Figures have been released days before the Budget, in which Reeves may target tax perks given to pension savers
Up to seven million extra working-age people could end up missing out on a minimum standard of living in retirement if the state pension triple lock is ditched, unpublished Government analysis shows.
Government figures on retirement saving show that 4.6 million people in the working-age population are projected to have pension income that falls below the minimum standard needed in retirement.
But, the figures are calculated on the assumption that the triple lock – which ensures that state pensions rise by the highest of average earnings, inflation or 2.5 per cent each year – continue for the next 50 years.
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The continuation of the lock for that long is considered unlikely, as many MPs already want to see it ditched because of its high cost.
Now, a Freedom of Information request by former pensions minister Sir Steve Webb shows what would happen if the lock were to be ditched.
The department had already modelled two alternatives – linking the state pension to earnings or to inflation. These projections have never been published until now.
They show that if the triple lock were cut and the state pension increased with inflation instead, then 11.7m could face missing out on a minimum standard of retirement income, which is 7m more than on current projections.
Even if the state pension was instead linked to average earnings growth, 6m would miss out on the minimum standard.
The minimum standard used is based on calculations by pensions body Pensions UK, which suggests a single pensioner needs £13,400 per year to cover their “basic needs”.
The analysis shows even more savers would miss adequately replacing their working-age income if the triple lock was cut.
The Government says there is a percentage of pre-retirement earnings an individual would need to replace to meet an adequate income in retirement. With the triple lock, 14.6m are on course to miss this. This could rise to 26.1m if the triple lock was cut.
The analysis is being released just days before the Budget, where Chancellor Rachel Reeves is expected to target pension tax perks, a move critics say would worsen an already serious problem.
Sir Webb, now a partner at consultancy LCP said: “These shocking figures reveal that the true state of under saving for retirement in Britain is far greater than has previously been admitted.
“Very few people expect the triple lock to continue for another 50 years, yet this is the basis on which the Government has so far published estimates.”
Pension tax perks could be cut at Budget
With Reeves set to deliver her Budget next Wednesday, Sir Webb warned that any measure reducing incentives to save would worsen the problem.
He added: “Against this backdrop, the Chancellor should be taking measures in the Budget to boost pension saving, not undermine it.”
The Treasury is exploring ways to raise several billion pounds next week. One proposal widely discussed in Whitehall is a clampdown on salary sacrifice for workplace pension contributions.
Under a salary sacrifice arrangement, an employee agrees to give up part of their gross pay in return for higher pension contributions.
Because their salary is lower, both the employee and employer pay less national insurance (NI). Employers benefit by saving on employer NI contributions, while employees pay less income tax and NI on their reduced salary.
Government under pressure to clarify long-term state pension plan
The discoveries intensify pressure on the Government to clarify its long-term state pension strategy.
The triple lock has delivered large increases to the state pension since 2010, but the Office for Budget Responsibility has repeatedly warned that it is costly and unpredictable.
Keeping the triple lock puts pressure on the public finances, but getting rid of it could pose financial problems for low-earning retirees.
Reports have previously suggested many MPs secretly want the triple lock to be ditched.
Sir Webb says the country is living in a “fool’s paradise” about how well-prepared workers are for old age.
The combination of weaker state pension growth and reduced incentives to save, he argues, would leave millions exposed.
A DWP spokesperson said: “We are committed to the triple lock for the rest of this Parliament, and this means millions will see their yearly state pension rise by up to £1,900.
“For those who need extra support, Pension Credit – worth on average around £4,300 a year – is available with an additional 57,000 pensioner households receiving it last year when compared to the year before.
“Through our Pension Scheme’s Bill, the average earner could see their pension pot boosted by £29,000 and we have also revived the Pensions Commission to tackle the complex barriers stopping people from saving enough for retirement, helping to build a future-proof pensions system that is strong, fair and sustainable.”