The new Labour government is expected to bring big changes to our pensions.
In Labour’s manifesto, it promised a review of the pensions system to make sure it works as well as it should and gets people the best outcomes.
But what could this review entail and what does Labour have in store for our pensions?
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.
Pension and tax rules can change, and any benefit depends on individual circumstances. Remember, you can’t usually take money out of a pension until at least age 55 (rising to 57 from 2028).
Lifetime pensions back on the cards?
We can expect further moves to consolidate schemes to drive efficiency and a push to boost investment in UK businesses.
The new government could take forward the idea of lifetime pensions. This is where people can designate where they want their pension contributions to be paid throughout their career, rather than potentially getting a new pension with every new job.
This move has the potential to reduce the number of lost pensions as well as driving up engagement and competition in the industry.
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What about pension taxes?
Concerns have been raised around what the new Labour government might be planning around pension taxes.
The Conservatives pledged not to introduce any new pension taxes and to leave tax relief untouched. However, Labour made no such claims, and this has opened the door to speculation about potential changes.
Labour also dropped their pledge to re-introduce the Lifetime Allowance shortly before the election.
Much has also been made of Rachel Reeves’ previous support of a flat rate of pension tax relief of around 33%. Though sources have said this isn’t a Labour policy, rumours continue to swirl that it could be for the chop.
Tax relief is currently set at your marginal rate of income tax, so if you are a basic-rate taxpayer you’ll get 20% relief. It’s a government top up that boosts your pension contribution.
This means that a £100 contribution to your pension in effect only costs you £80.
The benefits get bigger the more you earn. Higher-rate taxpayers only need to pay in £60 to get the top up to £100 and additional-rate taxpayers only needing to pay in £55.
It’s a significant incentive.
If we were to see a flat rate of tax relief, like the rumoured 33%, introduced then it would be good news for basic-rate taxpayers as a £100 contribution would now only cost £67.
However, higher and additional-rate taxpayers would get less than they got before, and this could affect how much they contribute.
It’s by no means set in stone, but it’s important that the review also includes analysis of how the pension tax system works so people remain incentivised to keep contributing.
It would also be beneficial to see a departure from the tinkering that can make it difficult for people to plan long-term towards a more settled, less complex system.
We might have to wait for the autumn Budget for more on what’s next for pensioners. In meantime, people shouldn’t worry about what could happen in the future.
Instead, they should use the allowances currently available to them as much as they can so they can build up their pension and boost their retirement resilience.
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