The ‘triple lock’ increase to State pensions offers two important lessons.
In November’s Autumn Statement, the Chancellor, Jeremy Hunt, ended weeks of speculation by announcing that the ‘triple lock’ would again operate on State pensions. As a result, from next April State pensions rise by 10.1%, in line with the September 2022 CPI inflation rate.
Perhaps more surprisingly, Mr Hunt said that the same 10.1% increase would apply to nearly all other social security benefits. That decision to go ahead with full inflation-linked uplifts at a time of tight government finances has two important lessons for your own financial planning.
Firstly, it is an implicit reminder of the paucity of benefits offered by the social security safety net – it would be difficult to justify not providing inflation protection to such minimal State protection. The Covid-19 pandemic gave many people a sudden – and unwelcome – insight into the low level of social security benefits. In response, the government was forced into a temporary £1,000 a year increase to the main benefit, Universal Credit (UC). It also relaxed waiting period rules on statutory sick pay (SSP) although, like the £1,000 UC uplift, the easing has since been withdrawn.
From April, once the 10.1% increase takes effect, SSP will be just £109 a week. For a couple aged 25 or more with two children, the maximum UC payment will similarly rise to just under £1,118 a month if both children are born after 5 April 2017. To put that in context, based on a 35-hour week, next April’s National Living Wage (NLW) of £10.42 an hour equates to earnings of just under £365 a week or £1,580 a month before taxes. The message in those numbers is stark: you and your family need more financial protection against life’s misfortunes than the government will provide.
Impact of devaluation
The second lesson from the benefit increases is that the impact of inflation must be built into any financial planning. Ignore rising prices and the targets you have set steadily devalue, whether in terms of your savings goals, planned retirement income or your health and life insurance protection. For example, if you had life assurance of £100,000 in October 2017, then you would need cover of £121,113 in October 2022 just to maintain your policy’s buying power.
With the new year in sight, now is a good time to review how the recent burst in inflation has affected your current financial plans. One consequence could be increased outlays, but as the Chancellor demonstrated, reviewing plans and implementing changes is the only way to maintain the same level of safety net.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.