Martin Lewis: "What's really happening to the State Pension 'triple lock'? See it as a move to a 2.5 times lock"
The Prime Minister Andy Burnham has said he'll "adjust" the 'triple lock' calculation used to determine State Pension payments to "generate significant savings which we will use to build up our National Care Service". It's planned to start in 2030, but it's likely the legislation to do it'll be brought forward in this Parliament. Here's MSE founder Martin Lewis giving his mini-briefing to understand what's happening.
Read Martin's beginner's guide to how the State Pension works.
Watch: Martin Lewis explains how the State Pension triple lock could change
Full video transcript
Martin Lewis: "Okay, let's do this together. I want to try and explain to you now what's really being proposed to happen with the State Pension 'triple lock', as it is so widely misunderstood. If you ask me to sum it up in a nutshell, I'd say they're planning to move from a triple lock to a '2.5-times' lock. Now, I'm not interested in whether this is good or bad. That's for you to make up your own decision.
"I just want to make sure you understand how it works. So, right now, the new State Pension and the old basic State Pension rise each April in line with the highest of 2.5%, CPI inflation or average earnings growth. Whichever is higher, that's what will happen to it.
"The proposal is, from 2030 it will work like this. It will rise each April by at least, and the 'at least' is important, the highest of 2.5% or CPI inflation. But there will also be a loose link to average earnings growth to make sure it keeps up with average earnings growth.
"Confused? You probably should be. And in fact they haven't announced the exact mechanism yet. So the explainer I'm about to give you, I think, should give you a rough idea of the type of thing we're talking about. But don't expect the i's to be dotted and the t's to be crossed. But I do think this makes sense once you understand it, here goes...
"So, let's take this scenario [Martin displays graphic on screen]. We've got three years. Well, under the current system, in year one, of course, it would go up by inflation. In year two it would go up by earnings because that's the higher. In year three it would go up by inflation. So you'd have 3% in year one, 6% in year two, 3% in year three, which is a total of 12%. Actually, as it compounds, you know, you get the 6% on top of the 3%, it's more than 12%.
"But to keep this really simple, I'm going to ignore compounding right the way through. They all compound. Let's just ignore it because it helps the maths be simple.
"So, what would happen under the new system? Year one, dead easy. Inflation is the highest. It goes up with inflation. Year two is where it all gets more interesting. In year two, if it only went up with inflation, so that's 3% in year one, 4% in year two, you would be at 7%.
"But the rule will be something like 'it must keep up with average earnings since this came into place in 2030', when it's proposed to start. So over the two years, if you look, average earnings is 2%, plus 6%. So if it had gone up 7%, it needs to go up 8% to match average earnings.
"So having gone up 3% in the first year, you would need it to go up 5% in the second year to match average earnings under the new system.
"So let's think about this for a second. Under the existing system, it would have gone up by 3% in year one and 6% in year two, which is 9%. If you only had a double lock, it was just inflation or 2.5%, whichever was higher, it would have gone up by 7%. Under the new system, where it's got a looser link to average earnings, it would have gone up 3% in year one, and then, to get it up to the total of average earnings in year two, it would have had to go up by 5% more to make the 8%.
"You with me? Year three, hopefully you can do for yourself. It's pretty simple. Inflation's higher so it'd go up by 3%, which means in total, under the current system it would have gone up by 12% (plus compounding). Under the proposed new system, roughly, it would have gone up by 11%.
"That is what is being spoken about. As you can see, it's probably more of a subtle change than some of the hype about it, but it is still a real change. Whether or not it's worth it for the shift to social care, whether it would actually go to social care, all of that is for you and the politicians to debate and discuss. I hope now, though, you at least understand how it would work."
Read Martin's triple lock mini-briefing
'Ending' the State Pension triple lock: what is really likely to happen?
Many are confused, and think the State Pension won't rise. Actually the change is subtle, it's about loosening, not ending, one of the three locks – the link to average earnings. So I want to try to explain as simply as I can.
CURRENT TRIPLE LOCK
The State Pension(s) rise each April by highest of:
- 2.5%.
- CPI inflation.
- Average earnings growth.
[State Pension(s), as it applies to the new State Pension and the older basic State Pension. Though not the old additional State Pensions (eg, SERPS) and a few other additional pensions, which only go up with CPI. The new system will likely be similar.]
PROPOSED NEW SYSTEM
The State Pension(s) will rise each April by at least the higher of:
- 2.5%.
- CPI inflation.
The 'at least' is because it will also rise due to average earnings, but not specifically for that year, instead, over a longer period.
Yet the exact mechanisms aren't set out, so I'm going to use one example of a way it could work, where the rise keeps up with average earnings since the system start date of 2030, as I think its easier to understand.
HOW THIS COULD WORK IN PRACTICE
Here's a made up example to set it out...
Current System:
Year 1: Inflation 3%, earnings up 2%. Pension rises 3%.
Year 2: Inflation 4%, earnings up 6%. Pension rises 6%.
Year 3: Inflation 3%, earnings up 1%. Pension rises 3%.
TOTAL RISE: 12.5% over the three years as the increases compound.
New system:
Year 1: Inflation 3%, earnings up 2%. So it rises 3%.
Year 2: Inflation 4%, earnings up 6%.
A rise of only 4% would be a total rise since the start of 7.1%, yet that's less than the total rise in average earnings of 8.1%. So the Pension would rise about 5% that year to match the total rise in average earnings.
Year 3: Inflation 3%, earnings up 1%, so it rises by 3%.
TOTAL RISE: 11.4% over the three years.
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I hope that makes sense, again this is just a rough example to give you an idea as best as I understand it, but I think I'm in the ballpark.
How it might work in practice
Martin's already covered off one example scenario of how the changes might work in practice above. However, we know the triple lock and the proposed changes can be confusing, so we've created this infographic below using an additional example (plus a little more explanation) to help simplify what's going on.
Note: These are made-up scenarios used to explain a couple of different situations. They are not predictions.
Martin's State Pension beginner's guide
For more detail on how the State Pension works, read Martin's simple guide below:
The State Pension is paid once you hit State Pension age, which is currently just over 66, rising to 67 (check your State Pension age) – but only if you've enough qualifying National Insurance (NI) years.
Think of each NI year as a token you must gain, either by earning enough from work, caring for your children, or being on certain benefits (see claim free NI years?). On the current system, you need at least 10 tokens to get any State Pension at all, and very roughly 35 to get the full new State Pension.
There are actually two State Pensions...
The new one: For those who hit State Pension age after 5 April 2016. Its full amount is £241.30 a week (or £12,548 a year).
The old one: For those who are older. Its full current amount is £184.90 a week (or £9,615 a year), though extra bits, such as the Additional State Pension, can lift that higher.
The State Pension isn't tax-free, it's taxable income. It's just that by itself, for most, it has long been less than the personal allowance (the amount most can earn tax-free a year). Yet as the State Pension's risen and the allowance is frozen at £12,570 a year, the full new State Pension is just £22 less than the allowance.
And as, from April 2027, the State Pension is due to rise 3.9% under the triple lock, the full new State Pension alone will be over the tax-free allowance. Last year, the then Chancellor Rachel Reeves promised me you wouldn't pay tax from then if the State Pension was your only income, and recently the Treasury said it'd keep that pledge.
PS: If you don't get the full State Pension and have a low income, check out Pension Credit, which can top it up.
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