And we’re off…
A General Election has been called for the 4th July and the polls point to a seismic victory for the Labour Party.
In the week following Rishi Sunak’s surprise election announcement, the press has been packed with predictions about what a future Labour government might do in terms of private pensions, State Pensions, and personal taxes.
Over the next couple of weeks, I’ll be exploring ‘what we know so far’ – not a lot as the Labour Party has been fairly ‘tight-lipped’ on formal policy details – what they might be considering, and some of my own thoughts and predictions.
This first blog focuses on pension policy, where there appears greatest scope for change.
Disclaimer: A pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your circumstances, tax legislation and regulations which are subject to change in the future. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of each investor.
Private pensions
This is the ‘big one’ and therefore warrants a blog in its own right.
Labour have called for a review of pension policy and have already hinted at some potential major policy overhauls.
The current rules
Pensions are, generally speaking, the most tax-efficient form of saving and investing. This is due to the ‘quadruple whammy’ of:
- Tax relief on contribution, at your marginal rate of income tax, so 20% for a basic-rate taxpayer, 40% higher and 45% additional,
- Tax-free investment profits within the pension itself,
- The ability to draw up to 25% of your pension tax-free subject to a limit of £268,275 (that is, unless, you have certain transitional protections entitling you to higher amounts),
- In most cases, pension savings fall outside your estate for inheritance tax purposes.
In terms of how much you can contribute, this is the lower of:
- 100% relevant earnings – generally work-related income,
- Your annual allowance, set at £60,000 a year, but tapered at a rate of 50p in the £1 once ‘adjusted income’ (generally, all taxable income plus employer pension contributions) exceeds £260k, down to a minimum £10,000 pa. You can also carry forward any unused allowance from the previous three tax years.
What might labour do?
There is a lot…
- Labour said previously that they’ll rethink the abolition of the Lifetime Allowance, but potentially with a carve-out for doctors (and some senior Civil Servants – funny that!). As a reminder, the Lifetime Allowance was the maximum amount you could draw from your pension without subsequently incurring extra tax - up to 55% - on the excess. It was most recently set at £1.073m (it has been as high as £1.8m previously) but was abolished by Chancellor Jeremy Hunt in his 2023 Spring Budget,
- They could reduce the amount of tax-free cash you can take, down from the current £268,275 – hopefully a round number at least,
- Or make uniform the amount of tax relief you get on contributions, say 25 or 30% for everyone (i.e. an uplift for basic-rate taxpayers who currently ‘only’ get 20%, vs a tightening for higher and additional rates),
- Or reduce the annual allowance – the current £60k a year is pretty generous, and this may enable an abolition of the overly complicated tapering rules, e.g. a move to a flat £30-40k for everyone.
- There is some speculation that Labour might look again at the inheritability of pensions, i.e. bringing these back inside your estate for inheritance tax purposes. At the moment, if you die, whatever is left in your pension is passed down to your chosen beneficiaries completely free of inheritance tax. If you die before the age of 75 (and the pension funds are claimed within two years), they’re also likely to be free of income tax. An inheritance tax on pension savings would not only raise additional tax revenue but also encourage spending of pension savings, which is good for the economy and brings in additional income tax revenue.
- Labour might look at the age you can start drawing your private pension, aka. the Minimum Pension Age. This is currently set at 55, but is due to rise to 57 by 2028. Pushing it out might make sense to a new government keen to nudge people into working for longer.
- In addition to the above, Shadow Chancellor Rachel Reeves is said to be sceptical about the Pension freedoms that were introduced by George Osborne in 2015 and allow you to access your pension flexibly, i.e. drawing as much or as little as you wish. For example, you can take the whole pot in one go, as a series of lump sums, or take tax-free cash only and intermittently access the balance via drawdown. There are concerns this has led to poor outcomes for retirees, too many of whom are ‘cashing their pensions in’ at the first opportunity, with little consideration for longevity risk, i.e. running out of money in later years. It would be a major U-turn, but a Labour government could re-introduce some form of forced annuity purchase, at least to cover ‘base spending’.
Personal view
1. Lifetime allowance and inheritance tax on pensions
First and foremost, I’m not convinced that the lifetime allowance will be reintroduced, certainly not in its former state.
I may well be ‘eating my words’ in a matter of days/weeks, but pension rules are already overly complex and the lifetime allowance was a flawed policy. In some respects, it was a tax on strong investment performance. And the way in which defined benefit pensions (also known as Final Salary) were valued for lifetime allowance purposes – 20x income – was extraordinarily generous in contrast to defined contribution (personal pension) plans.
Furthermore, to reinstate this but with a carve-out for certain public sector workers, would be difficult and costly to administer.
They may well reintroduce the lifetime allowance but at a much higher level – say £2m-plus. Alternatively, including pensions in one’s estate would both raise revenue and simplify the current system.
2. Annual allowance and tax relief
I think there’s a good chance we see a tightening of the current rules – a shift to a uniform 25-30% tax relief on contributions for all and/or a reduction in the annual allowance to say £40k (where it was as recently as the 2022/23 tax year) or even £30k, combined with a removal of the taper.
3. Increase in Minimum Pension Age
Hopefully not.
In discussions with clients, there is already a reticence to contribute to pensions and lock these funds away until your late 50s. Increasing the Minimum Pension Age would be a backwards step in my view, and potentially result in more people opting out of workplace schemes, a trend that is already on the rise.
Ultimately, this would risk a reduction in pension savings in general and, in turn, increase reliance on the state in later years.
4. Review of pension freedoms
This is the big unknown.
As part of their planned review into pensions and retirement savings, Labour has explicitly said they will look into whether the current framework delivers sustainable outcomes for individuals.
Could we revert to some level of forced annuity purchase in retirement, or a cap on drawdown income – maybe? Potentially with a ‘free pass’ for those receiving formal financial advice – that would seem reasonable, albeit there are nowhere near enough advisers to service those in need of, and willing to seek, advice (the so-called ‘advice gap’).
The bolder move would be a more far-reaching overhaul of the UK pensions industry and a shift towards some type of hybrid scheme, one that offers a guaranteed minimum income, plus a share in investment performance over and above this.
Planning opportunities
It’s very much ‘wait and see’ for now.
Acting on potential future policy has always been something of a fool’s errand and we should get more detail in the coming weeks – this blog is intended as a ‘first cut’ and something we’ll revisit in the coming weeks and months.
That said, I believe those able to get 40-45% tax relief on contributions, and with available funds to make use of their annual allowance (including carry forward), should potentially move pension saving up the agenda – the current rules are extremely generous and may not be around forever.
In next week’s blog, I’ll look at various other policy areas that may face review – State Pensions, ISAs, income tax, capital gains tax and inheritance tax.
Happy Thursday and good luck out there.
