Labour's possible pension changes - what chance they happen?

There was little known about Labour’s plans for our retirement savings prior to last week’s general election - the party’s manifesto contained only a handful of mentions of pensions. 

There were some clear commitments - including to keep the Triple Lock for uprating the State Pension - but beyond that nothing except a pledge to conduct a ‘review’ of pensions that will ‘consider what further steps are needed to improve security in retirement, as well as to increase productive investment in the UK economy’.

The lack of detail has created speculation about what may now follow and much concern among those at or near retirement, who will have to navigate any changes that come.

That concern was clear from the questions we received as part of our recent quarterly Investment Outlook activity. More than a hundred Fidelity investors sent in questions on all sorts of topics, but it was Labour’s plans that dominated. The Outlook’s author, Tom Stevenson, and I tackled as many as we could in both a video Q&A and a special episode of our weekly Personal Investor podcast. If you want to watch, listen or read the Outlook for yourself you can do that here.

How might Labour change pensions and retirement savings? Here are some of the most talked about potential reforms.

Note - these are not planned changes but merely possible reforms that have been discussed within the savings industry. They should not be taken as the basis for any financial decisions.

1. Use pension assets to invest in the UK economy

Labour appears supportive of reforms already being discussed that would enable money held in some Defined Benefit and workplace Defined Contribution schemes to be used to invest in projects and companies deemed supportive of the UK economy.

The manifesto included the promise to ‘act to increase investment from pension funds in UK markets. We will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC.’

This one, therefore, seems on the table although the details are still to be ironed out.

2. Auto-enrolment changes

Auto-enrolment means eligible employees automatically begin saving into a pension, but there are restrictions as to who is included and what earnings are used to calculate their contributions.

Some changes to expand the scope of auto-enrolment have already been legislated for, including lowering the starting age of auto-enrolment from 22 to 18, and to begin calculating contributions from the first penny earned, rather than from the current £6,240 starting point.

With no need for new legislation, these changes are expected to happen.

3. Reintroduce the Lifetime Allowance?

The Lifetime Allowance, which placed a limit on what could normally be held within pensions, was removed by the last Conservative government in April. The move was criticised by Labour in opposition and the party face questions over whether it would reintroduce the Lifetime Allowance.

There was nothing in the manifesto about it, however, and Labour has said that it will not reintroduce the limit. That suggests the change is unlikely for now and would be politically difficult to make.

There are still limits on what can be paid into pensions with tax relief, and you can read about those here.

4. Minimum pension age

There has been industry speculation that Labour may seek to make retirement incomes more sustainable, and that this could mean tweaks to the system of pension freedoms that allows you to access your money flexibly.

One change being mentioned is a rise in the minimum pension age, the age at which you can access your pension. It currently sits at 55 but is due to rise to 57 in 2028. Making people wait longer before they can access their money could, in theory, make retirement funds more likely to last in the future. A rise to 60 has been suggested.

Such a change would be very significant for those approaching the current minimum pension ages and would require a long period of communication to ensure individuals can plan for the change.

5. Introduction of a minimum secure income

A perhaps more radical way to make retirement income more sustainable would be to insist individuals use pension money to obtain a minimum secure level of income, with access to money beyond that allowed only if this is in place.

This is an idea that has been put forward by industry commentators but would require a significant reversal of the pension freedoms that have been in place since 2015.

6. Limiting Inheritance Tax (IHT) protection within pensions

Money held in pensions is treated differently on death from other assets. Pension money falls outside of a person’s estate for Inheritance Tax purposes and can be passed to beneficiaries without IHT applying. If death occurs before age 75 then no tax applies, and if after age 75 then the beneficiary will pay Income Tax at their marginal rate.

This has made pensions a valuable tool for those seeking to mitigate their IHT liability. Changing the tax treatment on death of pensions may prove a complicated task but there are levers the government could pull, short of a full overhaul, to make the system less generous if it wishes.

Industry voices have described the tax treatment on death of pensions as a ‘soft target’.

7. Reduction of ‘tax-free cash’

As much as 25% of pension money can be accessed without tax to pay, up to a limit of £268,275. This ‘tax-free cash’ - or Pension Commencement Lump Sum in the official jargon - is one of the most popular aspects of the pension system and one of the key reasons why saving within a pension is advantageous from a tax point of view.

There was a kerfuffle during the election campaign when Sir Kier Starmer was asked about the future of tax-free cash and replied that the current system would be reviewed in the coming years, were he to win the election. Labour spokespeople had to quickly confirm that he had spoken in error, and that the tax-free lump sum was here to stay.

No change, therefore, is expected.

8. Pension tax relief

Money contributed to a pension can benefit from tax relief. Basic rate tax relief is added automatically, meaning an £80 contribution becomes £100 inside a pension, while extra relief is available for higher and additional rate taxpayers which can be claimed back through their tax return.

It means the biggest benefits are potentially available to those earning at higher levels. There has long been talk that the system could be changed to target the benefits of tax relief more to those on lower earnings. Previously Rachel Reeves, now Chancellor of the Exchequer, has argued in favour of a flat rate of 33% relief for everyone.

Labour has insisted that this is not its policy, and no longer Reeves’ view. Any change risks being unpopular and could be very difficult to implement.

That isn’t the same as ruling it out altogether and the system of tax relief can be expected to be under the microscope when Labour conducts its pensions review.

Read more on what the election means for your finances

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.