Natasha Browne takes a look at what will feature in the next government's pensions policy
At a glance
- The last five years saw the introduction of auto-enrolment, ‘freedom and choice’ and an overhaul of DC governance
- The next parliament will see more changes to tax relief, a single-tier state pension, and reviews of all of the above
The last parliament saw the biggest change to pensions for decades. Compulsory annuitisation for people with defined contribution (DC) pots was abolished, which proved a big hit with the public.
Indeed, one survey of 2,000 people showed the flexibilities had affected how 15% of them would vote in the general election. The popularity of the policy meant Labour lent its support to the freedoms, although it plans to review them. And the UK Independence Party (UKIP) told PP it was broadly in agreement with the reforms.
It is very likely the result of the election will be inconclusive, with protracted negotiations before a government is formed, so we are unlikely to know the identity of the next pensions minister for some time. But regardless of who takes up the post, there are several burning issues they will have to deal with.
These include the introduction of the single-tier state pension; the continuation of auto-enrolment (AE); the possibility of a secondary annuity market, and the industry favourite: pensions tax relief.
Competing on tax relief
Labour kicked off the debate on pensions tax relief by revealing it wanted to slash the annual allowance from £40,000 to £30,000. It also pledged to cut the lifetime allowance by £250,000 to £1m.
The cuts were proposed alongside a commitment to limit tax relief for those earning above £150,000 (including pre-tax income and employer pension contributions) from 40% to 20%. The party said its total tax and benefit changes would raise £11.8bn.
But the Institute for Fiscal Studies (IFS) described the plans as "misguided". It pointed out the policy ignored the fact that pension contributions are excluded from taxable income because pension income is taxed at the decumulation phase.
The Conservatives then pledged to incrementally reduce the annual allowance of £40,000 for people earning more than £150,000. By the time their income reached £210,000, they would enjoy an annual allowance of just £10,000.
This followed Osborne's Budget 2015 announcement that the lifetime allowance would be cut to £1m, as Labour had pledged. The Conservatives said their total tax and benefit policies would boost the Exchequer by £10.3bn.
But the IFS said it was not clear why there was such disparity in the treatment of pensions tax relief between higher earners. The policy would affect about 0.66% of the population.
The think tank questioned whether it would raise the projected £1.4bn saying it could bring forward tax receipts, rather than increase them.
After these announcements, the Liberal Democrats revealed it would seriously consider a flat rate of tax relief for pensions. The idea was previously floated by the party's Steve Webb, who said a rate of 30% would spread tax relief more fairly.
Research published in July 2013 by the Pensions Policy Institute (PPI) said a 30% rate of pensions tax relief would encourage basic taxpayers to save for retirement. The cost to the government would be negligible at £35bn.
Figures from the IFS show the Liberal Democrats' total tax plans are expected to generate £11.7bn. But the think tank said it would not look at the potential consequences of the policy because the party's commitment was merely to review the current system.
Other key areas
The next government will be responsible for implementing the single-tier state pension. This will be £144 per week and is tied to a triple-lock for now; it is promised to rise annually in line with the higher of inflation, earnings growth, or 2.5%. The IFS branded the policy "absurd" and said the policy would increase costs by 0.8% of national income by 2060.
Another area of focus will be AE. Launched in October 2012, the initiative has brought five million people into pensions. Figures show nearly one in five employers were late with their staging obligations in 2014, however.
As the project trickles down to the smallest employers, that number could increase. An added complication is that the first wave of auto re-enrolment will begin from this July.
In March, Osborne launched a consultation into setting up a secondary annuity market. There is mixed opinion on whether or not annuitants should be allowed to trade in their contracts for cash. But this issue is likely to remain at the forefront of the next government's pensions policy.
Lastly, governance of DC schemes could be looked at again. Legislation has taken effect to require independent governance committees (IGCs) to oversee contract-based schemes. But questions remain over how independent these committees will be.
And then there is the potential for the 0.75% charge cap to be trimmed down. The industry can look forward to another exciting parliament.
This week's edition of Professional Pensions is out now.
Ben Gunnee reflects on 2018 and talks about the Fiduciary Management trends to keep an eye on in 2019
Lloyds Banking Group secured 630,000 new pension customers last year, according to its 2018 annual results.
Guy Opperman has rejected calls to speed up changes to auto-enrolment (AE) despite increasing pressure to boost contribution rates and overall savings pots.