Can you rely on the state pension triple lock for your retirement income?

The state pension triple lock aims to protect Brits and the income they get from the government throughout retirement. Unfortunately, this is an expensive guarantee that’s become a political football in recent elections, and Brits should be wary of relying on it for a comfortable retirement.

How much is the state pension?

Once you hit your pension age, (you also have the option of deferring your state pension) you’ll be eligible to get income from the government to help see you through retirement –as long as you’ve contributed to national insurance for 30 years.

You’ll get £164.35 a week from the state pension, unless you reached the pension age before 6 April 2016, which means you’ll get the old state pension of £125.95 a week.

What is the state pension triple lock?

The new state pension increases each year by either UK wage growth, inflation, or 2.5%, whichever is higher. This guarantee on both the basic and new state pension is known as the state pension triple lock.

Introduced by the Conservative and Liberal Democrat coalition, the triple-lock promise aims to protect pensioners from the impact of inflation. In theory, this means you’ll still be able to buy the same amount of goods with your state pension income over the years.

It also aims to avoid negligible ad-hoc increases to the state pension, instead offering Brits reliability into their retirement.

Retirement can be a nervous time, as you wave goodbye to a reliable income and look to the state to supplement your diligent pension savings.

Having the reassurance that the value of your income won’t be eroded by inflation is important in helping reduce money worries ahead of retirement.  

Is the state pension triple lock guaranteed?

As with most pension initiatives, the state pension triple lock costs the government a lot of money to honour. In fact, it adds around £6 billion a year to the state pension bill, according to the Government Actuary’s Department.

This has forced the government to try and look for an affordable alternative. Some have suggested reducing it to a double lock, by dumping the link to either inflation or 2.5%.

Without this crucial link to inflation, however, the purchasing power of pensioner’s income could take a hit if the rate of price growth races ahead of average earnings of 2.5%.

Although the government has stepped back from its pledge to introduce the double lock by 2020, the future of the UK pensions system is still uncertain.

Relying on the state pension triple lock

Few would advise Brits looking forward to their retirement to rely on the state pension. If you reached state pension age before April 2016 you’ll have just £6,500 a year, otherwise you’ll have £8,500 a year.

You’re unlikely to be able to rely on this to cover what you need for a comfortable retirement. Instead, you should look to build up a pension pot that will provide you with a good income that your state pension can supplement.

Find out more about how the Moneyfarm Pension can help you achieve your retirement dreams

Take advantage of the tax benefits

The government desperately wants you to save for retirement, which is why there are generous tax incentives for you to take advantage of.

When contributing into your personal pension, you can claim tax relief relative to your income tax band. This means that if you’re a basic rate tax payer, you can pay in £8,000 and the government will give you a £2,000 top-up, taking your overall contribution to £10,000.

This basic rate tax relief is given to investors automatically, but don’t forget that you can claim back more if you’re a higher or additional rate taxpayer. If you’re a higher rate taxpayer you’ll essentially be paying £6,000 for a £10,000 contribution, or just £5,500 if you’re in the additional rate tax band.

Make sure you claim for this in your annual tax return to ensure you don’t miss out on any valuable tax relief that could help you maximise your pension savings further.

How much should you be saving each month for retirement?

When it comes to saving for your pension, the earlier you start and the more you can put away each month the better. But it’s important you know you’re on track to achieve the retirement you deserve.

It’s generally thought that you’ll need two-thirds of your final income in retirement to maintain your standard of living. If you’ve been waiting for the chance to jetset and want the freedom to update your car every five years, you’ll probably need around £39,000 a year.

Moneyfarm research shows that if you’d invested in a globally diversified portfolio split 60/40 equities/bonds over the last 30 years, you’d have seen an annualised return of 7.5%.

The FCA says it’s reasonable to expect your pension to grow by an annualised 2%, 5%, or 8%, depending on your risk level and time horizon. The longer you have and the more risk you can take, the higher your expected long-term return – although the value of your investments can also fall.

If you keep your pension invested throughout your retirement and expect your pot to grow by an annualised 5%, you can – in theory – withdraw 5% of your pension each year without materially depleting the size of your pension.

For an annual income of £39,000 a year, you’ll need around £750,000 in your pension when you retire.

It goes without saying that the sooner you start and the more you can put away each month, the less of a financial burden saving into your pension will be later in life. Find out how long it will take you to get a good retirement income with Moneyfarm’s regular investment plans.

Can you protect your pension from inflation?

Thanks to Pensions Freedoms, you can now look to protect your money from the impact of inflation and even aim to grow it during your retirement.

With people living longer, retirement can easily last three decades for many Brits. This is a long time horizon when investing, which means Brits could be missing out on maximising their savings by not keeping their money invested.

Brits no longer have to swap their pension for an annuity once they reach retirement. Annuities are good for those wanting a reliable income, but they can offer negligible returns.

Instead, flexi-access drawdown allows investors to keep their money invested in the stock market whilst they withdraw their pension income from it. You can still get 25% as a tax-free lump sum from the age of 55 – pension freedoms just gives you more options with what to do with it.

By keeping your money invested, you can look to offset your money and grow it for your hopefully long and happy retirement.

With flexi-access drawdown, once your pension has gone, it’s gone. You’ll have to be more disciplined and aware of your spending habits, but the flexibility now available to Brits in retirement means you’re put back in the driving seat at a time when you can truly put yourself first.

Our free Pension Drawdown Service helps you make confident, stress free decisions to stay in control of your retirement income.

You can use Moneyfarm’s Pension Calculator to help you work out how much you need to be saving a month to get the income you want in retirement, or start one of Moneyfarm’s regular investment plans.

Making sure you plan for retirement in the best way for you and your family can be difficult. If you need any help, talk to an independent financial adviser and be sure to read our pension guide.