The so-called triple lock is a legal guarantee that the State Pension will rise in line with the highest of average earnings growth, inflation, or 2.5%. It was introduced in 2011 to ensure that the average pensioner’s household income increases each year.
The policy strikes me and many others as being fair because it almost guarantees that pension income for most retired people won’t lose its spending power over time. However, because of the coronavirus crisis, the government is spending a lot of money to support the economy. Consequently, speculation is growing that a cash-crunch may be coming for the government, and the triple lock could go out the window.
The Prime Minister says the State Pension is safe, for now
Indeed, a government up to its metaphorical armpits in borrowings could start looking for areas in which it can save a few bob. But just last month the Prime Minister Boris Johnson reassured Parliament about the government’s commitment to protecting the spending power of the State Pension, saying, “We are going to meet all of our manifesto commitments. Unless I specifically tell you otherwise”.
And as far as I’m aware, he hasn’t told us otherwise… yet. But if the triple lock does disappear in future, it will be bad news for pensioners because their real income from the State Provision could start to slip as inflation erodes money’s spending power. And escalating inflation strikes me as being a red-alert risk in the years ahead.
Indeed, since the financial crisis of the late noughties, real inflation has been a problem. Anecdotally, I estimate that my own household expenses have at least doubled since 2008. Rising expenses and falling income would be no joke for the nation’s increasing army of ageing people in the leisure class.
One thing seems certain – there is much uncertainty in the air for pensioners, both those of today and those joining the ranks soon. Indeed, on top of the potential disappearance of the triple lock, we’ve already seen the State retirement age slipping further away. My father got his State Pension at 65. I’ll need to wait until I’m 67 for mine. Some of those younger than me may need to wait longer still. And it wouldn’t surprise me to see further extensions to the State Retirement age down the road.
Here’s what I’d do immediately
So what can we do? We can build a pot of retirement money to help fund our lifestyles in retirement alongside the State provision, that’s what we can do! Indeed, a second source of income will help protect you from the risks of relying on an uncertain State Pension.
And I reckon the best way to achieve a second pot is to invest regular money in the stock market. I’d go for a monthly payment that transfers into a share-backed investment, perhaps a Pension Scheme, Self-Invested Personal Pension (SIPP) or a Stocks and Shares ISA.
You can go for a fully-managed pension fund, or select your own managed share funds in which to invest. Or you can go for passive, low-cost index tracker funds such as those that follow the FTSE 100, FTSE 250, or the S&P 500 in the US, as well as many others. But as well as all those options, we at The Motley Fool are keen on investing in the shares of individual companies.