The triple lock is a safeguard introduced by the UK government to ensure that the State Pension remains financially viable for pensioners.

How?

It protects the State Pension from losing value over time, maintaining the purchasing power of pensioners.

Let’s explore the intricacies of the triple lock system and address the uncertainty around its future.

What Is the Triple Lock Pension in the UK and How Does it Work?

The triple lock is a guarantee that the State Pension payments won't erode with rising inflation. It was introduced in 2010 by the coalition government led by then Prime Minister David Cameron.

The 'triple' in the name stands for the three safety locks to which the UK government ties the annual State Pension increases.

Here’s how it works:

Each year, the UK government increase the State Pension by the highest of these three components:

• The rate of inflation as measured by the Consumer Prices Index, or CPI (September reading in the previous year)

• The average increase in wages (measured between May and July of the previous year)

• A baseline rise of 2.5%

To put it in practical terms:

Let’s say in a given year, the average wages increase by 2%, but inflation rises at a faster rate, say 3%.

In the following year, the State Pension wouldn't just increase by 2% to match earnings; it would increase by 3% to keep pace with inflation.

If the CPI and average earnings increase at a rate lower than 2.5%, the State Pension would still rise by the baseline rate of 2.5%.

The 2023 Example

The UK State Pension in the tax year 2023-24 saw a 10.1% increase over the 2022 rates.

• The standard rate basic State Pension rose from £141.85 to £156.20 per week.

• The full New State Pension rate grew from £185.15 to £203.85 per week.

But why a 10.1% increase?

According to the UK Treasury data, inflation grew by 10.1% in 2022 — which was higher than the 5.2% growth in average earnings and the 2.5% baseline.

Who is eligible for a ‘triple lock-protected State Pension?

The triple lock guarantee applies to everyone receiving the basic State Pension (pre-April 2016) and the new State Pension (post-April 2016).

Learn more about the Basic and New State Pension in the UK.

3 Ways the State Pension Triple Lock Scheme Benefits Pensioners

1. Safeguarding Retirement Income from Inflation

The triple lock scheme ensures that pensioners’ income is steady and in line with the rising cost of living.

For instance, if price inflation hits 3%, the pension rises by 3%, protecting retirees from reduced spending power.

And as we mentioned above, inflation rose to 10.1% in 2022, but pensioners were cushioned by the triple lock, receiving a 2023 State Pension increase consistent with inflation rates.

2. Guaranteed Minimum Increase

The triple lock guarantees pensioners a minimum annual increase of 2.5% on their State Pension.

So, in a year when price inflation and wage growth are low (below 2.5%), pensioners will still see a respectable increase in their pension payments.

3. Wage-Adjusted Pension Growth

The State Pension triple lock ensures that pensioners are not left behind as the nation’s earnings rise.

For instance, in 2019, wage growth was at 3.9%, and under the triple lock, the 2020 State Pension increased accordingly – from £168.60 to £175.20 per week.

But with all its benefits, the State Pension triple lock system has had moments of uncertainty.

Why Was Triple Lock Protection Suspended in 2022?

In a surprising move, the Prime Minister at the time, Boris Johnson, forfeited the triple lock protection for the 2022 State Pension increase.

The reason?

The economic upheaval caused by the Covid-19 pandemic.

According to the UK Office for National Statistics, there was a significant surge in average wage growth between April and June 2022.

Why?

Following the pandemic, wages rebounded sharply as furloughed workers returned to employment.

This would’ve triggered a disproportionately large increase in the State Pension under the triple lock formula, putting the government under immense financial strain.

The situation prompted the UK government to temporarily suspend the triple lock for the financial year 2022-23.

So, on what basis did the State Pension increase in 2022-23?

The government based the State Pension increase on the inflation rate – which was 3.1% for the given period. The goal was to aim for a balance between protecting pensioners’ income and managing budget responsibility.

While the suspension of the triple lock in 2022 was temporary, it has raised questions about the scheme's future.

Is the Triple Lock for the UK State Pension Getting Scrapped?

The 10.1% rise in 2023 State Pension increased the government’s pension costs by £11 billion. The total pension expenditure is expected to increase further and hit £135 billion by 2025.

Financial Experts predict that by 2025, the State Pension spending could cost Britain more than the combined spending on education, policing, and defence.

Some economic experts suggest that a double lock system could be a more sustainable solution.

What is a double lock system?

A double lock would link pension increases to inflation or average earnings (whichever is higher) and exclude the 2.5% baseline increase option.

