As expected, the Labour party won the general election and with it the keys to Downing Street. So, what does this mean for the UK’s retirement savings and what should we be looking out for from this Labour Government?
We know the context is extremely challenging. Taxation is at its highest level for 70 years, public services are stretched and the population is ageing. Tough choices lie ahead.
There are several things Labour has already talked about and on which we have a fair degree of clarity. Then there are a few issues on which they have either been silent or just ambiguous, and where we might see some surprises.
After a bit of a wait, Labour finally named Emma Reynolds as pensions minister. The role now straddles both the Department for Work and Pensions and HM Treasury, sparking hopes of a more cohesive approach and smoother progress.
UK pensions for UK people
Labour has promised a review of pensions. However, they haven’t yet said a lot about what that review will actually look at. They’ve talked broadly about pensions delivering sustainable retirement incomes, which points towards a focus on the outcome of the income, rather than the accumulation of the savings pot: a subtle but perhaps important distinction.
They’ve also talked about tackling the barriers to pension schemes investing more into UK productive assets and setting out proposals to bring about an approach that will benefit both UK PLC and UK retirees. There is a clear agenda here to use pension fund capital to invest in the growth of the UK economy.
There are a few issues on which Labour has been silent or ambiguous, and where we might see some surprises
We think it is unlikely they will explicitly mandate how and where pension funds must invest, but there is a very clear intention to at least incentivise and steer pension trustees and investment managers in that direction.
The King’s Speech caught the sector by surprise with the announcement of a Pension Schemes Bill, carrying on themes that had already been set in train by the previous government. Measures outlined include the Value for Money framework, consolidation of small pots and occupational schemes being required to offer retirement income solutions to members.
Pension taxation
On pension taxation, Labour have said they won’t be reintroducing the Lifetime Allowance, which will come as a relief to many, given how complicated it proved to be getting rid of it in the first place.
However, they have maintained a studious silence around the taxation of pension death benefits; this is an area where we think the government may have plans for raising tax.
Similarly, it is possible that the tax-free lump sum could be reduced under this government. It has already effectively been frozen at £268,275 and it would be a simple stroke of the legislative pen to slice away at this amount.
There is an outside possibility the Government will bring into their review the whole broad architecture of pension tax relief. Tax relief costs tens of billions of pounds every year and is by its nature regressive; it is most generous to the wealthiest, while part-time workers and the low paid can miss out entirely. The counter-argument is that reform of pension taxation would be complex and unpopular.
Pensions dashboards and auto-enrolment
There is unfinished business with pension dashboards and auto-enrolment. We expect the government to see through the roll-out of pension dashboards over the next couple of years, much to everyone’s relief. On auto-enrolment, enhancements were agreed in 2017 to bring down the minimum age and expand the earnings definition.
Despite the legislation now having been passed to make these changes, they still haven’t been implemented; we expect the new government to make these changes a reality.
Might pension freedoms be curtailed?
Coming back to the question of sustainable retirement incomes, the government may take another look at pension freedoms and at the minimum age for accessing private pension savings.
Labour have never been enthusiastic about pension freedoms, and they may now take the view that firmer guardrails are needed to prevent savers from running down their savings prematurely.
It’s unlikely anything will happen quickly, and that’s probably a good thing
It is also possible (though the Government hasn’t talked about it) that they’ll look to bump up the minimum age at which people can access their private savings.
We know the sustainability of the state pension is going to come under increasing pressure, due to demographic changes and a shifting worker to retired ratio. In this context, forcing people to work longer before they can draw on a pension, whether private or state, may be a soft target for the Government.
It’s unlikely anything will happen quickly, and that’s probably a good thing. Any review of pensions will take time and should involve members of the financial-services sector who work with the people relying on those products for their future retirement plans.
Ben Lester is head of distribution at Morningstar Wealth
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