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For retired people, you may be concerned about how the recently-announced suspension in the State Pension “triple lock” affects you. Those who are saving for retirement, moreover, may be wondering what this means for their retirement plan. Below, our team at Hanson Financial Services (financial advice in Liverpool) explores how this change came about, what the planned change is and what this might mean for your pension plan. We hope you find this content useful and invite you to get in touch if you’d like to discuss your own mortgage or financial plan with us.
Why the triple lock was suspended
The Conservative Party made an explicit pledge in their 2019 manifesto that they would protect the State Pension triple lock if they were elected. This has been suspended, with Boris Johnson arguing that the COVID-19 pandemic (which ensued in the months after the general election) has changed the situation and public finances.
Ordinarily, State Pension income rises each year by average earnings, by 2.5% or by prices as measured by the CPI (Consumer Prices Index). This helps to protect the “spending power” of the State Pension as the cost of living goes up. However, the COVID-19 lockdowns and various job protection schemes (e.g. furlough) led to a distortion in the way this system is supposed to work. Without suspending the triple lock, therefore, the Government faced needing to hike the State Pension by 8% in 2022. This would have put a large strain on the public finances (which are already overstretched from the pandemic) and, arguably, could have been seen as unfair by younger generations who are still working.
The plan for 2022
Instead of rising by 8% in April 2022, the State Pension is set to be suspended from this time so that it rises by inflation (the CPI), or by 2.5% – whichever is higher. Given that inflation is going up, at the time of writing, this means that the State Pension could still rise by 4% (or more) next year. As such, State Pension recipients can still rest assured that their income will rise with the expected higher cost of living. In real terms, therefore, pensioners should not be worse off – but they will likely not receive a higher income from the Government in 2022.
Long term implications
At present, the Government has announced a suspension – not abolition – of the triple lock. This means that the State Pension system should go back to normal in the following tax year, after 2022 (i.e. 2023-24). However, there is a risk that the Government may extend the suspension to try and reign in public spending. After all, the UK’s debt level is extremely high due to COVID-19 and it may take a while to bring the country’s finances back into order.
Whether or not the triple lock suspension is extended is likely to depend on political factors in the year ahead. Notably, the Government will want to be careful not to alienate its voting base further as the next general election draws near (expected in 2024; possibly even early in 2023). It is worth stating that the State Pension, itself, is likely to remain a feature of the UK budget for the foreseeable future – in one form or another. After all, 6 out of 10 people rely heavily on it to cover their retirement expenditure. For the UK’s lowest retirement earners, the State Pension comprises as much as 90% of their income. As such, removing the State Pension completely would likely exacerbate pensioner poverty and lead to a higher strain on other areas of the UK’s social security spending (e.g. pension credit).
One notable trend that political analysts have identified in 2021 has been the Government has increased the tax burden on the population. Working pensioners, for instance, will need to start paying National Insurance (NI) contributions for the first time. Moreover, both NI and dividend tax are planned to rise by 1.25% from April 2022. Businesses will also need to pay a higher rate of corporation tax (25%) on profits over £250,000, from April 2023. Taken together, the UK now faces its highest tax burden in 70 years. People who have fully retired are likely to be shielded from much of this. However, those still saving for retirement will need to plan carefully to take these (and other possible) changes into account.
Consider speaking with a financial adviser about how you can make the most of your existing tax-efficient allowances. For instance, you can put up to £20,000 into your ISA(s) each financial year – generating capital gains, dividends and interest tax-free. Remember that you can still also take advantage of tax allowances for these areas, each year. For example, you can earn up to £2,000 in dividends, tax-free, and you can generate up to £12,300 in profits (e.g. selling shares or a second property that has risen in value) without facing capital gains tax. If you are married or in a civil partnership, moreover, you can make use of each other’s unused allowances.
Conclusion & invitation
Are you interested in talking to a financial adviser about your financial planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
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