Pension predictions post-election: what now for your finances?

Proposed changes to the pension landscape have been thrown into limbo, following the election result earlier this month.

At the time of writing (15 June) the Conservative Party was still locked in talks with the Democratic Unionist Party (DUP) of Northern Ireland, with a view to striking a deal that would secure a working majority. It is expected a deal will be ironed out that will result in support for certain key votes, such as the Budget.

But, in failing to secure a majority, one of the many consequences is that it is tougher to pass legislation, particularly when it is controversial. Therefore various pension changes that had been in the pipeline may now not see the light of the day.

Below we run through three proposed changes and offer our own predictions for each.

Triple lock

It was expected that the triple lock would be reformed into a 'double lock' under a Conservative premiership. This, however, did not materialise, and it now seems the triple lock will live to fight another day.

Under the triple lock, first introduced in 2010 by the Conservative/Liberal Democrat coalition government, the state pension increases each year by the highest of three measures: inflation, the average earnings increase, or 2.5 per cent.

As part of its 2015 election manifesto, the Conservative Party pledged to maintain the triple lock until 2020. This time around the Conservatives retained this commitment, but pledged to tweak the rules after 2020, introducing a new ‘double lock’ under which pensions would rise in line with earnings or inflation, whichever is highest.

Other parties have pledged to keep the triple lock, including Labour and the Liberal Democrats. The DUP also pledged in its manifesto to retain the triple lock, and will not want to back down and break its word, so is therefore unlikely to agree to vote the changes through. Given inflation, now at 2.9 per cent, may well remain above the 2.5 per cent threshold for some years, the government would not save money by removing it from the equation anyway.

Verdict: The DWP holds all the cards, but triple lock looks likely to be retained

Money Purchase Annual Allowance

It was announced in last November’s Autumn Statement there would be a reduction to the amount savers can pay into a pension once they have started taking a pension income (known as the money purchase annual allowance or MPAA), from £10,000 to £4,000 a year from the start of the 2017/18 tax year (6 April).

The proposed change was left out of the 2017 Finance Bill, however, so has not been given the green light. This came as a shock to financial advisers, some of whom had been counselling their clients to reduce their pension contributions to just £4,000 this tax year. The MPAA was given a temporary stay of execution, due to the fact that the policy did not have enough time to be rubber-stamped ahead of parliament being dissolved.

Verdict: Clarity is needed, but as Rachel Vahey, product technical manager at Nucleus Financial, points out, the longer this hiatus lasts, ‘the less likely it seems that the government can backdate this piece of legislation to the start of the tax year when, or if, it is eventually passed’.

Pension tax relief

Pension tax relief reforms have been on the agenda for some time. George Osborne, the former chancellor, consulted at length on possible reforms to the tax relief on pension contributions, although he stopped short of implementing change. One idea on the table was to impose a flat rate of pension tax relief, which would negatively impact high earners but benefit basic rate taxpayers.

But given the outcome of the election, radical pension reforms seem less likely to be on the agenda, as it will not be a popular policy. Jon Greer, head of retirement policy at Old Mutual Wealth, says: ‘Major pension reforms are unlikely, particularly controversial ones. It would be a surprise therefore if they tinker with pension tax relief any time in the next parliament.’

Vahey agrees, but thinks the annual allowance, which currently stands at £40,000, remains in the firing line. ‘Pensions tax relief is another area which is likely to be consigned to the backburner. A proposed big ticket switch to, say, a single rate of tax relief will probably not get the parliament’s time or focus. But this still gives the new government wriggle room for more tinkering, and changes to the lifetime allowance or annual allowances cannot yet be ruled out,’ she says.

Verdict: Radical reform looks off the cards, but annual allowance could become less generous in the future.

Other pension policies in a pickle

Further changes to the state pension age look likely to remain up in the air for some time, particularly as the Labour Party stated in its manifesto that it favours freezing the retirement age at 66. Also cast into doubt are previous plans by the Conservative Party to review the regulation of defined benefit pension transfers in light of various schemes facing significant deficits.  

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