The state pension is set to rise by up to £460 a year from April 2025, thanks to the “triple lock” policy. This increase aims to support pensioners amidst rising living costs, but it also comes with its own set of challenges and implications.
Understanding the triple lock
The triple lock is a Government policy that ensures the state pension increases each April by the highest of three measures:
- Average wage growth between May and July (including bonuses).
- Consumer Prices Index (CPI) inflation in September of the previous year.
- A fixed rate of 2.5%.
For 2025, the average wage growth has been confirmed at 4%, which is higher than the current inflation rate of 2.2%. This means the state pension will increase by 4%, translating to an additional £8.80 per week or approximately £460 per year.
However, with the Government cutting the Winter Fuel Payment for most pensioners, the overall increase in pensioners’ income might be less significant.
Who benefits the most?
The full new state pension will rise to around £12,000 per year for those who qualify. However, not all pensioners will receive this amount. Only one in four pensioners (3.4 million) get the ‘new’ state pension, while three in four (9.3 million) receive the old, lower state pension. Pre-2016 retirees, who may have been eligible for a secondary state pension, are likely to see at least a £300 a year increase in the basic state pension to £9,000 next year under the old system.
How much income do you need?
Determining the amount of income needed for a comfortable retirement in the UK depends on various factors, including lifestyle choices, location, and personal preferences. However, several studies and guidelines provide a general benchmark to help plan for retirement.
According to the Pensions and Lifetime Savings Association (PLSA), the following annual income levels are suggested for different standards of living in retirement:
- Minimum standard:
- Single: £14,400
- Couple: £22,400
- This covers basic needs such as food, housing, and utilities, with some allowance for social activities.
- Moderate standard:
- Single: £31,300
- Couple: £43,100
- This allows for a more comfortable lifestyle, including a car, occasional holidays in Europe, and some leisure activities.
- Comfortable standard:
- Single: £43,100
- Couple: £59,000
- This provides a more luxurious lifestyle, including more holidays, a new car every five years, and more frequent dining out.
These figures assume that retirees own their homes outright and do not have mortgage or rent payments.
It’s important to note that these are average figures and individual needs may vary. Factors such as health care costs, personal debt, and unexpected expenses can significantly impact the required retirement income.
The importance of saving
While the state pension provides a crucial safety net, relying solely on it will not be sufficient for a comfortable retirement. Even as a couple, with a full state pension, you will be short by around £35,000 per year.
There are lots of ways to boost your savings over the long term:
- Contribute to the workplace or private pensions – the Government will add to your contribution via ‘tax relief’, giving an instant boost, and your money is invested tax-free. Your employer will also contribute if you join the workplace scheme, under the auto-enrolment rules.
- Use ISAs – you can save £20,000 per year into an ISA, where the returns are entirely tax-free, helping your money grow more efficiently.
- Invest rather than save – The biggest impact on your savings over the long term will likely be inflation. Keeping your money in cash deposits does not keep pace with inflation, meaning your money is worth less over time. Investing your money in growth assets such as shares will help to improve the long term growth of your money.
- Pay off debts – Personal debt such as personal loans and credit cards usually have high rates of interest. Prioritising paying these off will help you to save more long term. Eg – Paying off a credit card that has the annual interest of 9% is better than saving money in a cash ISA that pays 4.5%.
Starting as early as possible is key, as are focussing on the long-term objective and keeping up good habits. Working with a Financial Planner will help to deliver these outcomes through advice, reassurance, and coaching.
How can Nelsons help?
Nathan Richardson is an Investment Director & Chartered Financial Planner in our expert Investment Management team.
For further financial advice concerning your investments or finances, please get in touch with Nathan or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
Contact usPlease note that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.