Imagine, for a minute, that you’re an MP, one completely au fait with using a variety of on- and offline platforms, through which you can express opinions on any topic under the sun. Let’s assume that your current focus is government spending; this gives you a perfect opportunity to highlight the enormous sums wasted when our rulers dip into the public purse.
“Colossal sums of public money are being poured down the drain in all areas – from education, defence, repairing potholes and across the NHS,” you declare, adding: “this waste must be brought to an immediate halt and resumed only after this outrageous expenditure has been properly audited in great detail, with future spending plans set in tablets of stone.”
Good luck with that.
Ordinarily, only opposition MPs criticise the often wasteful nature of an incumbent government’s expenditure, but we live in extraordinary times. For example, the overwhelming majority of adults agree that we must dramatically increase our expenditure on defence. The UK spent almost 2.5% of GDP on defending the realm last year (the government’s first obligation to citizens) and while NATO allies have agreed to increase expenditure to 3.5% by 2035, most people recognise the fact that we live in a dangerous world: increasing defence spending to 3.5% of GDP by 2030 would probably suit most adults.
I suspect that a combination of waste and wokeism continue to burden the NHS, but any number of government departments fall into the same boat.
Which brings us on to the state pension.
Once upon a time, suggesting that the state pension should be reduced, means tested or taxed (as our make-believe MP may advocate) would have met with howls of protest. No more. Today’s retirees are regularly depicted by a succession of resentful sorts as affluent, five-holidays-a-year baby boomers who, having bought their homes between 1980 - 95, have been incredibly lucky as their property’s value has soared.
There’s no escaping the fact that yes, property values rocketed during the final two decades of the twentieth century and many pensioners now own their homes outright, but we should remember what many of them encountered as mortgage interest rates hit 15% and beyond, sending great swathes of the population prematurely grey.
And before anyone starts fiddling with the current state pension, we should also remember that today’s retirees paid into the state pension ‘pot’ for the majority of their 40-odd-year working lives. These monthly (or weekly) contributions were made on the iron-clad understanding between state and citizen that upon retirement the contributor would receive a modest state pension in return.
Yet what seems to rankle a surprisingly large number of folks is the unequivocal undertaking made prior to the 2010 general election by then Chancellor, George Osborne, who confirmed he would apply the ‘triple lock’ formula to state pensions, a policy, he said, that would see pensioners "have the income to live with dignity in retirement".
Former pensions minister Sir Steve Webb concurs: “It [the triple lock] was introduced for a reason. For the previous thirty years, the state pension had been falling compared with what people earned before they retired. The last 15 years have undone much of that damage,” he told The Daily Telegraph recently.
The triple lock is designed primarily to ensure that the state pension is not eroded by gradual rises in the cost of living. For the time being, at least, pensions rise by whichever of the following three measures is highest: average earnings, inflation or 2.5%.
For the best part of 15 years, the triple lock policy suited all parties: it was a relatively inexpensive initiative and enormously popular with the government’s core voters. From April 2013, the average annual increase in state pensions was a modest 2.8%; however, thanks to a Covid-related anomaly which saw average earnings soar, pension payments rose by more than 10%. Although this was a one-off increase, it hasn’t prevented a steady flow of individuals and organisations questioning whether the commitment to the triple lock should remain.
Over the longer-term, runs their argument, public finances will come under greater pressure as age-related spending is rising and current pension policy will become increasingly costly.
When the triple lock was introduced, the Office for Budget Responsibility estimated it would cost the Treasury an additional £5.2 billion a year by 2029. However, a combination of corrosive inflation and a series of hard-hitting financial shocks have pushed the OBR’s annual estimated cost to £15.5 billion.
The policy has certainly improved retirees’ lot. According to the Resolution Foundation, during the late 1990s, an estimated 25% of pensioners lived in poverty; the triple lock has been instrumental in seeing that figure reduced by 10%.
Nonetheless, comparatively few older folks have sufficient financial resources to ensure they can spend great tracts of their retired lives traversing the globe on some form of bucket list-ticking jaunt.
Which brings us on to one deeply inherent flaw that could determine whether both the triple lock and the basic state pension itself will remain as we know them.
As this column has noted over the last few years, the state pension fund, which receives national insurance contributions and uses them to pay retirees (note: NICs are not invested but immediately disbursed in the form of state pensions) has been “under strain” for several years as a result of the UK’s population getting progressively older. It follows that if state pensions are to continue being paid, NICs need to be around 5% higher to ensure the fund breaks even.
This figure could rise significantly, particularly as: a) the number of working people paying taxes continues to fall and b) people wishing to benefit from those taxes in the form of a state pension will increase at a rate of 230,000 a year until 2046.
Let us, therefore, assume that at some point in the near future the triple lock will be ‘amended’ or perhaps ‘reformed’. What can retirees do to plug the inevitable gap that will subsequently appear in their finances?
A growing number of people, mindful that pressure is being applied behind the scenes to ‘trim’ the triple lock, may look for ways to cover potential shortfalls in their pension income. For some homeowners, that could include considering the wide range of equity release products now available.
Ostensibly, equity release enables homeowners aged over 55 to release a proportion of the bricks-and-mortar wealth built up in their property in the form of tax-free funds. Once these funds are withdrawn, often in the form of a ‘lifetime mortgage’, there is no legal compulsion to make any monthly payments. The lifetime mortgage is settled when the property’s owner(s) die or move into permanent residential care and the home is sold.
Granted, equity release is not a financial panacea, and it is important for those considering its appeal to take professional advice. Fortunately, this is readily available.
Of course, equity release will not be right for everyone. It can reduce the value of an estate, may affect entitlement to means-tested benefits and should always be considered alongside other options, including pensions, savings, investments, downsizing or family support.
But for many homeowners, property wealth has become an important part of later-life financial planning. If the triple lock is changed in future, or if the state pension simply fails to keep pace with the real cost of retirement, some people may decide that the home they have worked hard to own can also help support the life they want to lead.
That does not mean making rushed decisions or treating equity release as a quick fix. It means understanding what is available, what the long-term implications may be and whether it fits comfortably with wider retirement plans.
In an uncertain pension landscape, having options matters. For some older homeowners, equity release may provide one of those options - not as a replacement for the state pension, but as a carefully considered way to help maintain financial confidence, independence and peace of mind in later life.
