Research from Fidelity International into the cost of inflation protection on private pension savings has highlighted the true cost of the triple lock on the state pension.
The triple lock, which was launched in 2010 by the Coalition government, guarantees that the state pension will rise by the higher of inflation, earnings growth or 2.5%.
However, its future now hangs in the balance with only Labour and the Liberal Democrats guaranteeing to preserve it throughout the next Parliament. After 2020 the Conservatives plan to introduce a new double lock with increases to the state pension only being linked to earnings and inflation.
According to the analysis from Fidelity International, purchasing just one part of the triple lock could cost private savers in the region of £115,000.
To carry out its analysis, Fidelity generated annuity quotes that would provide an income equivalent to the basic state pension that either rose by 2.5% a year or in line with the retail prices index measure of inflation.
To purchase an income equivalent to the state pension at outset – so £159.55 a week or £8,319 a year – would cost a man aged 66 £161,850. However, this is a level rate and would not increase over the years.
To add in RPI escalation it would cost £276,900 – a further £115,050. Escalation at 2.5% was not quite so expensive, costing £230,650, costing savers an additional £68,800.
‘Inflation protection has always been expensive’
Commenting on the research, Richard Parkin, head of pensions policy at Fidelity says: “One can’t buy an annuity with triple-lock increases. But just taking one element of its guarantee shows its value. Providing inflation protection has always been expensive but is particularly so in today’s climate of low interest rates and rising inflation.
“These figures show why there is so much political attention on state pension increases. While they don’t show the cost to government, they do emphasise that while the state pension seems like a small amount of money, maintaining its purchasing power over time is a huge expense.
“Guaranteeing it will go up by at least 2.5% even when inflation is low is a significant financial commitment and one the Conservatives have decided we can no longer afford.”