Ask most people to give their interpretation of ‘welfare spending’ and they would probably reel off a long list of constantly rising financial commitments accumulated by various governments over the past 40 years which show little sign of stalling. On the contrary: there’s a much greater likelihood that government spending will continue its upward trajectory for the foreseeable future.
There seems little political incentive to change this trajectory. Financial markets may show their displeasure by increasing the interest rate at which the UK can borrow, but elected politicians still face pressure to spend taxpayers’ money, either to appease their political friends or placate different sectors of the electorate.
Fifteen years ago, one such section of the electorate obtained an unexpected addition to the modest funding they were already receiving through the Treasury. Furthermore, not only was this uplift financial in nature, it was accompanied by a simple formula which outlined how future annual increases to the state pension would be made.
When introduced in 2011, the ‘triple lock’ was an attempt to make life a little easier for millions of elderly folks. It currently increases the basic and full new State Pension each year by the highest of inflation, average earnings growth or 2.5%. However, despite the state’s apparent largesse, a sizeable number of pensioners argued that after decades of working life, during which they made National Insurance contributions (NICs), they had earned their entitlement.
Over the past few weeks, the future of the triple lock has once again come under the microscope. The government has announced plans to adjust the formula from April 2030, while retaining the existing triple lock throughout this parliament. Under the announced system, annual increases would still protect against inflation and be at least 2.5%, with an earnings link designed to maintain the pension’s value relative to wages over time.
Meanwhile, state pension recipients grow increasingly exasperated. Earlier in the week, I spoke with one retired lady who said, “I do wish people would stop referring to the state pension as a benefit and painting pensioners as a drain on the country’s finances. Pensioners like me worked long and hard, and paid National Insurance out of our income to qualify.”
“You’re right,” added a man standing nearby, nodding in agreement. “The state pension is an earned pension, not a benefit. The fact that our contributions were used for other purposes over the years is not our fault.” His frustration is understandable. Technically, the State Pension is a contributory benefit, but National Insurance is not an individual pension savings pot: today’s contributions help fund today’s pension payments.
Nonetheless, the debate over the cost of the triple lock continues. For pensioners who feel they have already paid their dues, the prospect of smaller future increases is unlikely to be welcome. Nor does a comparison between the State Pension and a full-time minimum-wage income offer much comfort to those trying to make ends meet.
In October 2023, I used this column to issue a warning to all current and prospective retirees, noting that, “…at the risk of being cynical (or is that realistic?), should a future government conclude that it can get away with scrapping the pension ‘triple lock’… there’s plenty of evidence to suggest they could be tempted. It follows that having a back-up plan to supplement your retirement income could prove a shrewd move.”
The question, then, is no longer simply whether a Chancellor might change the triple lock. The announced reforms would produce smaller increases in some years than the existing formula, although that is different from cutting the cash amount of the pension. Chancellor John Healey may welcome the prospect of a lower future pensions bill, but millions of pensioners will understandably be asking what the changes could mean for their own retirement plans.
So how can this one-sided situation be rebalanced?
According to the latest Office for National Statistics life tables, a man aged 65 has an average remaining life expectancy of 18.7 years, while a woman of the same age has 21.2 years. In other words, retirement can last around two decades, and often longer. These years are supposed to be a happy time of life, when opportunities to travel, enjoy yourself on ‘grandparent duty’, activate hobbies you’ve been wanting to do for ages, or generally take it easy more often present themselves.
If retirement income fails to keep pace with people’s needs, some of this planned activity may have to be curtailed as pensioners tighten their belts. Thankfully, eligible older homeowners have another option worth exploring when considering how to fund their retirement.
Releasing capital from your property enables eligible homeowners aged 55 and over to gain access to a percentage of the ‘hidden wealth’ built up in their property. The funds can be released as a tax-free lump sum or, with a drawdown lifetime mortgage, as an initial amount followed by further withdrawals from an agreed cash reserve when needed, subject to the lender’s terms.
The most popular method by which this capital (or equity) is released is through a ‘lifetime mortgage’. The amount homeowners may borrow depends on their property’s value, the age of the youngest applicant and the lender’s criteria, with health and lifestyle sometimes also taken into account.
Two attractive features of lifetime mortgages are that homeowners retain ownership of their home and, with plans that allow interest to roll up, there is no contractual obligation to make monthly repayments. The loan and any outstanding interest are normally repaid from the sale of the property when the last remaining borrower dies or moves permanently into long-term care. Borrowers must continue to meet the conditions of their plan.
If interest is not paid, it builds up over time and increases the amount owed, reducing the inheritance left behind. Equity release can also affect entitlement to means-tested benefits.
Readers wishing to explore equity release can compare deals available to them using smartER, a platform designed by Equity Release Supermarket, an independent, whole-of-market equity release adviser. Preliminary research can help homeowners understand their options, but qualified advice is required before taking out a lifetime mortgage. A local equity release adviser can also assess alternatives, such as downsizing or using other savings.
As the population ages, retirement planning becomes a ‘must-do’ for millions of folks hoping to enjoy a prolonged retirement.
In the meantime, they will continue to receive a State Pension, however commentators choose to categorise that spending. For some homeowners, equity release could provide additional funds to help bridge a retirement income gap. Whether it is the right approach depends on their circumstances, rather than the fate of any one government policy.
