The Big Pensions Debate - where do you stand?

Pensioners are metaphorically dancing in the streets as the highly contentious ‘Triple Lock’ means that next year’s State Pension is set to go up to about £11,500 per person, for those who qualify for the full amount.

The trio in the ‘Triple Lock’ are wage growth, inflation and 2.5%. And pensions go up by whichever number is biggest in September the year before.

This year the winner was – wage inflation sitting at a punchy 8.5% - and causing the Governor of the Bank of England to reach for the Gaviscon before bedtime. And possibly the gin. If the Triple Lock is honoured then the full new State Pension will go up from £204 a week to £221 a week from next April. To buy this kind of retirement income from a private pension company would cost you about £225,000. That’s one hell of a big benefit.

The Triple Lock is not sustainable – full stop

The future of our State Pension is a debate which every politician wants someone else to have. And it’s a global problem. The French responded with general Gallic riot-y behaviour this year at la témérité of someone suggesting the pension age should go up to 64 . But the Institute of Fiscal Studies has calculated that to keep the triple lock in place to 2050 will cost anything from an additional £5 - £45 BILLION a year.

Younger people have to accept that it is absolutely and totally inevitable that when we retire, we will not get the same amount over our retired lifetime. We will live for a ‘selfishly long time’ and there will not be enough money in the pot. There’s also a really common misconception that somehow, somewhere, people in the Treasury are counting up our National Insurance contributions and putting them into a pension piggybank with our name on. They are not. Pensions are paid from taxes available to the Government at the time. And in the legislation, the word used is ‘benefit’ not a right or an entitlement.

What to expect and what can we do?

If you get the State Pension today, then expect a rise of around £900 a year from April. The precise amount could be a tad less if the Government decide to wiggle out of the triple lock a little bit, deducting the one-off hit to wage inflation from the NHS pay settlement. But it will be a decent rise nonetheless.

If you are a grandparent, or indeed a parent, as daft as it sounds initially, setting up a Junior SIPP (self-invested personal pension) for the rugrats could well be the most selfless thing you do this year? I think even if it’s just with £50 – what you do here is remove the agony of choice for a young person down the track. Not knowing where to start or who to choose or indeed how to go about it is the biggest barrier for most. So having one already set up will make life a lot easier for any young person. Fidelity doesn’t charge any fees on its Junior SIPPs. You could open one here, buy a low-cost global tracker fund for example, and leave it alone. The minimum is £20 a month with a regular monthly contribution. You can check out the bestselling funds in August which include a handful of such tracker funds.

And everyone else – we have to start to make provisions for ourselves. If pensions make you feel a bit sick and you don’t know where to start, we have a short 30 minute course on how to set up a pension which will help you to get started. Or you can check out the 8 providers awarded our 2023 Best Buy for pensions here.

Coming up next – the orchestra strikes up the Jaws theme tune for interest rates…

Next week, we’re in for the latest episode of the horror show which is the Bank of England Monetary Policy Committee meeting. There is strong consensus that we’ll see another hike to 5.5% even as there are signs that the economy is starting to slow and employment is falling. I’ll cover this next week with tips on savings, mortgages and investments which will be impacted as a result.

A final note for those who follow global stock markets with interest. Our sponsor this week is ardn who write about what’s going in in China. I think this is interesting to consider – "When we talk to companies in India, they reference the “China plus one” opportunity. A lot of countries are looking to benefit from that reconfiguring of supply chains away from China. We see Vietnam and Indonesia benefiting in particular”. You can read the full piece here.

Have a lovely weekend everyone.

Holly

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