£200,000. That’s the cost of scrapping your state pension

Angela Rayner refuses to commit to state pensions triple lock

The triple lock has helped boost the value of the state pension since it was introduced by the coalition government in 2010, and scrapping it would be hugely controversial. The mechanism increases the state pension each year either by inflation, wages or 2.5 percent, whichever is highest.

No wonder suggestions that it should be scrapped cause outrage and alarm. 

Even with the triple lock, the UK is still said to have one of the lowest state pensions in the developed world. Yet pensioners are still getting poorer rather than better off.

Some argue that the triple lock causes intergenerational unfairness but the state pension is not just there for those who have retired. With luck it will be around for future generations, too.

It will be sorely needed as more than one in four people over 50 has no pension savings of their own, rising to a third for women, according to new research from SunLife.

Almost two thirds of over-40s are anxious about retirement, said Shona Lowe, financial planning expert at wealth manager abrdn. “It is particularly daunting against a backdrop of rising interest rates and the cost-of-living crisis.”

Everybody should be saving all they can for the future but it isn’t easy, as the sums required are so huge.

The true value of the real of the state pension is double the average person’s total retirement savings, including company and personal pensions.

Only very wealthy would be able to replace it from their own resources.

Currently, the new state pension pays a maximum £220.21 a week, or £10,600 a year.

Yet in practice many get less either because they did not make enough qualifying National Insurance contributions, or because they retired before April 6, 2016, on the basic state pension which pays much less.

It would cost an incredible £200,000 to replicate the full new state pension from your own savings, said Alice Guy, head of pensions and savings at platform Interactive Investor. 

“Pension income of £10,600 would cost £199,000 to buy with a workplace or private pension pot. A couple getting £21,200 would need £398,000 between them.”

These figures assume that the pension pot is placed in an escalating annuity at age 65, where the income increases every year by three percent to keep up with inflation.

Savers are falling well short of the numbers required. The average pension pot for over 55s currently stands at £91,400 for employees, but collapses to just £16,100 for the self-employed.

Those with long-term illnesses find it even harder to save for retirement, with an average pension pot of just £13,000 at age 55, official figures show.

The demise of “defined benefit” company final salary pension schemes has left workers increasingly reliant on the state pension, Guy added.

Most pension schemes are now known as “defined contribution”, where money is invested in the stock market and dependent on performance.

This makes the state pension even more precious, Guy said. “Having a guaranteed element to your pension income is extremely valuable and the state pension is the jewel in the crown of our retirement system. The triple lock should not be tampered with lightly.”

This explains why pensioners get so anxious whenever the future of the triple lock is brought into question, which seems to happen all the time these days.

Those who argue the triple lock favours today’s pensioners at the expense of younger people are taking a short-term view. 

While the auto-enrolment scheme will give millions of employees a workplace pension for the first time, it won’t be enough to supply a decent retirement income on its own.

Young people will struggle to save under their own steam as they graduate with huge sums in student debt, face sky-high property prices and an uncertain jobs market.

They will need the state pension just as much today’s elderly, if not more so.

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