However, by increasing as the maximum of either inflation or average wages, Adams said the state pension would still increase faster over time than if it were based on earnings growth or inflation alone.

A political hot potato

Quilter’s Anderson highlighted that the cost of maintaining the triple lock remained a long-term issue for government and “a political hot potato”.

She said: “The reality is if the policy is changed for the worse by either party it would so enrage a core voter base that it could prove disastrous for their election hopes but there are some significant structural problems with the policy.

“A more sensible approach rather than constant tinkering would be to link pensions more closely to average earnings. This would represent a good alternative as it would create a more predictable and sustainable pension system.”

Under current UK law, the state pension must be increased in line with average earnings. The triple lock is a pledge, introduced by the coalition government in 2012, that each subsequent administration has maintained, but it is not mandatory.

Anderson said linking uplifts only to earnings growth “not only aligns pension growth with national economic performance but also fosters a fairer distribution of wealth across generations”.

It would also reduce the unpredictable nature of the cost of the triple lock, she said, but also acknowledged that it would be politically difficult to enact – especially given that older people are more likely to vote than younger people.

Further reading

Future of triple lock ‘turning into a game of pensions poker’ (13 September 2023)

State pension age ‘must rise to 71’ to balance ageing, research shows (5 February 2024)

IFS calls to end the state pension triple lock (3 January 2024)