Pensioners Pinched – The Triple Lock Loophole Slashing Expected Increases

This month, UK retirees were primed for a significant uplift in their state pensions, advertised as an 8.5% increase—one of the largest in recent history. Yet, findings from a new Money Mail investigation reveal a starkly different reality for the majority of pensioners. Shockingly, less than one-third of British pensioners will enjoy the full 8.5% boost on their entire state pension.

Despite initial celebrations, a lesser-known loophole in the system means that up to eight million pensioners are set to receive a less substantial rise, with the hardest hit losing nearly £200 annually. This issue predominantly affects those who retired before the year 2016.

The government often promotes the triple lock system, which guarantees that state pensions increase annually by the highest of three measures: inflation, average earnings, or a fixed rate of 2.5%. However, not all components of the state pension are tied to this generous triple lock—some only adjust according to inflation, which often results in smaller increases.

Understanding the Triple Lock Mechanism

To fully grasp the implications of this discrepancy, it’s crucial to understand the mechanics of the triple lock system. This policy specifically applies to the portion of the pension based on National Insurance contributions. For those who retired after April 2016 under the New State Pension scheme, the full 8.5% increase translates to an annual raise of £902.20, boosting their total yearly pension to £11,502.40.

For pensioners who reached their State Pension age before April 2016, the calculation is more complex. The old State Pension system consists of two parts:

  • The Basic State Pension: This part depends on your National Insurance record. With the recent increase, the full Basic State Pension now stands at £156.20 weekly or £8,814 yearly.
  • The Additional State Pension: Often based on one’s earnings and certain state benefits, this component was previously recognised under various schemes such as SERPS and the Second State Pension. It is this part of the pension that is only adjusted based on inflation rates, which, as of September 2023, was marked at 6.7%—below the 8.5% headline figure.

The Winners and Losers of the System

This structural anomaly in the pension system means that over eight million pensioners receive less than they potentially could have, were the full pension subjected to the triple lock increase. In some instances, higher-income retirees or those with substantial benefits history could receive a total of £355.40 per week from the Basic and Additional State Pensions combined. However, the average Additional State Pension clocks in at a mere £48.90 per week, significantly less than the maximum potential.

The Cost of Deferring

There’s another catch for those who choose to defer their State Pension in hopes of higher future payments. For every nine weeks of deferral, there’s a 1% payment increase. Yet, this increase mirrors the inflation rate, not the triple lock rate, leading to a yearly shortfall of £11 per deferred pension.

Government Savings vs. Pensioner Shortfalls

While this loophole is a financial drain for millions of pensioners, it ironically results in substantial savings for government coffers—over £350 million, according to Money Mail’s analysis. Critics like former pensions minister Ros Altmann argue that the triple lock is more a political maneuver than an effective policy, particularly disadvantaging older, poorer pensioners who need the most support.