Party manifestos: which pensions boxes do they tick?
For adviser use only
Whether you think the outcome on 8 June is a foregone conclusion or, in today’s unpredictable world of politics, firmly up for grabs, the party manifestos signal a raft of changes to pensions and retirement regardless of the party in power.
There’s no avoiding the challenges of our ageing population and as a result, intergenerational fairness is firmly part of politicians’ policymaking. Recent analysis showed pensioners’ incomes after housing costs have risen to just 7% lower than those of the working population.
Here, we consider the key proposals from the Conservatives, Labour and Liberal Democrats and consider what these might mean. Of course, just because something doesn’t feature in a manifesto doesn’t mean it won’t happen, and vice versa - we’ve already seen the Conservatives ‘update’ their policy on social care.
State pension increases
With both Labour and the Liberal Democrats committing to the state pension triple lock, the spotlight was on whether the Conservatives would do the same. However, as widely expected, and grey vote considerations aside, they announced they’d replace it with a double lock from 2020, with the 2.5% underpin removed. This will only lead to less generous increases if both earnings and price inflation fall below 2.5% in coming years. Many expect inflation to remain above this for the foreseeable future, so in reality, the 2.5% may not bite anytime soon. And it’s that expectation of higher inflation which should be the primary concern for pensioners as it erodes spending power. The continued link to national average earnings (as well as price inflation) does mean pensioners benefit where a stronger economy leads to greater earnings for the working population. However, this subtlety may not be front of mind as pensioners approach the ballot box.
State pension age
The Government deferred its planned response to the Cridland review of state pension age when the snap Election was announced. Their manifesto limits comment to saying the state pension age will ‘reflect increases in life expectancy while protecting each generation fairly’.
Labour is against the current plan to increase state pension age beyond age 66 and would set up a new Commission to consider a flexible approach ‘to reflect both the contributions made by people, the wide variations in life expectancy, and the arduous conditions of some work’. Greater flexibility sits well with pension freedoms and the trend towards retirement based on personal circumstances. However, linking the state pension age to work conditions and individual life expectancy could become a minefield - difficult to monitor to avoid people taking advantage of the system and highly subjective.
We believe that a more inclusive, less divisive and more straightforward solution would be to open up flexibility to all, regardless of their circumstances, to take their state pension a few years early, at a reduced level for life to make this fair and affordable.
When looking at the state pension age and the rate at which its level will increase as a whole, the key message has to be that it’s not safe for anyone to rely entirely on the state pension. When it comes to meeting retirement income aspirations, it’s essential that people join their workplace scheme or make individual private provision.
Social care for the elderly
A new approach to social care funding is long overdue. Labour’s Manifesto talks of a new National Care Service running alongside the NHS and of coming to a cross-party consensus on how to fund social care. Suggestions for Government led approaches including a wealth tax, employer contributions, and a social care levy. The Liberal Democrats talk of limiting the amount individuals would pay.
The Conservative Manifesto proposal proved so contentious that they made what was widely considered a U-turn within days. Currently, individuals in England (there are different rules in other UK countries) only receive state support if their assets are below £23,250. The proposal was to increase this to £100,000. The asset test for residential care already includes property but this would have been extended to those receiving care in the home. Another contentious aspect was that individuals could still face an unlimited bill if their assets are well above £100,000, which is not at all uncommon with average house prices sitting at £215,847.
The Tories then announced a post-Election consultation which would include the potential for an overall cap on how much an individual would ever pay. A cap is particularly important in encouraging advance planning. Those facing an unlimited bill, with no state support until assets fell below £100,000, would have no means to plan ahead to cover possible care costs while keeping inheritance aspirations intact. A cap may encourage those who can afford it to ‘do the right thing’. We believe individuals are more likely to include a ‘reserve’ for care in their pension savings than to set up a separate savings account. But for this to be effective, the current pension lifetime allowance needs to be increased. Either way, a cap could create a major new area of advice for those approaching and in retirement considering social care funding and inheritance.
Self-employed and auto-enrolment
It’s good to see a cross-party consensus that more needs to done to protect the rights of the self-employed, including helping them to save for retirement, albeit without a great deal of detail in the manifestos.
15% (4.78 million) of the working population are now self-employed or in non-regular employment such as the ‘gig economy’ which means a growing army are excluded from auto-enrolment and are ‘flying solo’ with no employer pension contribution. So nudging the self-employed into pensions, similar to the ‘inertia’ under auto-enrolment, would be positive. One option would be to use the National Insurance framework to automatically deduct additional amounts from the self-employed, diverting these to a pension scheme of the individual’s choice. The alternative is to encourage self-employed individuals to select a pension that suits their individual needs, something many will need advice on.
Pensions tax relief
Only the Liberal Democrats made any direct reference to pension tax relief, repeating their previous commitment to move to a flat rate of relief, ‘somewhere above the basic rate’ for everyone.
However, the Labour proposal to introduce a higher income tax rate for those earning over £80,000 a year could have a number of as yet unknown implications for private pensions. Individuals currently receive pension tax relief at their highest rate. But offering 45% or 50% tax relief to a larger number of ‘higher earners’ doesn’t fit well with Labour’s broader intentions. Those earning above £80,000 could also find they have their ‘annual allowance’ further restricted which could prove very damaging for their future retirement prospects.
As with so many aspects of Government policy, any change here will increase the need for advice, including how to avoid paying more in income tax by boosting pension contributions.