Martin Lewis: State Pension 'triple lock' – what's REALLY happening

Martin Lewis: "Okay, let's do this together. I want to try and explain to you now what's really being proposed to happen with the State Pension 'triple lock', as it is so widely misunderstood. If you ask me to sum it up in a nutshell, I'd say they're planning to move from a triple lock to a '2.5-times' lock. Now, I'm not interested in whether this is good or bad. That's for you to make up your own decision.

"I just want to make sure you understand how it works. So, right now, the new State Pension and the old basic State Pension rise each April in line with the highest of 2.5%, CPI inflation or average earnings growth. Whichever is higher, that's what will happen to it.

"The proposal is, from 2030 it will work like this. It will rise each April by at least, and the 'at least' is important, the highest of 2.5% or CPI inflation. But there will also be a loose link to average earnings growth to make sure it keeps up with average earnings growth.

"Confused? You probably should be. And in fact they haven't announced the exact mechanism yet. So the explainer I'm about to give you, I think, should give you a rough idea of the type of thing we're talking about. But don't expect the i's to be dotted and the t's to be crossed. But I do think this makes sense once you understand it, here goes...

"So, let's take this scenario [Martin displays graphic on screen]. We've got three years. Well, under the current system, in year one, of course, it would go up by inflation. In year two it would go up by earnings because that's the higher. In year three it would go up by inflation. So you'd have 3% in year one, 6% in year two, 3% in year three, which is a total of 12%. Actually, as it compounds, you know, you get the 6% on top of the 3%, it's more than 12%.

"But to keep this really simple, I'm going to ignore compounding right the way through. They all compound. Let's just ignore it because it helps the maths be simple.

"So, what would happen under the new system? Year one, dead easy. Inflation is the highest. It goes up with inflation. Year two is where it all gets more interesting. In year two, if it only went up with inflation, so that's 3% in year one, 4% in year two, you would be at 7%.

"But the rule will be something like 'it must keep up with average earnings since this came into place in 2030', when it's proposed to start. So over the two years, if you look, average earnings is 2%, plus 6%. So if it had gone up 7%, it needs to go up 8% to match average earnings.

"So having gone up 3% in the first year, you would need it to go up 5% in the second year to match average earnings under the new system.

"So let's think about this for a second. Under the existing system, it would have gone up by 3% in year one and 6% in year two, which is 9%. If you only had a double lock, it was just inflation or 2.5%, whichever was higher, it would have gone up by 7%. Under the new system, where it's got a looser link to average earnings, it would have gone up 3% in year one, and then, to get it up to the total of average earnings in year two, it would have had to go up by 5% more to make the 8%.

"You with me? Year three, hopefully you can do for yourself. It's pretty simple. Inflation's higher so it'd go up by 3%, which means in total, under the current system it would have gone up by 12% (plus compounding). Under the proposed new system, roughly, it would have gone up by 11%.

"That is what is being spoken about. As you can see, it's probably more of a subtle change than some of the hype about it, but it is still a real change. Whether or not it's worth it for the shift to social care, whether it would actually go to social care, all of that is for you and the politicians to debate and discuss. I hope now, though, you at least understand how it would work."