Now that the dust has settled following the General Election, it is time to dig out the crystal ball and try to work out what the new electoral arithmetic means for our pensions and retirement.
The best clue to a government’s priorities is the Queen’s Speech. This year’s speech was particularly important, due to the fact it set out legislative plans for the next two years. Notably, apart from a number of Finance bills (to which we will return) there is very little proposed legislation on pensions and related issues. Probably the only one of interest is the plan to merge the various free public financial guidance bodies – the Pensions Advisory Service, the Money Advice Service and Pension Wise – into a single (as-yet-unnamed) organisation.
Beyond this it is striking that there is no planned legislation on state pension age changes. This means that although the government has a legal duty to announce its plans in response to recent reviews of the state pension age, we will probably have no more than an announcement of the government’s intentions but no legislation. There is also no time for legislation on final salary pensions, meaning that ‘another BHS’ remains very much a possibility.
One consequence of the government’s very slender majority (even with the help of minority parties) is that it will find it almost impossible to get through any major reform that creates significant numbers of gainers and losers. One obvious example of this is a big shake up of pension tax relief.
Just two summers ago, the former Chancellor, George Osborne, published a Green Paper looking at some pretty radical options including scrapping tax relief altogether and replacing it with an Isa-style tax treatment of all pension saving. There seems to be no chance of that kind of bold structural reform in the present parliament as the losers from reform would be able to unsettle enough MPs to deprive the prime minister of a majority.
Triple lock wins stay of execution
Of course, not all areas of policy require legislation and there are two pensions-related topics where we had expected change but where none is now likely to be made. In both cases this is a consequence of the deal between the Conservatives and the DUP, which has resulted in a reversal of plans announced in the Conservative manifesto.
The first is on the ‘triple lock’ mechanism for uprating the state pension. The Conservatives had planned to end this process, using instead a ‘double lock’ where pensions rise each year by the greater of the increase in earnings or prices. However, as a result of the negotiations, the triple lock will now live on for another five years.
The second is on the Winter Fuel Payment. The Conservative manifesto proposed some form of means-testing of these annual payments to pensioners, though was not very specific about who exactly would stop getting it. Again, this proposal has now been dropped as part of the deal with the DUP.
Annual allowance looks vulnerable
However, before we relax and think that we are in for a period of stability in legislation when it comes to money matters, we have to return to our old friend, the Finance Bill.
Although most of parliament’s time for the next two years will be taken up debating the consequences of Brexit, every year there will be at least one Budget and at least one Finance Bill. This year we are expecting two – the first will re-enact the main changes from the 2017 Budget which had to be put on hold during the General Election. This includes measures like the cutting of the dividend allowance from 2018. But the second will presumably follow the November Budget and will implement any new changes announced later in the year.
If there is to be no major structural reform, it looks odds on we will see more ‘slicing and dicing’ – further incremental cuts to things like pension tax relief in order to fund some of the many pressures on public spending. The most likely cut to tax relief is to the £40,000 annual allowance, whilst the £1 million Lifetime Allowance may not escape unscathed.
More contentious changes such as an end to tax-free cash probably will not pass the minority government test and are therefore unlikely, but you can be sure the Treasury will be looking for complex technical changes that few will understand and which raise serious money.
Steve Webb is director of policy at Royal London. Read more from Steve Webb's Pension Clinic here.
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