Pensions expert James Jones-Tinsley reviews the election result and its impact on the pensions landscape.
What has surprised me most about the outcome of yesterday’s General Election is not the much-predicted Labour landslide victory, but how well the smaller political parties have fared, largely at the expense of the Conservative Party.
At the time of writing, the Green Party have 4 seats, the Reform Party have 4 seats, a number of Independent candidates – including Jeremy Corbyn – have gained parliamentary seats, and while the Scottish Nationalist Party’s hold over Scotland’s political landscape has been reduced to single figures, the Liberal Democrats have secured their best result since the 1920’s.
The Labour Party faces a tough inheritance on many fronts.
Where pensions are concerned, arguably the top priority is to finalise the outstanding legislation in connection with the abolition of the Lifetime Allowance, which was cut short when the former Prime Minister, Rishi Sunak, decided to go out into the pouring rain without his umbrella and call the election.
The Labour manifesto speaks of a “review of the pensions landscape”; a broad-brush statement, with no time limits attached.
However, given that the incoming Chancellor, Rachel Reeves, has stressed which taxes she will not increase, one wonders if an emergency Budget in the near future might focus on the ‘low hanging fruit’ that pensions offer the new government, in their bid to raise funds from elsewhere?
Firstly, pensions tax relief, which currently costs the government over £40 billion each year, could come into view. The last nine years have seen reforms to pensions tax relief discussed at many junctures, but to date, individuals can still obtain pensions tax relief at their highest marginal rate of income tax.
An incoming government with a significant majority will always deliver bad news to the country early on in their tenure, and so expect reform of pensions tax relief; potentially a move to a single percentage rate of relief for all individuals, regardless of how much income tax they pay. If this was as low as 20%, it would save the government billions of pounds each year, at a stroke.
Secondly, the tax treatment of pension death benefits for those individuals who die below the age of 75 could be up for review. The ability to pass on these benefits to surviving recipients free of income tax for the rest of their lives has been criticised by think-tanks including the Institute for Fiscal Studies as “overly generous”, and so a move to impose the payment of income tax on these pre-age 75 distributions would undoubtedly be tempting to a new government.
Thirdly, Inheritance Tax (IHT) was not included in Ms Reeves’ list of taxes that will remain untouched, and one wonders if the current exemption from IHT that trust-based pensions enjoy, may be under threat. I sincerely hope not, as the ability to pass on pension death benefits to surviving beneficiaries via the discretion of the trustees of the pension arrangement, without the potential imposition of IHT on those benefits, is a powerful benefit for those recipients who are arguably at their most vulnerable.
Fourthly, maintaining the ‘Pensions Triple-Lock’ for annual increases to the State Pension.
Yes, the Labour manifesto stressed they would maintain this promise, in order to secure the pensioner vote, but its affordability over time will only increase, and so I fully expect the new government to call for yet another review of increasing the State Pension Age to 68 and beyond, far earlier than is currently set out in legislation.
James Jones-Tinsley FPMI APFS is a Self-Invested Pensions Technical Specialist at Barnett Waddingham LLP
