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What the election means for pensions
Big questions hang over the government's pensions policies following the election, says David Prosser.
Theresa May's failure to win an outright majority in last week's election means there are now serious doubts about whether she will be able to implement any of her campaign promises. Pensions policy is no exception, yet big questions about the future of the pension system need to be resolved fast to give people certainty as they plan for retirement.
First, the Conservative manifesto included proposals to stop paying the winter fuel allowance worth £200 to the over-65s and £300 to the over-80s to all pensioners automatically. Instead, May proposed to means-test the benefit, so that it would be paid only to the "most vulnerable".
In practice, the Conservatives didn't supply any detail of how means-testing would work. But this policy shift now looks dead in the water. Not only are the manifesto proposals for reducing support for pensioners being widely blamed as a major factor in the Conservatives' disappointing election results, but also the Democratic Unionist Party (DUP), on which May's government will depend for support, is opposed to this change.
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Next, the fate of the triple lock remains up in the air. This is a guarantee that the state pension will rise each year by the higher of inflation, earnings, or 2.5%. The Conservative manifesto proposed a switch to a double-lock system from 2020, with the 2.5% minimum dropped. This proposal also now looks vulnerable. The DUP opposes an end to the triple lock, and it would be easy for May's opponents to portray the change as an attack on pensioners.
With inflation now rising, however, it may become easier to make the case for doing so. When prices are rising at a rate above 2.5% per year inflation rose to 2.9% last month this element of the triple lock becomes worthless. The Conservatives will point to independent analysis showing that pensioners would rarely lose out because of such a change, though this also undermines the case for expending energy on pushing it through.
The government also took flak in the run-up to the election for refusing to publish its response to the Cridland review of the state pension age, even though it was legally bound to do soby 7 May. While the government was able to argue the election forced it to delay, the legal deadline means May cannot kick this issue into the long grass.
The review recommended that the state pension age rise from 67 to 68 by 2039, seven years earlier than the current timetable suggests. The government must now decide whether or not to accept this proposal, despite the ammunition it would give to Labour, which has proposed a freeze on the state pension age at 66, rather than going ahead with plans to increase it to 67 from 2026. This will be a difficult call for ministers, though the projected cost of protecting the current timetable is high.
Finally, we need clarification on long-term pension reform. Chancellor Philip Hammond is thought to favour major reform of pension tax relief possibly even a switch to a single flat rate of relief, rather than the current system where relief on pension contributions is given at your highest marginal rate of income tax. The election result appears to have saved Hammond's job: the prime minister had been widely expected to appoint a new chancellor, but this now looks unlikely. However, such a major reform which would have many losers looks impossible given the government's tiny working majority. Expect it to be delayed for the time being.
Advisers "in limbo" over MPAA changes
Last October, Philip Hammond announced that the money purchase annual allowance (MPAA) would be slashed from £10,000 to £4,000 with effect from the beginning of the 2017-2018 tax year. However, in the end the chancellor was unable to include this measure in the truncated Finance Bill that the government published in the run-up to the election the bill was stripped of controversial measures to ensure a speedy passage through parliament. It was assumed that the change would be quickly resurrected following a Conservative election victory, but after last week's results the outlook for this change is now unclear.
The MPAA is the amount savers may invest in their private pensions each year once they have started drawing down money from their funds. Hammond wants to crack down on savers withdrawing money simply so they can reinvest it with a slug of pension tax relief, but the allowance is mostly used by people taking advantage of the pension freedom reforms introduced two years ago.
For example, some people have moved into part-time work in retirement and are drawing down savings to supplement their income, but wish to take advantage of the pension provision offered by their employers to continue building up future benefits.The delay in introducing the lower MPAA has created a window of opportunity for savers to continue taking advantage of the higher allowance, but there was concern that the change might be backdated to 6 April.
This is now much less certain, says Rachel Vahey of Nucleus Financial. "Advisers and their clients [are] in limbo, trying to work out how much the MPAA is for the 2017-2018 tax year £10,000 or £4,000," she says. "But the longer this hiatus lasts, the less likely it seems that the government can backdate this piece of legislation to the start of the tax year when or if it is eventually passed." Indeed, it is now possible changes to the MPAA won't come into effect until next April, which would give people a whole additional year to take advantage of the current allowance. Given the political situation at the moment, it may be a while before this situation is clarified.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
