Retirement Income  

Low-earning millennials worst hit by scrapping triple lock

Low-earning millennials worst hit by scrapping triple lock

Lower-earning millennials will be most affected by scrapping the state pension triple lock, losing up to 5.2 per cent of their retirement income, new research from Pensions Policy Institute (PPI) shows.

Under the current triple lock system, the state pension increases each year in line with whichever is the highest: consumer price inflation (CPI), average earnings growth or 2.5 per cent.

The research found that a 27-year-old assumed to be earning £19,000 at the age of 40 would have a pension income 2 per cent lower if the 2.5 per cent lower limit was removed and 5 per cent lower if the state pension was just linked to earnings growth.

This is because by the time the first millennials reach state pension age, the triple lock would have been in effect for around 40 years and would have had a longer period to influence the benefit's level.

If the individual is a higher earner – aged 27 in 2017 assumed to earn £49,000 at age 40 – their retirement income will be slashed by 1.9 per cent under a double lock or 3.7 per cent under earnings growth alone.

The report said: "The proportional impact of a change in state pension uprating on an individual’s total retirement income depends on how reliant they are on the state pension."

This year, the state pension will go up in line with consumer price inflation, which hit 3 per cent in September.

In its manifesto for last year’s snap election, the Conservative party proposed scrapping the 2.5 per cent lower limit after 2020.

But following the election results, the government was forced to abandon this idea in order to secure parliamentary support from Northern Ireland’s DUP, which disappointed the pensions industry.

For a low earner aged 27 in 2017, assuming to earn £19,000 at age 40, replacing a triple lock for a double lock – the greater of CPI or earnings – would represent a 2.5 per cent savings cut.

The report, sponsored by Standard Life, showed that this percentage goes up to 5.2 per cent if only the earnings growth is used to increase state pensions.

Jamie Jenkins, head of pension strategy at Standard Life, said that the idea the triple lock can be kept forever was "unrealistic".

"The question is when to change it," he added.

The PPI’s research also considered the impact of the latest auto-enrolment review on millennials pension pots.

The Department for Work & Pensions published its review of auto-enrolment in December, where it announced that the minimum age for workers to be included into workplace pension schemes will be reduced from 22 to 18-years-old, and it will change the way pension contributions are calculated by the mid-2020s.

According to the report, removing the lower earnings limit and automatically enrolling at age 18 means that a medium earner – around £34,000 – could achieve a pension pot of £146,200, 32 per cent higher than under the current policy.

maria.espadinha@ft.com