The State Pension is set to increase by a record amount under the triple lock due to high levels of inflation. If you’re claiming your State Pension, read on to find out what it means for your income.
While there had been speculation that the triple lock would be suspended this year, the Conservative Party under Liz Truss committed to maintaining it. However, new prime minister Rishi Sunak hasn’t commented on the triple lock yet.
For pensioners, it’s an important way to maintain spending power as the cost of living rises.
The State Pension increase will be based on September’s inflation rate
The State Pension triple lock guarantees that it will increase each tax year.
As the cost of living generally rises gradually, this can help pensioners to maintain their standards of living throughout retirement. The Bank of England (BoE) has a target to keep inflation around 2%. While this may seem small, it can have a significant effect on how far your income will stretch during retirement.
Let’s say you retired in 2011 and needed an income of £35,000 to achieve the retirement lifestyle you wanted. According to the BoE, your income would need to have increased to more than £41,700 in 2021 to deliver the same lifestyle as average inflation was 1.8% a year.
Over a retirement that could span several more decades, the effect of inflation can really reduce your spending power.
The current high inflation environment – the rate was 10.1% in the 12 months to September 2022 – means that pensioners’ income may be stretched more than they expect.
As a result, knowing that your State Pension will increase each tax year can provide some peace of mind. While the State Pension often isn’t enough to reach lifestyle goals alone, it does provide an important foundation for many people.
So, what is the triple lock? It means that the State Pension will increase by one of three measures, whichever is higher. These measures are:
- Average wage increase
- Rate of inflation
The inflation rate was the highest measure at 10.1%, and pensioners are set to receive the largest rise in income since the triple lock was introduced.
The full State Pension will increase by £972 a year in April 2023
Pensioners that receive the full State Pension will see the income it provides rise from £185.15 a week to £203.85. The annual income it will deliver will be £10,600 in 2023/24 – an extra £972 a year.
Under current rules, you must have at least 35 years on your National Insurance record to be entitled to the full State Pension.
If you have between 10 and 35 years, you will be entitled to a proportion of the full amount. If you don’t receive the full State Pension, the amount your income will increase for the 2023/24 tax year will be lower.
State Pension rules have changed over the years, including significant reforms in 2016, and they can be complex. If you have any questions about what you’re entitled to and how the triple lock will affect your income, please contact us.
Do you need to update your retirement plan as inflation rises?
The triple lock means the State Pension you receive will increase next year. However, as it’s likely to be just a portion of your income in retirement, it’s a good idea to reassess how your expenses and income needs may have changed.
Inflation may mean that your regular expenses have increased over the last year. Your disposable income that helps you reach retirement goals may also not stretch as far.
In some cases, you may want to take a higher income from your pension or other assets, like your savings and investments. It’s important you consider the long-term effects of taking a higher income now – could it mean that you run out of money in the future?
Taking the time to review the effect of inflation on your retirement plan can help balance short- and long-term needs.
Contact us to talk about your finances in retirement
Whether you have questions about how rising inflation will affect your pension or other parts of your retirement plan, we’re here to help. Please contact us to discuss what you want to get out of retirement and how to achieve it.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.