How the general election could affect your pension and retirement income

Pensions could be a key battleground for the general election as political parties battle for the "grey vote."

From the lifetime allowance to the state pension, there are plenty of ways that governments could tinker with your retirement income depending on who wins the general election on 4 July.

The Department for Work and Pensions and Treasury spend around £124 billion per year on state pension payments and more than £50 billion for tax relief on pension contributions, so it is no surprise that current and future governments may want to make changes.

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Pensioners or “grey vote” also make up an influential part of the electorate so MPs won’t want to alienate this group too much.

“Pensions are often subjected to policy changes due to the costs involved to the Treasury of offering tax relief and the state pension, but also because of the votes won or lost through tinkering with people’s retirement prospects,” says Becky O’Connor, director of public affairs at PensionBee.

“The ability for working people to have the opportunity to build a decent pension is a key pillar of a well-functioning society and a healthier, wealthier older population reduces many cost burdens on the state. Equally, a recent focus for this government has been making sure older people do not retire too soon and keep contributing to a growing economy for as long as possible.”

Here is how a Tory or Labour government could influence the pension landscape.

The lifetime allowance

The lifetime allowance on how much can be put into a pension was abolished from this April.

It was previously set at £1,073,100 but there were fears that this was deterring higher earners, particularly senior doctors and nurses who were leaving the NHS early to avoid hitting the limit and being charged extra tax.

Chancellor Jeremy Hunt scrapped the lifetime allowance charge from April 2023 and the allowance was removed from April 2024.

The hope is that this will keep more over-50s in the workforce, especially senior doctors and nurses, stopping people from retiring too early and hopefully making sure they save more for their golden years.

Labour had previously objected to scrapping the lifetime allowance and pledged to reinstate the limit if elected. But it is rumoured to have scrapped that policy amid concerns that NHS workers would leave towards the end of their careers to avoid being hit by a tax bill on their retirement savings

"Labour has clearly realised that each option would have sparked controversy," says Graham Crossley, NHS pensions expert at Quilter.

"Similarly, how Labour would address the monetary cap on tax free cash could also open a can of worms. All these questions could end up being a distraction that poses a risk to Labour’s campaign.

Hopefully a clearer position will help stop senior doctors and medical professionals expediting retirement plans but whatever is announced in the manifesto will be crucial to those who might be impacted by the lifetime allowance."

State pension triple lock

The state pension is increased each year based on the controversial triple lock calculation, which increases the weekly payments each year by the highest of inflation, wage growth, or 2.5%. 

The state pension rose by 8.5% in April, in line with wage growth.

It is an expensive policy, especially as the triple lock increases are far higher than the rate of inflation and critics warn that it creates a generational divide with those still working who do not benefit from increases of the same level.

Some groups, such as the Institute for Fiscal Studies, have even called for it to be scrapped.

“The triple lock continues to face scrutiny and question marks hang over whether a future government will have to make changes to this mechanism for state pension rises, in the name of keeping the cost burden down,” adds O’Connor.

Both the Conservative Party and Labour have pledged to keep the triple lock.

The Tories have even proposed introducing a triple lock plus that would increase the personal tax allowance for pensioners by same level as the state pension increase each tax year.

Inheritance tax

Inheritance tax (IHT) is regularly rumoured to be under review. 

There were suggestions that the inheritance tax thresholds or IHT rate would be cut in last year’s Autumn Statement but nothing materialised.

More recently, there have been reports that the government would scrap the tax altogether, which may appeal to much of the ‘grey vote,’ although only around 4% of estates actually pay IHT.

Defined contribution pensions are generally exempt from inheritance tax, but IHT changes could benefit older people with other assets such as the home, a buy-to-let portfolio or investments.

However, Labour leader Keir Starmer has said Labour would reverse a scrapping of inheritance tax if the Conservatives went ahead with it. 

'Pot for life' pensions

There are already some pension reforms underway.

The government has launched a call for evidence on ‘pot for life’ pensions that follow employees to different jobs throughout their career rather than starting a new scheme each time you get a new job.

The idea is that this will help people keep track of their pension pot.

The government is also working with the industry on pension dashboards, to give savers online access to all their retirement savings.

Tax cuts

Both Labour and the Conservatives are reportedly eyeing tax cuts as part of their election manifestos. 

The Conservatives could consider gradual reductions in income tax, while Labour has ‘hinted’ at tax cuts for higher earners although it has previously suggested it would introduce a wealth tax.

“Tax cuts put more money in people’s pockets, which could be used to plump up pensions,” adds O’Connor.

“On the other hand, some higher earners pay more into their pensions as a way to reduce their tax bill, so lower income tax could reduce this incentive to use pensions for that purpose.”

Auto-enrolment

One area where the government has avoided meddling so far is auto-enrolment but things can always change, especially with an election looming.

Its latest review of automatic enrolment has kept the minimum earnings thresholds, when people are enrolled, at £10,000.

This will see private pension participation at 15.8 million, the government said.

"Following the success of auto-enrolment there is a growing sense that some changes need to be made to help the policy continue to help boost pension saving but the timing clearly is not right as reducing the earnings trigger or lower earnings limit could effectively amount to a pay cut when people are already struggling," says Jon Greer, head of retirement policy at Quilter.

"While saving for retirement is key, low income workers must balance this need with hanging on to as much of their money as possible to stay afloat in this economic climate. That said, we do need to have a timeline for tweaking this successful policy to ensure it works for people."