The number of seemingly popular, pre-election policies subsequently implemented once a political party ascends to power can usually be numbered on the fingers of one hand. Regrettably, our elected representatives often become remarkably forgetful once election results are filed away to be pored over by future historians and statisticians.
Prior to the 2010 general election, however, the then Chancellor, George Osborne, confirmed he would apply the ‘triple lock’ formula to state pensions, a policy, he said, which would see pensioners "have the income to live with dignity in retirement".
Mr Osborne was true to his word. Moreover, the policy remains in place, but for how much longer? The triple lock is designed to ensure that the state pension is not eroded by gradual rises in the cost of living. For the time being, at least, pensions rise by whichever of the following three measures is highest: average earnings, inflation or 2.5%.
The arrangement has proved a boon for pensioners: the UK’s state pension rose by 60% between 2010-23, whereas prices increased by 42% and earnings by 40%.
For most of this time, the policy suited all parties: it was a relatively inexpensive initiative and enormously popular with the government’s core voters. Between April 2013 and April 2022, the average annual increase in state pensions was 2.8%, but last year, thanks to a Covid-related anomaly which saw average earnings soar, pension payments rose by more than 10%. Since then, we’ve had a steady flow of organisations questioning whether a commitment to the triple lock should remain.
Earlier this month, the Organisation for Economic Co-Operation and Development (OECD) urged the government to scrap the triple lock and spend more on childcare instead. The Paris-based body believes such a move would ease pressure on public finances and rein-in an ever-growing tax burden.
“In the longer-term,” it said, public finances “will be under pressure as age-related spending is rising [and] the current pension uprating will be costly in the future.”
Meanwhile, the Institute for Fiscal Studies (IFS) waded into the argument, warning that the triple lock could add £45 billion a year to the state pension bill by 2050 and Pensions Minister Mel Stride has said that retirees may not see the full anticipated uplift of 8.5% in 2024. Former Conservative leader William Hague believes the triple lock is “unsustainable and unfair”.
Official figures show that by the end of last year, the UK was home to 12.5 million pensioners, a figure expected to grow by more than 20%, to 15.2 million, by 2045. Given this eye-catching increase, coupled with an associated rise in the cost of distributing state pensions to three million more people, it would be prudent for existing and would-be pensioners to plan their retirement finances, primarily because the UK’s pension system is inherently flawed.
While existing and soon-to-be retirees rub their hands in glee at the prospect of bringing their full-time careers to a conclusion and enjoying the freedom to do almost anything – and for a long time, too – it’s worth remembering that retirement can be expensive, especially in the early years when we’re still comparatively fit and healthy.
Today’s recently retired folks possess broad horizons and long lists of places they’re keen to visit. And why not? Most of us are not only healthier, but we’re also significantly richer than our grandparents and parents too, which means that during the first decade of retirement we rush to tackle experiences and see those destinations we’ve always wanted to visit.
Yet comparatively few older folks have sufficient financial resources to ensure they can spend great tracts of their retired lives travelling around the globe in some form of bucket list-ticking exercise. Moreover, travelling, even in luxury, can become tiresome and extraordinarily expensive. Indeed, even a seemingly healthy-looking combination of state pension, savings, and a company (or private) pension may be insufficient to cover the cost of our most ambitious retirement plans.
Which brings us on to that inherent flaw referred to above. The state pension fund, which receives national insurance contributions and uses them to pay retirees (note: NICs are not invested but immediately disbursed in the form of state pensions) has been “under strain” for several years as a result of the UK’s population getting progressively older. It follows that if state pensions are to continue being paid, NICs need to be around 5% higher to ensure the fund breaks even.
This figure could rise significantly, particularly as: a) the number of working people paying taxes continues to fall and b) people wishing to benefit from those taxes in the form of a state pension will increase at a rate of 230,000 a year until 2046.
Moreover, possible ‘reforms’ to the pension system cannot be dismissed.
Take the state pension age, for instance. Scheduled to rise to age 68 by 2028, there’s an excellent chance of it being above 70 by 2040. In the meantime, the triple lock could be amended or scrapped altogether and there’s every chance the state pension could be means-tested to take account of cash savings or other forms of income.
There is, however, an answer suited to some homeowners aged 55 and above.
Equity release is not everyone’s cup of tea, but a growing number of people, keen to see whether 60 really is the new 35, effectively cover potential shortfalls in their pension income by making use of a wide range of equity release products.
Ostensibly, equity release enables homeowners aged over 55 to release a proportion of the bricks-and-mortar wealth built up in their property, usually over several decades, in the form of tax-free funds. Additionally, once these funds are withdrawn, most commonly in the form of a ‘lifetime mortgage’, there is no compulsion to make any monthly payments.
However, with the flexibility of today’s equity release plans, more homeowners without affordability issues are taking the option to make flexible voluntary payments of up to 10% each year to manage the future balance – ultimately increasing the size of the legacy they leave behind for their beneficiaries.
There is now more choice in an industry that has listened to the consumer and adapted lifetime mortgage plans to embrace the lifestyle retirees live today, with voluntary payments being just one of those ‘standards’ created by the Equity Release Council to help protect homeowners and their beneficiaries.
The lifetime mortgage is eventually settled when the property’s owner(s) die or move into permanent residential care and the home is sold with the lifetime mortgage repaid from the sale proceeds.
As mentioned above, equity release is not a general panacea and before deciding to top-up a state or private pension with tax-free cash, it’s important for those considering its appeal to take professional advice. Fortunately, this is readily available.
Older people don’t get many opportunities to plug gaps in their pension, but equity release offers what might be considered an attractive option for people who are committed to enjoying their retirement to do just that without necessarily worrying whether the triple lock will remain in place.
