A fortnight after winning a landslide in the general election, chancellor Rachel Reeves announced a wide-ranging “pensions review”, led by new pensions minister Emma Reynolds.
While details are still scarce on the changes the new administration plans to make, and any timetable, read on for a look at the current pensions landscape and for some measures that Labour could introduce following the review.
A new Pension Schemes Bill
Labour wasted no time in announcing a new Pension Schemes Bill in the King’s Speech on 17 July.
Measures in the bill include:
- Identifying poor-performing default funds and using a “traffic light” system to rate funds on a range of metrics. Poor-performing funds may then have to improve, or close and move assets to a better fund
- Preventing people from losing track of their pension pots through the consolidation of defined contribution (DC) individual deferred small pots
- Requiring occupational pension schemes to offer retirement income solutions to members under the plans.
The government estimates that introducing these “value-for-money” measures, alongside addressing small pots and guided retirement products, may lead to the average earner having around 9% more in their pension pot at retirement.
No plans to reintroduce the pension Lifetime Allowance
Having previously stated that they would reverse the former government’s abolition of the pension Lifetime Allowance (LTA), the party changed their stance during the election campaign. Currently, there are no plans to reintroduce the pension LTA.
The LTA capped the amount your clients could hold in your pensions without paying an additional tax charge when they accessed the funds. Labour has said it will not reintroduce the charge to provide certainty for savers, and because they say that bringing back the former rules would be too complicated.
In place of the LTA, two new allowances came into force on 6 April 2024 that your clients should be aware of:
- The Lump Sum Allowance (LSA) caps the amount that an individual can take tax-free during their lifetime in the form of a pension commencement lump sum or the tax-free element of an uncrystallised lump sum at £268,275.
- The Lump Sum Death Benefit Allowance (LSDBA) caps the amount that a client can take tax-free in life and death combined at £1,073,100.
Labour will likely retain these new allowances – certainly in the short term.
No changes to other pension allowances
So far, there have been no commitments to change other pension allowances.
The Annual Allowance – the amount a client can save into a pension each year without an additional tax charge – remains at £60,000.
If you have a client who is a higher earner, they may be affected by the Tapered Annual Allowance. This will affect them if their threshold income is above £200,000 and their adjusted income (essentially their threshold income plus pension contributions) is more than £260,000.
In this instance, a client’s Annual Allowance will be reduced by £1 for every £2 of adjusted income over £260,000, potentially reducing their Annual Allowance to as little as £10,000.
The Money Purchase Annual Allowance also remains at £10,000. This restricts the amount of tax-efficient pension contributions an individual can make if they have already flexibly accessed a defined contribution pension.
New auto-enrolment legislation could come into effect
Some changes to expand pensions auto-enrolment have already been legislated for, including:
- Lowering the starting age of auto-enrolment from 22 to 18
- Calculating contributions from the first penny earned, rather than from the current £6,240 starting point.
These are waiting to be put into practice, although ongoing cost of living pressures could make reforming auto-enrolment difficult in the short term.
Labour could also take steps to increase the minimum contribution level – perhaps to 12%. If this is split equally between employers and employees, it could increase the costs to businesses.
Could Labour change the level of tax relief or the amount of lump sum available?
While no details of the scope of the pensions review are available, there is speculation that Labour could reform pensions in one of several ways.
Change the tax relief regime
Pension savers currently receive tax relief on contributions at their marginal or highest rate of Income Tax.
In 2016, chancellor Rachel Reeves wrote an article for the Times arguing for a 33% flat rate of tax relief. While Labour has denied that this is their current policy, and flat rate of tax relief could affect how much higher earners would save into their funds over a long career.
Remove the 25% tax-free lump sum
Some experts have said that Labour could make changes to the 25% tax-free lump sum.
For example, they could change the rules to insist that individuals use their pension savings to generate a minimum level of income, and only allow them to draw lump sums once this income is secure.
This could help to ensure that retirees maintain a sustainable income, although it would require a significant reversal of the Pension Freedoms legislation that has been in place since 2015.
Could pensions become liable for Inheritance Tax?
The Guardian reports that Rachel Reeves told The News Agents podcast that some taxes would have to rise in October’s Budget.
Inheritance Tax (IHT) is one tax that the chancellor could reform.
One option the government has is to change the tax treatment of pensions on death. At present, money held in pensions usually falls outside an individual’s estate for Inheritance Tax (IHT) purposes.
Including the value of pensions in an individual’s estate when they pass away, or simply making the system less generous, could raise valuable funds to plug the £22 billion “black hole” the chancellor says she is facing.
A greater focus on investing in the UK
Building on the so-called “Mansion House reforms” announced by Jeremy Hunt in July 2023, Labour has said that they will act to increase investment from pension funds in UK markets.
Money Marketing reports that even a 1% shift could potentially result in £8 billion of new investments to spur growth and infrastructure development.
However, any restrictions on investments could affect the growth potential of pensions given the poor performance of London-listed companies in recent years compared to American companies.
This could be a thorny issue for pension trustees who have a fiduciary duty to act in the best interest of scheme beneficiaries. Would an insistence on investing more in UK assets align with this?
Maintaining the State Pension triple lock
Labour has committed to maintaining the State Pension triple lock.
The triple lock ensures that the State Pension rises each year by the highest of:
- Inflation, based on September’s Consumer Prices Index
- Average wage increases between May and July
- 2.5%.
The commitment means that the policy is likely to stay in place until at least 2030 at least.
While there has been no suggestion that the government will change the State Pension Age, one possible change could be a rise in the minimum age at which your clients can access their defined contribution pension.
It currently sits at 55 but is due to rise to 57 in 2028. A rise to 60 has been suggested, as making people wait longer before they can access their money could, in theory, make retirement funds last longer in the future.
Get in touch
If you have any questions about what the pensions review might mean for your clients, or if you have a client who would benefit from Chartered advice, please get in touch.
Email hello@sovereign-ifa.co.uk or call 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
