Interactive Investor

Retirees dodge bullet as state pension freeze avoided

23rd September 2020 13:11

Marc Shoffman from interactive investor


Share on

Government brings in new laws to dodge a coronavirus-related hit to 2021 state pension payments.

Retirees are set for state pension increases next year, as the government has bypassed an automatic freeze that applies when wages fall significantly.

Since 2011, the state pension has been increased using a formula known as the triple lock. This ensures it rises every year based on the highest of earnings growth, price inflation or 2.5%.

The government was facing a tricky situation when next deciding on increasing the payments in April 2021, as the coronavirus pandemic has limited earnings growth.

There is a technical detail in the current rules that says if earnings growth is negative, state pensioners get no increase.

This would have frozen payment rises for those on the state pension.

To avoid this, the government is today introducing The Social Security (Up-Rating of Benefits) Bill that will remove any legal barriers to increasing the payments.

Thérèse Coffey, work and pensions secretary, says: “In these difficult times, I want to give pensioners peace of mind about their financial health.”

But the news comes amid rumours that the triple lock could eventually be scrapped to save the Treasury money as it looks to pay off the bill for emergency coronavirus support.

Steven Cameron, pensions director at Aegon, says: “State pensioners are on tenterhooks waiting to find out if the government will continue to honour a manifesto commitment to increase their state pension in line with the triple lock. 

“While removing the legal barrier to granting an increase is welcome news, it may not be the final twist in the tail of the triple lock saga as it’s still to be seen if the government will stick rigidly to this formula year on year.”

Cameron warned maintaining the triple lock in the current environment may create inter-generational unfairness.

He adds: “Doing so could see pensioners receive a 2.5% uplift next April and a much higher increase the following April if earnings growth rebounds after falling. 

“This could come as many working age people might be struggling to regain pre COVID-19 earnings levels.

“The government could decide to retain the spirit of the triple lock, but rather than the formula working year on year, it might smooth earnings fluctuations caused by furlough over two years, which would present a fairer approach across generations.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up