As the country prepares to go to the polls on 12 December, the Labour party has published its manifesto, in which it has pledged to build a country where “wealth and power are shared.” Industry commentators have highlighted policies which affect financial services and their potential implications.
Pensions-related policies
As part of its manifesto, Labour has vowed to help women born in the 1950s who have been affected by state pension age changes, promising to design a system of “recompense for the losses and insecurity” they have endured.
It has also pledged to retain the state pension age at 66, abandoning plans to raise the age threshold, and said it will review retirement ages for manual and stressful occupations.
In a further boon for pensioners, the Labour party has also promised to retain the triple lock system, which guarantees that the state pension will increase at the same rate as the highest of inflation, average earnings growth or 2.5%.
However, Helen Morrissey, pension specialist, Royal London, warned that Labour’s pledges would cost billions
“The pledge to leave the state pension age at 66 and to compensate the 1950s women are likely to cost many billions of pounds and with no money set aside to meet these commitments it will be difficult to see how they can be funded.
“In addition, paying state pensions at a different age based on doing heavy jobs would be extremely difficult to implement in practice as there are no records of what job people were doing, and defining what counts and does not count as heavy work would be very difficult in practice.”
Tom Selby, senior analyst, AJ Bell, said freezing the state pension age was a “gargantuan promise” that would have enormous ramifications for society and long-term government spending.
“It is incredible that the impact this will have on taxpayers doesn’t appear in the policy costings. This may simply be because planned increases in the state pension age run beyond the next Parliament, but such a short-term approach to something as vital to the long-term future of the UK as state pension reform is hardly encouraging. It’s also important to remember that planned state pension age increases to 67 and 68 are not just based on the last few year’s data but decades of life expectancy improvements,” he said.
Jon Greer, head of retirement policy, Quilter, called the pledges on pensions “out of step” with the demographic changes of the country.
He said any move to freeze the state pension age could “shackle the government” from making any future changes to the state pension at a time when it is becoming increasingly unaffordable.
He commented: “Given the rises in life expectancy, the cost of the state pension is only going to go one way, increasing the burden on the decreasing number of working age people. It remains to be seen how Labour will account for the costs associated with these policies whilst delivering an affordable state pension system.”
In addition, Labour has said it will extend auto-enrolment access to low income and self-employed workers. It has also thrown its support behind a single, publicly run pensions dashboard.
Selby said: “We agree wholeheartedly with the principle of getting costs and charges on dashboards at the earliest possible opportunity. Doing this should help savers make better decisions as they become engaged and consider switching provider.
“However, this is no reason to limit the ambition of dashboards to a single service. People engage with a variety of platforms in a variety of ways and allowing them to see their pensions through any of these services would be a huge positive.”
Income tax
As part of its vow to create a “fairer taxation system”, Labour has said it will increase income tax rates for those earning more than £80,000 a year, while keeping National Insurance and lower income tax rates at current rates for everyone else.
It will also introduce a new tax rate for those earning more than £125,000.
According to the Institute for Fiscal Studies, the plans would see the tax bills of £1.6 million individuals increase.
However, Selby said that the move would also unintentionally benefit the pension system for higher earners.
“The party’s proposal to bring the 45p income tax band down to £80,000 and introduce a new 50p rate for those earning more than £125,00 is clearly designed to clobber higher earners but it also has an impact on pension tax incentives,” he said.
“Because pension tax relief is paid at an individual’s marginal rate, this reform will hand a bigger pension tax boost to those on the highest incomes.”
Dividends
The manifesto also pledges to tax capital gains and dividends at income tax rates with a single allowance.
Laura Suter, personal finance analyst, AJ Bell, said: “The pledge to bring capital gains and dividends into the income tax regime will raise £14bn for the Government. The move to crack down on dividends will hit business owners who pay themselves through dividends rather than income, but also investors, with the capital gains tax allowance being slashed from £12,000 to £1,000 – which will cost up to £4,400 a year for those earning £50,000 or more.”
However, Labour’s plans around taxing dividends could end up impacting a greater number of people than just the corporate executives it wants to target with its policies.
Rachael Griffin, tax and financial planning expert, Quilter, said: “There are around five million self-employed workers in the UK and a number of these will pay themselves through dividends taken from the companies they run to provide their services, and as such this will have a significant impact on the way they run their businesses.
“The proposal aims to bring the taxation of dividends in line with Labour’s plans for income tax. Given its wish to increase income tax rates on higher earners, this could end up being a significant hit to those that provide services to the economy.”
Social care
Addressing the huge issue of social care funding, Labour has promised to place a lifetime cap on personal contributions to care costs, stating that no one should pay more than £100,000 for care costs. However, there’s little detail on what the policy would look like.
Griffin said: “Labour have clutched the opportunity to promise what the public want to hear – they will fund free personal care. However, the manifesto lacks detail on what exactly is included. Importantly it does not clarify whether “hotel costs”, such as food and board in a care home are included.
“They have gone so far to say they will institute a care cap of £100,000 for catastrophic costs and lifetime cap on personal costs. The sustainability of such a cap is a big question mark over these care policies as we have to remember it is today’s workers that will be funding it and as costs rise with an ever ageing population, will it still be in place by the time they need to benefit?”
