By David Robbins, Retirement Director at WTW
This article outlines how pensions policy might feature in the new Parliament. A more comprehensive summary of the possible changes will be published shortly, analysing comments made previously by Labour spokespersons.
Pension investments: Like her predecessor, the expected new Chancellor, Rachel Reeves, has suggested that pension funds are not investing in the right ways, particularly when it comes to financing start-up businesses looking to scale up. A review promised by Labour would aim to “identify and tackle barriers to pension schemes investing more into UK productive assets – including cultural and regulation-induced risk aversion”. Labour wants “greater consolidation of all types of schemes”. What this will mean for private sector DB schemes has not been spelled out, but the new government inherits plans to create a public sector consolidator, which would allow government to influence how a chunk of DB assets is invested. It is unclear whether, or how, Labour will take forward potential changes to rules around how DB surpluses can be accessed. For DC schemes, Labour proposes “an opt-in scheme…to invest a proportion of their assets into UK growth assets”, guidance on default investment approaches and new powers to force consolidation.
Automatic enrolment: Labour has not proposed a timetable for automatically enrolling 18-21 year-olds into workplace pensions, or for abolishing the lower qualifying earnings threshold so that contributions always start from the first pound of earnings. This might reflect concerns about the cost of living and the fact that Office for Budget Responsibility (OBR) forecasts assume the changes do not start being implemented before 2029; earlier implementation would reduce forecast tax revenue.
Pensions tax (general): Labour has set out a few limited tax rises (not affecting pensions directly) and its manifesto ruled out increasing income tax rates, National Insurance, VAT or the main rate of Corporation Tax. Beyond that, its general stance during the campaign was that it had “no plans” to change other taxes, that Labour spending plans did not require additional revenue and that a Labour government would focus on trying to generate extra resources by growing the economy. Invitations to rule out other specific tax rises were generally declined. Cutting higher-rate tax relief, which the incoming Chancellor advocated before having responsibility for Labour’s tax policy, is in the “no plans/not needed” category rather than the “ruled out” category, but implementation would be challenging. After Sir Keir Starmer mistakenly gave the impression that the option to take a 25% tax-free lump sum would soon expire, Labour said it had a “firm commitment” not to change the system; it is unclear whether this extends to not cutting the maximum £268,275 in cash terms.
Lifetime Allowance: Labour’s manifesto said nothing about restoring the Lifetime Allowance, which an Opposition spokesperson once promised to do “immediately”, and the party’s fiscal plans at the election did not include any revenue from doing so. Not committing to bring the LTA back is not the same as committing not to bring it back, but there have been hints that Labour will not restore it.
State Pensions: Labour is committed to applying the Triple Lock throughout this Parliament. OBR forecasts suggest that the 2.5% underpin will bite in three years of the new Parliament, in which case the Triple Lock will produce bigger pension increases than would be due under the earnings indexation required by statute. A review of when State Pension Age should rise to 68 is due by 2029; Labour has not said when this will be conducted.
As ever, speculating on the policies of an incoming government is fraught with risk. Time will tell whether the new government will feel compelled – either by preference or the country’s economic situation – to introduce more substantial changes.
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