With polling day just around the corner, Emily Perryman analyses how the triple lock, state pension age and pension tax relief could be affected.
Britons are gearing up for another trip to the polls on 8 June for a general election that looks set to have far-reaching consequences for the pensions industry.
Pensions are a key part of the political battleground as each party fights to secure the influential “grey” vote.
Triple lock
A key issue that has been thrown under the spotlight is the pensions triple lock. Both Labour and the Liberal Democrats have promised to keep the triple lock if they win the election, with Labour pledging to preserve it until 2025.
Several commentators think it is unlikely the triple lock will survive in its current format if the Conservatives win. The party’s 2015 manifesto committed only to maintain the triple lock, without specifying for how long.
Tom McPhail, head of policy at Hargreaves Lansdown, said the policy is not sustainable in the long term, so the challenge for any government is how and when to move away from it without upsetting a key constituency of voters.
“Older people vote more than younger people, and every year the population as a whole is getting older,” he said.
“The simplest position for the Tories would be to reiterate their most recent commitment to preserve the triple lock to at least until 2020, thereby bridging across the snap election (of their making), showing good faith with voters and keeping open the door for a review during the next Parliament.”
There have been talks of a “double lock” coming into play in the future. This would see the removal of the minimum 2.5% annual increase, with future increases subject to average earnings or inflation.
Gary Smith, chartered financial planner at Tilney, said this would ultimately reduce the burden on the Treasury over the long term, if increases in average earnings and inflation remain below 2.5%.
“I suspect we will see further changes to the state pension in the future, with the timescale of increasing the state pension age accelerated, as the Treasury seeks to manage the future costs of maintaining this benefit.
“With this in mind, I would encourage savers to consider how much they are saving towards their retirement, as the state pension is unlikely to be as generous as it has been under the triple lock regime, and the age from which it will become payable will no doubt increase.”
Tax relief
Labour recently announced that if elected, the party will raise income tax for those earning in excess of £80,000. This would have a significant knock-on effect for pensions.
Tax relief on pensions is based on income tax rates, so the more someone earns the more tax relief they can get on their pension contributions.
“Given the ideological leanings of this Labour party, it is hard to see them being relaxed about actually increasing pension tax relief for higher earners,” said McPhail.
“This means we’d be likely to see the annual allowance taper threshold brought down to £80,000 – a move which would be met with horror by employers and the pensions industry alike.”
McPhail said today’s tax relief system causes myriad problems, adding whoever forms the next government will have to “get a grip” on pension taxation and look at a fundamental reform of the system.
According to HM Revenue & Customs, there are 2.8 million people earning between £50,000 and £100,000, 466,000 people earning between £100,000 and £150,000 and 165,000 people with incomes between £150,000 and £200,000.
Bringing the taper down to an £80,000 threshold from £150,000 would affect an estimated 1.2 million people.
“Indirectly, it would make life more difficult for millions more,” warned McPhail.
Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, said further piecemeal cuts to tax relief would undermine the stability of, and public trust in, the pensions system.
“The government should instead undertake a thorough, independent review of tax and incentives to save in order to seek sustainable solutions which continue the alignment of government (both current and future), savers, employers, industry and broader society which has driven the success of automatic enrolment so far,” he stated.
National insurance
Although the government made a U-turn on its plans to increase National Insurance contributions for the self-employed, this was purely because it broke a manifesto pledge.
Tom Selby, senior analyst at AJ Bell, said the policy is still regarded as fair by Chancellor Philip Hammond, who has pointed to the increased entitlements that self-employed workers now receive under the single-tier state pension.
“Logic dictates this policy should form party of the Conservative’s 2017 manifesto. However, elections have a funny habit of shifting political priorities and it would be no surprise to see [Prime Minister] Theresa May kick this can as far down the road as possible.
“If this is the case, the Conservatives will still need to fill a £2bn black hole from the Budget, with reports suggesting annual allowance for pension tax relief could be in the firing line.
“However, permanently cutting savings incentives to fill a short-term financial gap would be awful policymaking and could also prove unpopular among the electorate.”
DB pensions
The pensions under-secretary Richard Harrington has published a green paper looking at the sustainability of defined benefit (DB) pensions. One possible option to ease funding pressure on sponsoring employers would be to allow a degree of latitude over the inflation proofing granted to scheme members.
DB pensions are underfunded, with about three million people having only a 50/50 chance of seeing their benefits paid in full.
Vidler said the government should bring forward legislation to reduce burdens and enable pension schemes to share services or to merge, delivering better returns, saving money and improving governance.
“This will mean a greater chance of members receiving their benefits. It will free employers to focus on corporate growth and it will return public confidence to the system.”
WASPI
The current Conservative government has repeatedly refused to compensate women affected by the increases in their state pension age as a result of acts of parliament in 1995 and 2011.
By contrast, Labour and the Scottish National Party have argued WASPI (Women Against State Pension Inequality) women should get pension credit, taking their income up to £155 a week.
Labour deputy leader Tom Watson recently reiterated his support for the WASPI campaign and urged the PM to address the issue.
Long-term direction
Whichever party wins, the government needs to present a long-term and stable vision for the pensions industry, including a promise to end constant tinkering of the rules.
Vidler added: “Above all, it needs to build public confidence in the system, helping the industry fight scams and deliver the retirement choices savers want, while resisting the temptation for further raids on the pensions tax relief piggy bank.”
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