Theresa May, the former British Prime Minister, proposed replacing the triple lock with the double lock in 2017. But the idea failed to get enough support back then and couldn't get implemented.

Proponents argue that the double lock would ease the financial burden on taxpayers while providing reasonable protection for pensioners against rising living costs.

However, despite mounting pressure, Prime Minister Rishi Sunak has reassured vulnerable pensioners that the triple lock is here to stay — at least for the time being.

In their 2022 Autumn Statement, the government announced that it would reinstate the State Pensions triple lock for 2023-24.

But unlike the currently in-power Conservative Party, the Labour Party hasn't committed to continuing the triple lock policy if it comes to power.

What’s the State Pension Forecast for 2024?

The next triple lock-protected pension increase will be effective from April 2024.

The government will consider the inflation rate in September 2023 and average earnings between May-July 2023.

Now:

• As per the April-June 2023 data, the average earnings growth is running at 8.2% and is expected to remain unchanged when the May-July data is released in September 2023.

• Meanwhile, the inflation rate in July 2023 stood at 6.8%. The Bank of England predicts inflation to reach around 7% by September 2023.

Considering this, financial experts predict the State Pension to rise by at least 7%, going up to 8.2%

Bottom line: With the triple lock policy’s future uncertain, you must consider other ways to make your retirement income inflation-proof.

4 Ways to Protect Your Retirement Income From Inflation

The best way to safeguard your retirement income from inflation is to plan ahead and make additional contributions to your pension pot. Also consider investing in securities that promise good risk-adjusted returns.

This approach also ensures you have a sizeable pension pot if you’re planning an early retirement.

Here are five ways to do this:

1. Contribute More to Workplace or Personal Pension Schemes

If you’re eligible for auto-enrolment, your employer will typically enrol you in a private pension scheme.

You can boost your workplace pension pot in the following ways:

• Contribute more to your pension fund than the minimum auto-enrolment limit of 5%.

• Make one-off lump sum payments into your pension fund.

• Speak with your employer on ways to maximise your pensionable earnings.

Pensionable earnings refer to the portion of your salary that your employer considers for calculating pension contributions.

Not eligible for auto-enrolment?

You can still request your employer to be included in a workplace pension in some cases.

You can also become a member of a personal pension scheme and increase your contribution incrementally.

As an employer, you can contribute more to an employee’s pension fund than the required auto-enrolment minimum (3% of pensionable earnings).

But that could be a hard ask if you already spend excessive time and money to manage your workplace pension scheme.

This is where Yonder can help.

Set Up Cost-Effective UK Workplace Pension With Yonder

Yonder is a digital pension platform that lets you offer a workplace pension scheme to your UK team without the burden of brokerage and administrative costs.

We’ve partnered with Smart Pension, a trusted pension provider in the UK, to help employers set up and manage pensions compliantly from anywhere in the world.

With Yonder, you can:

• Offer your employees more freedom to track pension savings through a digital app.

• Contribute the required auto-enrolment minimum of 3% or even up to 8%.

• Integrate your existing HR and payroll tools to reduce administrative work.

• Assess and re-enrol employees with ease every three years.

• Postpone auto-enrolments compliantly for up to three months. You can even automate the process to create a standard postponement period for your team.

2. Invest in an Individual Savings Account (ISA) or Lifetime ISA

An individual savings account is a tax-efficient way to save and withdraw money. It allows you to save up to £20,000 per year in cash or investments.

Similarly, a Lifetime ISA, or LISA, is a government-backed savings account that’s designed to help you save for a first home or retirement.

The government adds a 25% bonus on your yearly contributions up to £4,000 per year, making it a smart, inflation-beating option.

3. Delay Taking Your Retirement Income

You give your pension pot more time to grow when you delay taking your pension.

This approach increases your monthly pension payments and fortifies your income against the erosive effects of inflation.

4. Use the Salary Sacrifice Scheme

A salary sacrifice scheme lets you reduce your take-home salary and instead put the amount into your pension fund (or other non-cash benefits).

It reduces your taxable income, so you’ll have to pay less income tax. This leaves you with more money to invest in your pension fund.

Secure Your Pension Income Above and Beyond the Triple Lock

The UK government’s triple lock policy protects your retirement income from inflation.

While the current government has committed to continue the policy, its future remains uncertain.

So, you must consider other avenues to boost your pension income.

If in doubt, you can seek professional financial advice to plan your post-retirement finances and protect them from economic uncertainties. So consult advisers who are authorised and regulated by the Financial Conduct Authority.