Supporters say the triple lock is essential in raising pension incomes relative to wider incomes following a previous period when the gap widened.
Opponents of the triple lock, such as organisations highlighting intergenerational unfairness, say the triple lock will become unaffordable on the current trajectory. There is an aspiration to cap State Pension costs to 6% of GDP (the total size of the economy). The Office for Budget Responsibility expects the figure to rise from 4.8% to 8.1% by 2071. It would breach the 6% cap somewhere in the late 2040s (see table).
The primary ways to mitigate this are to either slow rises in the State Pension, which would involve watering down or abandoning the triple lock perhaps to a double lock, or to increase the age of State Pension eligibility. Note that the triple lock was made a double lock for one year, in 2022, when wages soared after the end of Covid lockdowns. The rise was pegged to the 3.1% rise in inflation.
Nearly 13m people are eligible for the State Pension.
|
Year |
2021/22 |
2031 |
2041 |
2051 |
2061 |
2071 |
Cap |
|---|---|---|---|---|---|---|---|
|
State pension cost as % of GDP |
4.8% |
4.9% |
5.5% |
6.2% |
7.3% |
8.1% |
6% |
Source: Office for Budget Responsibility, 2023
What to watch out for
In a newspaper interview last month, Labour leader Sir Kier Starmer committed to keeping the triple lock for the duration of the next parliament if Labour were elected. He promised it would be included in the Labour manifesto.
Senior Conservatives have also committed to keeping the policy. The triple lock was introduced by the Conservative-Liberal Democrats Coalition in 2010. The Lib Dems said last September that they were “first to commit” to protecting the triple lock, adding: “We are proud that we are the ones who brought in the triple lock.”
Baroness Altmann, who served as a pension minister in David Cameron’s government, last year wrote for the i newspaper: “Prioritising keeping the triple-lock would be wrong if the price paid was bigger rises in state pension age.”
2. State pension age
What is it:
The age of eligibility for the state pension has risen in recent years from 65 to 66 for men and from 60 to 66 for women. The government has further legislated for an increase from 66 to 67 in 2026-28 and to 68 in 2044-46.
These reviews are held each parliament and come back with recommendations which the government accepts, rejects, or comments on. The 2022 review recommended a slower increase to 68, in 2041-43, and it mooted a possible rise to 69 in 2046-48.
Bear in mind that there is also a ‘private pension age’ – the age at which you are allowed to access money in a company pension or SIPP. This is expected to remain fixed at 10 years below the State Pension age, as has largely been the case since a raft of rule changes in 2007. The government has said this private pension age will rise from 55 to 57 on 6 April 2028, affecting anyone born on or after 6 April 1973.
What to watch out for:
The timing of the rise to age 68 is already in doubt and will be looked at by an independent review after the next election, the government said earlier this year. The 2022 pension age review recommended a slower increase to 68, in 2041-43 rather than 2044-46. And it mooted a possible rise to 69 in 2046-48.
In an interview with LBC earlier this month, Labour Shadow Chancellor Rachel Reeves said: “What you’d need to see for any further increases in the state pension age is life expectancy increasing and sadly it’s going backwards at the moment, but also healthy life expectancy, and sadly that is also going back at the moment. So I don’t think there’s any justification for further increases in the state pension age.”
The International Longevity Centre, a think tank, has said the state pension may need to rise to 70 by 2040.
3. Lifetime allowance
What is it:
The lifetime allowance, or LTA, capped the amount people could have in their pensions without incurring a tax charge. The limit had edged up from £1m to £1,073,100 in recent years but was still spurring people to retire early because of the penalties incurred on their pensions. GPs with final salary pensions were particularly affected.
The cap was introduced by Labour in April 2006, set at £1.5m, amid a raft of other pension changes. It had been increased to £1.8m by 2010 but was steadily reduced by the Coalition government.
What to watch out for:
Labour had pledged to reinstate the cap when it was first abolished last year but doing so would be complicated, especially for individuals who have taken advantage of the increase while they could. The change has made calculation of the lump sum allowance more complicated for some. This is the tax-free amount that can be withdrawn. It has remained at £268,275, or 25% of the old LTA cap, but there are some circumstances where a higher lump sum might be allowed.
It is worth noting that Labour has promised a review into pensions and retirement savings more broadly. As part of its plan for financial services, the party said it will look into whether the current pensions framework delivers sustainable retirement outcomes for individuals.
A change in the system of tax relief – which allows most people to save £60,000 a year into a pension – has long been mooted as a target for change by think tanks. Relief on money contributed is paid at the taxpayer’s marginal rate of income tax – 20%, 40% or 45%. Think tanks have suggested this should be replaced with a flat rate of relief for all, possibly at 33%. It’s worth noting that the allowance has only just been increased from £40,000 to £60,000.
4. ISAs, LISAs and the ‘UK ISA’
All adults get an annual allowance of £20,000 for a tax-efficient ISA. This can be used for savings or investments. The government has announced plans to introduce an additional £5,000 allowance for a ‘UK ISA’ that must be invested in UK investments. The consultation closes on 6 June leaving no time to implement the policy before the General Election.
Lifetime ISAs (LISAs) contribute up to £4,000 each tax year. This forms part of the overall £20,000 ISA annual allowance and can be opened by anyone aged 18 to 39. A bonus of 25% is applied, so a £3,000 contribution is boosted to the maximum £4,000. The money can be used on an eligible house purchase on a property worth up to £450,000 – or kept and withdrawn after age 60. Onerous penalties apply on early withdrawals. Campaigners had called for the penalties to be reduced and the property limit to be increased.
What to watch out for:
Labour has its review into pensions and retirement savings and would also look to simplify the ISA landscape if the party is elected. This could include any of the above. Labour hasn’t yet confirmed its position on the UK ISA. The policy has come in for criticism for adding additional complication.
5. Capital Gains Tax
What is it:
Capital Gains Tax or CGT is owed when you make a profit on the sale of an asset, such as property or a stock market investment. Money held in ISAs and pensions is exempt, and so is your home.
There is an annual exempt amount. This was £12,300 but was cut to £6,000 for individuals in the last tax year and reduced to £3,000 for this tax year. Basic-rate taxpayers pay a 10% rate, or 18% on residential property. Higher-rate and additional-rate taxpayers pay 20%, or 24% on residential property.
What to watch out for:
Labour has been saying since last year that it has no plans to change CGT. Raising CGT could discourage investment in assets, and start-ups. Others have argued it would be simpler and fairer to equalise the CGT rate with income tax rates. The last time they were made the same was in 1988, by the then Conservative Chancellor, Nigel Lawson.
6. Inheritance tax
What is it:
Inheritance tax or IHT is paid at a rate of 40% above the exemption threshold of £325,000. If you leave your home to your children, this can be raised to £500,000. It is also transferable between spouses so a couple could get a £1m exemption.
What to watch out for:
IHT is widely cited in surveys as one of the most hated taxes even though fewer than one in 25 estates (4% of the total) pay it. It was widely reported last year that the government would make significant changes, either cutting the rate or even abolishing the tax all together. This could be one of the personal finance policy battlegrounds in the General Election run-in.