What are Labour's pension plans?

The financial industry rumour mill has been in overdrive over the past few weeks amid the Labour party’s overwhelming victory in the UK general election. The new government has wasted no time in getting to grips with several issues. Perhaps not surprisingly, given the prominence in the pre-election manifesto, pensions and retirement have been an early focus.

Nothing unveiled so far has any impact on personal pensions including SIPPs. Instead, the emphasis has been on occupational and workplace pensions with the aim of driving scale and efficiency, as well as greater productive investment in the UK economy.

This will primarily affect millions of people in defined contribution (DC) workplace schemes where typically members pay money into their pot each month, investing in a range of assets. This contrasts with a defined benefit (DB) scheme, where the pension provider promises to pay a specific income once you reach a certain age.

The King’s Speech and Pension Review

Many people are not saving enough or sufficiently engaged with their pensions, so it’s encouraging the new government has started on the front foot in getting to grips with the issue.

Last week’s King’s Speech unveiled a Pension Schemes Bill that promises new rules and requirements for occupational pension schemes. It aspires to a new system to enable small pension pots to be automatically combined in one place, a ‘value for money’ test, and the requirement to offer a retirement income solution, including default investment options, to members.

Chancellor Rachel Reeves has also launched a review of the pensions landscape, which pledges a “big bang of reforms to unlock growth.” It is set to consider further steps to improve people’s retirement, including tackling inefficiency and increasing investment in UK assets among occupational schemes.

The objectives of greater value for money and automatic consolidation of ‘forgotten’ small pension pots make sense. Fragmentation can lead to unnecessary costs that lead to inferior performance, and most people change jobs several times over the course of their lifetime so it’s easy to lose track. Meanwhile, the challenge of making choices about retirement income can only be helped by greater awareness and guidance around the options. Taking money from pensions involves many tax and planning pitfalls that can be hard to negotiate without expert help.

The consideration of options to reinvigorate interest in UK infrastructure, venture capital and other productive assets is also welcome to help reignite lacklustre growth across the UK economy. However, it is uncertain how pension schemes will be incentivised or mandated to alter their approach. All schemes are first and foremost duty bound to invest in the best interests of their members. However, there appears to be ambition to go far beyond Jeremy Hunt's Mansion House Compact, a voluntary commitment to allocate at least 5% into non-stock market listed UK growth companies by 2030.

One obstacle is the current charge cap on pension default funds, which can be a barrier to investing more in labour-intensive, hands-on forms of investing such as venture capital and infrastructure. However, greater economies of scale across the industry might help tackle this.

Will there be changes to pension rules?

Pensions are often a tempting target for governments to tamper with and raise much-needed cash. The lifetime allowance and annual allowance have both been tinkered with over the past few years for instance, but hopefully a period of relative stability lies ahead. All of this will be dependent on Labour’s tax plans for pensions – so what do we know so far?

Well, Labour has backtracked on its intention to reintroduce the Lifetime Allowance, the total value an individual can accumulate across their pension schemes without facing a tax charge, and this now looks set to remain abolished. We also have no indication thus far that either pension tax relief or tax-free cash is going to be altered.

The former would be a tough nettle to grasp as any move to a flat rate of tax relief – which has at times been mooted in the press – would mean overhauling the ‘relief at source’ system whereby contributions are automatically paid into a scheme gross, i.e., before tax.

The rules surrounding tax free cash might be an easier lever to pull. The current rules allow for a tax-free lump sum of up to 25% of the pension value subject to a maximum across all schemes of £268,275. It would be an easy step to make this a rounder number, for example £300,000, though it also possible it could be reduced to make the regime a little less attractive for those with larger pensions.

However, we would caution against any decision to bring forward any decision to take pension tax free cash based on what might happen. At this stage we simply don’t know what might change, if anything. It’s likely we will learn more in the coming weeks, including during the new Chancellor’s first Budget in the autumn.

Read more: Seven questions to ask before withdrawing from your pension

What will happen to the State pension triple lock?

In the run-up to the election, the Conservative party accused Labour of planning to introduce a ‘retirement tax’. Really this was an absence of any commitment to deal with the looming issue of the full New State Pension, which is uplifted by the so-called ‘triple lock’ each year, exceeding the income tax personal allowance for the first time. Inaction would mean many more pensioners paying tax on their state pension even if they have no other taxable income.

This isn’t an immediate problem. The personal allowance is presently frozen at £12,570 and the full New State Pension for 2024/25 tax year is significantly lower at £11,502. However, the terms of the triple lock mean the state pension rises by the higher of inflation, wage increases and 2.5% each year. With the latest figure for wages at 5.7% it is highly likely this element will uprate the amount next April. The relevant figure isn’t published until September, but it would take the state pension to over £12,100 assuming no change from the most recent March to May reading.

From this point it would only take a couple more years (with two rises of 2.5% say) to exceed the personal allowance, so a ‘retirement tax’ on the state pension would realistically come into play in the 2027/28 tax year.

The government will need to address this at some point as it probably isn’t feasible to drag lots of low-income pensioners into declaring and paying tax. Having committed to the triple lock, at least for now, one option would be for the Chancellor to increase the personal allowance. Indeed, the Conservative manifesto contained a promise to do this for people of pension age. However, this would give preferential treatment to that cohort, so an uplift across the board could be seen as more equitable.

Read more: How to qualify for the State Pension

What’s the future for the State Pension?

The government must also grapple with the broader long-term question of whether the state pension is sustainable. Recent analysis from the Adam Smith Institute found that the point at which the system reaches the stage that more is paid out to pensioners than is being brought in through national insurance contributions could come as early as 2035. This is because of demographic changes and the ratcheting up of payments from the triple lock.

At some point reform appears to be inevitable, but whatever happens a renewed focus on retirement saving to enjoy a level of comfort in later years is going to be a necessity for most people. Data from the Pensions and Lifetime Savings Association shows the cost of comfortable retirement has jumped significantly over the past year, and it is common for people to underestimate the effects of inflation as well as their own longevity.

Read more: What is the average pension pot by age in the UK?