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General Election – the key retirement planning issues

Tom McPhail
care

Ever since the NI Budget U-turn debacle, an early General Election has made increasing sense. The Government needs a mandate to govern and if it lacks the legitimacy even to deliver on its centre-piece announcement of a rise in NI rates for the self-employed, then an Election in pursuit of a strengthened majority was the logical solution. From Tom McPhail, Head of Policy – Hargreaves Lansdown.

There are myriad policy issues to watch out for in the weeks to come, not least campaign pledges around tax and NI policy. Labour look set to target the over 65s as a key part of their campaign strategy. Only last week they made several announcements on issues such as the Triple Lock and the Winter Fuel Allowance and we expect pensions to be an important political battleground.

Triple Lock

Pension tax relief

State Pension Age increases

WASPI

Watering down of Defined Benefit pensions

State pension increases for overseas pensioners

Peripheral pensioner benefits (winter fuel allowance etc)

Auto-enrolment

Tax free pension withdrawals for care costs

The State Pension Triple Lock

(A guarantee to uprate the state pension in line with the highest of inflation, earnings and 2.5 percent)

The Conservative party’s 2015 manifesto committed only to maintain the Triple Lock, without actually specifying for how long. In his 2016 Autumn Statement Philip Hammond re-iterated the commitment for ‘this Parliament’ (which was generally interpreted as meaning until 2020). By contrast, Labour has guaranteed to maintain the Triple Lock until at least 2025. The Liberal Democrats, who were originally instrumental in introducing the Triple Lock thanks to Steve Webb are now silent on the issue; Nick Clegg (remember him?) recently argued for its abolition. According to Ipsos Mori, in the 2015 General Election those aged 18-24 were only around half as likely to vote as the over 65s (43 percent vs 78 percent).

Tom McPhail, Head of policy: “The over 65s are such a powerful voter group, politically It would be a very bold move for the Tories to explicitly resile from the Triple Lock this side of the election. It might make more sense for them to park it until 2020 by committing to maintain the policy until then, subject to a wider fiscal sustainability review encompassing other issues such as the state pension age. Given Labour’s poor poll ratings with the older age groups, it would make sense for them to press hard on this issue; they need to gain ground with the over 65s.”

According to the recent Cridland review of state pension age, the Triple Lock will add nearly 1 percent of GDP to the cost of the state pension by 2066/67, increasing it from 5.9 percent to 6.7 percent. “Our own view is that the policy is not sustainable in the long term, so it is a question of if rather than when the policy is formally abandoned. The General Election could present an opportunity for parties to lay the groundwork for a modification during the term of the next parliament.”

Pension tax relief
Pensions tax relief costs the Treasury around £48 billion a year, with around 2/3rds of this going to higher and top rate tax payers. George Osborne attempted to reform the system but was beaten back by his own back-benchers, settling instead for the introduction of the Lifetime ISA, seen by many as a Trojan Horse for further reform. At present the official government position is that they have reviewed pension taxation, there was no consensus and they have no further plans at present. Not everyone entirely believes them. In 2015 Labour pledged to restrict tax relief for top earners.

Tom McPhail: “There would be wide-spread support for reform of pension taxation but only if it were done in a measured way, building a sustainable system which encourages and rewards everyone for taking responsibility for their own retirement saving. The problem is successive governments have a adopted more of a smash and grab approach to pension tax reform; now would be an ideal moment to commit to a progressive and sustainable review in the next parliament.”

State pension age
Currently scheduled to increase to 66 by 2020, 67 by 2028 and 68 by 2046. Everyone knows more is needed, the only question is how quickly. The Cridland review pointed to the State Pension increasing to 69 or 70, with a move to 68 by 2039, 7 years earlier than currently planned . We are currently waiting for the government’s response to his review, which could be published on May 5th, but possibly they will look to fudge this decision until after the election. Will the political parties commit to a firm position on this issue as part of their manifestos?

Tom McPhail: “There are very few votes to be gained by telling 40-somethings they have to work for another year or two before they qualify for their state pension in around 20 years’ time. Set against this is the fiscal sustainability question: every year you push back the state pension saves the government billions of pounds.”

WASPI (Women against state pension inequality)
There is a clear dividing line here, with the current conservative government (and its coalition predecessor) repeatedly refusing to compensate those women affected by the precipitous and for some unexpected increases in their state pension age as a result of the 1995 and 2011 pensions act changes. By contrast, Labour and the SNP have fought their corner, arguing the WASPI women should get pension credit, taking their income up to £155 a week.

Watering down defined benefit pensions
The current Pensions Minister Richard Harrington has published a green paper looking at the sustainability of defined benefit 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. It will be interesting to see whether any party will be willing to commit to preventing any watering down of scheme members’ benefits, in a bid to put pressure on their opponents.

State pension increases for overseas pensioners
As part of a series of recent pension pledges, John McDonnell and the DWP shadow Debbie Abrahams committed to rectify the non-indexation of state pension for some UK pensioners living abroad, most notably in former Commonwealth countries. This is in contrast to the current government and past Labour governments, which have repeatedly turned a deaf ear to all such demands. UK citizens resident abroad are eligible to register to vote in parliamentary elections up to 15 years after moving abroad.

Peripheral pensioner benefits
Labour has committed to preserve the free bus pass and winter fuel allowance; this is in contrast to Ed Miliband’s 2015 manifesto which pledged to cut the winter fuel allowance for the top 5 percent of pensioners. The winter fuel payment costs the government around £2 billion a year (for comparison, the state pension costs over £90 billion a year).

Tom McPhail: “The New State Pension introduced in 2016 was set at just 5p above the minimum possible level. There is an argument that a higher state pension would provide a more robust foundation on which retirement savers could base their private pensions. This could be paid for in part by rolling all the peripheral benefits such as the bus pass and the winter fuel payment back into the state pension. The political cost of this would probably be so high it seems no party would be willing to go there.”

Auto-enrolment
The government is already conducting a review of the auto-enrolment programme, it is possible this could become politicised.

Tom McPhail: “We’d like to see the self-employed brought into auto-enrolment and for coverage to be extended to include lower earners. It is also important to put individuals at the heart of the pension system, so we’d like to see political commitments to give individuals the right to choose their own workplace pension into which their employer makes contributions for them.”

Tax free pension withdrawals for care costs
Tom McPhail: “The Care provision challenge is a very difficult issue for politicians; it costs huge amounts of money and there aren’t many votes to be won here. Allowing pension investors to make tax free pension withdrawals where the money is being used for care provision would reinforce the benefit of retirement saving and would put pension freedom drawdown on a par with care annuities which can already be paid tax free.”

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