The Labour Party has vowed to carry out a review of pensions to improve pension outcomes and boost investment in the UK economy.
In its newly-published Manifesto released on Thursday, Labour also confirmed its commitment to retain the State Pension Triple Lock policy for a further five years, despite growing speculation over how government finances can afford to maintain it.
The triple lock offers state pensioners a guarantee of pension increases equal to the highest of price inflation, earnings growth or 2.5%.
Steven Cameron, pensions director at Aegon, said: “Of course this comes at a cost but a return to typical historical levels of inflation and earnings growth may make it less costly or unpredictable in future years. One means of funding this would be to further increase the state pension age but there has been no mention of this in either Manifesto.”
However, Labour stopped short of following the Conservatives in creating a Triple Lock Plus arrangement, which would increase state pensioners’ personal allowance in line with the state pension triple lock. Without this, the Conservatives warn there is a risk that the new full state pension, currently at £11,502 a year, will rise above the personal allowance of £12,570 within a couple of years, meaning pensions could be subject to income tax.
Tom Selby, director of public policy at AJ Bell, said: “If Keir Starmer emerges victorious, he will face two clear state pension challenges. Most immediately, Labour will need to consider how to deal with the problem that the full new state pension will soon be higher than the personal allowance.
“Over the longer-term, the next government needs to set a clear direction for the state pension, moving beyond the random rachet of the triple lock. Ultimately, we need to reach a lasting consensus on what the state pension should be worth and for how long on average people should receive it, allowing Brits to plan for retirement with confidence.”
Jon Greer, head of retirement policy at Quilter, suggested a potential reform would be to link pensions more closely to average earnings. “This approach would align pension growth with national economic performance, creating a more predictable and sustainable system.”
The manifesto also failed to elaborate on plans to enhance automatic enrolment. Enhancements include lowering the age of auto enrolment from 22 to 18 and gradually increasing the minimum contribution to 8% of earnings from the first £1, rather than only on earnings above £6,240.
Commenting on the party’s plans for a pensions review, Greer said: “Labour’s pension review is poised to be a comprehensive examination of the current system, with the potential to encompass a variety of reforms. The review could address auto-enrolment (AE) reform, aiming to make workplace pensions more accessible for a wider range of employees. This may involve adjustments to the minimum contributions and the age threshold for eligibility, ensuring that individuals can begin saving for retirement earlier.”
“Improving security in retirement is another critical aspect of the review,Greer added. “This could mean revisiting the pension freedoms introduced in 2015, which gave retirees more flexibility in how they access their pension pots. The review may consider measures to mitigate the risk that individuals outlive their savings.
The review is also expected to explore avenues for productive investment, which could lead to pensions playing a more active role in stimulating the UK economy. “Furthermore, the review might push forward the implementation of Collective Defined Contribution (CDC) schemes. CDCs are a type of pension scheme where both employers and employees contribute to a collective pot, which is then invested. Upon retirement, members receive a pension based on the performance of the investments.”
Greer pointed out: “These are all laudable areas to look at, but outside the promise of a review, what that might mean in practical terms is missing.”
Aegon has also called for greater clarity around many other pension initiatives currently under development by the Conservatives, including online pension dashboards, a solution to consolidate small pension pots worth under £1,000, offering members of trust-based pensions more retirement options and offering individuals the choice of a pension pot for life.
Lifetime allowance
The decision to scrap the pensions lifetime allowance in April this year was widely welcomed by the pensions industry and after previously stating that it would reinstate the allowance, Labour failed to make mention of it in its Manifesto.
Selby said: “The decision to scrap the allowance was both necessary and sensible. Labour therefore deserves credit for recognising this and dropping plans to reintroduce the limit, a move which would have risked hitting senior public servants, including doctors, with huge tax bills, added unwelcome complexity to the pensions tax system and unfairly penalised those who enjoy strong investment growth.”
Selby said Labour’s commitment to stability should give savers “confidence for the future” and said any pension tax reform taken going forward should focus on simplification and encouraging more people to save for the long term.
Jason Hollands, managing director at Evelyn Partners, said: “A great sigh of relief will be going up among savers, public sector DB scheme members, financial advisers and the pensions industry alike that Jeremy Hunt’s abolition of the LTA will not be reversed.
“Labour’s threat to reinstate it had been causing a lot of uncertainty, putting some savers’ plans into paralysis and raising the spectre of yet more stultifying legislation.”
Main image: leohoho-GyrU_lxcFao-unsplash
