State pension triple lock under threat from furlough & pandemic outcomes – taxes may rise
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State pension payments require at least 10 years of National Insurance contributions to be claimed, with 35 years needed to receive the full amount of £175.20 per week. However, it has been confirmed that from April, state pension payments will rise by 2.5 percent to £175.28 per week, raising its annual income to £9,109 in total.
The triple lock has proven to be a controversial element of state planning for the Government, as it is a costly measure which many argue is hard to justify when the economy is struggling.
This has been made more evident over the last year or so with coronavirus forcing the Government to spend billions just to keep the economy afloat.
On this, Kevin Holister the founder of Guiide, warned triple lock guarantees could even result in generational angst: “There may be many younger people, who may feel hard done by this increase in pensions.
“Currently they may be seeing retirees receive an above inflation increase, when their own incomes may have reduced considerably due to furlough, redundancy or reduced hours during the pandemic.
“Intergenerational fairness may certainly be an issue for debate, but other more immediate factors may bring this into sharper focus also.”
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Kevin went on to examine the difficulty in maintaining the triple lock: “It is no secret that the Government has had to borrow at an unprecedented rate in order to support employees and businesses through the pandemic.
“Once the economy hopefully returns to something more like normal, spending cuts must be on the agenda and the triple lock may become to be viewed as unsustainable.
“Secondly, if the economy returns to normal by September 2021, this may lead to higher than usual earnings growth, from the low levels 12 months previously.
“If so, this may lead to a quirk in earnings growth levels and disproportionate increase linked to earning growth.
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“This would not be the reasoning behind this measure, which exists to underpin increases to reflect real economic growth.
“Again at this point the Government may consider if the triple lock should be continued in future, perhaps replaced as a double lock initially, with the higher of 2.5 percent and inflation being used.
“Over the longer term any increase above inflation does not seem in line with the reasoning behind any increase, which is really to protect the spending power of the pension income.
“Given this, the 2.5 percent underpin itself may come under pressure, especially if inflation stays at lower levels.”
It should be noted that the current Government committed to keeping the triple lock in place in their manifesto and in recent months have prided themselves on maintaining it even with the current economic climate.
At the same time, public debt has risen to unprecedented levels and Rishi Sunak has highlighted this will need to be addressed at some point.
Many fear the Chancellor will raise taxes in the upcoming budget and Kevin concluded by examining how state pensions could be tied into this: “There is no invested fund from which the Government pays State Pensions from. These are paid on a ‘pay as you go’ basis from general taxation collected today.
“Currently it is safe to assume that the Government’s own projections of future taxes are considerably lower than previously estimated, whilst spending is higher.
“Therefore, funding the triple lock may come under pressure. Raising tax rates and reducing spending elsewhere is obviously an option.
“Another is reducing spending and tax savings on pensions themselves.
“Reducing spending could involve a higher State Pension Age for example.
“Reducing tax benefits could mean less tax benefits on pension contributions, or tax free cash lump sums.
“The last two points may increase the problems around intergenerational fairness in pensions further.”
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