When planning retirement, the amount a teacher gets from the state pension is an integral part of this process. In 2010, the Conservative and Liberal Democrat coalition brought in a “triple lock” on pensions that promised to stabilise the income for those who have retired.
What is the triple lock?
The triple lock is a guarantee that the state pension will increase annually by an amount that is calculated from the highest amount – whether it is inflation, average earnings, or a minimum of 2.5%. There is also a built-in guarantee, at the moment, that the amount paid to pensioners will not be subject to national insurance payments.
This means that the state pension will keep growing on or above the cost of living. Therefore, theoretically, you will still be able to buy in the future, what you can today, with your state pension. The hope for this policy is that older people will never fall into poverty. However, as the number of pensioners increases, this policy becomes expensive. Consequently, there are constant warnings that this triple lock will come to an end.
How might this change?
Reports in the Financial Times recently suggested that this triple lock is under threat and the government could be looking to introduce national insurance payments to pensioners. Why? Well, COVID-19 has increased the national debt by an unprecedented amount, and there is pressure to find ways of retrieving some of this money through increased taxation and reduction in costs.
While changing the pension rules risks alienating older voters who tend to be the mainstay of the Conservatives, there may not be much choice. Also, if younger generations experienced higher taxation, and none of the burdens was felt by the older generation, this could be perceived as unfair.
What does this mean for pension planning?
If you are a teacher, you are already guaranteed a work-based pension scheme payout from the Teacher’s Pension Scheme. You will be able to track how much this will give you in retirement via My Pension Online and then you can add this to your forecast state pension.
If you worry that the state pension changes could drop your income in retirement below the cost of your desired standard of living for your retirement, you then need to think about adding to your payments or additional measures. You could consider AVC (additional voluntary contribution) schemes, or look to flexibilities to increase your income. With the insecurities in state pension, it suggests that speaking to an independent financial adviser could be advantageous.
The content in this article was correct on 15th September 2020. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on your teachers’ pension scheme, as well as financial matters in general. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.