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What Britain’s ‘Brexit election’ means for pensions policy

The main parties’ positions on tax, regulation and State Pensions

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By David Robbins | May 23, 2017

What Britain’s ‘Brexit election’ means for pensions policy: we review the parties' positions on State and private pension provision.

Officially, the election was called to give the Government a mandate to negotiate the UK’s exit from the European Union, and Brexit is the issue that people most commonly say will affect their votes. But as David Robbins explains, even a ‘Brexit election’ has implications for pensions.

Pensions taxation

Theresa May would not have called the election if she did not expect her party to gain seats. Pollsters, pundits and punters all expect the Conservatives to win an increased majority on 8 June.

Such a result would make it easier to get tax and benefit changes with significant losers through the House of Commons, and the Conservatives have left themselves room for manoeuvre. Right at the start of the campaign, Philip Hammond, the Chancellor, said his party’s 2015 commitments not to raise income tax, National Insurance or VAT “constrain the ability to manage the economy flexibly”. Only the VAT promise resurfaced in the Conservatives’ 2017 manifesto, though it does communicate a “firm intention to reduce taxes”.

If there are no outright commitments on headline rates of income tax, changes to pensions taxation are very unlikely to be ruled out between now and polling day. That does not mean that secret plans have been hatched or that major changes will happen, but they would be an option for a re-elected Conservative Government looking to eliminate the deficit (though it anticipates borrowing until 2025) or to pay for tax cuts/spending increases.

The other main parties also appear to be in the “nothing ruled in, nothing ruled out” camp. Labour say they would “guarantee no rises in income tax for those earning below £80,000 a year”. Wouldn’t cutting tax relief on pension contributions for these people increase their income tax? Yes, but that is probably reading too much into the wording. When the “under £80,000” commitment was first trailed, ITV’s Robert Peston asked Labour’s Emily Thornberry whether it guaranteed no cuts to pension tax relief below this income level and was told the details would be in the manifesto. They’re not.

Labour’s plans to increase taxes on higher earners involve the 45% tax rate starting at £80,000 and a 50% rate that would kick in at £123,000. These changes would make tax-deferred pension saving more attractive, all else being equal.

Putting the 45% rate together with the withdrawal of the personal allowance would create an effective 67.5% income tax rate between £100,000 and £123,000. When employer and employee National Insurance is included, each £100 of additional employer spend on people in this income bracket would give them just £26.80 in extra take-home pay (compared with £33.39 now). By contrast, a £100 pension contribution at the same cost to the employer might leave the individual with substantially more post-tax income in retirement – for example, they could get £85 if they only have to pay basic rate tax on the taxable 75%. Labour’s proposals would accentuate what can already be a very strong case for pension saving in this income bracket, especially for people who may later be subject to the Annual Allowance Taper.

The snap election did not leave the parties much time to cobble their manifestos together. The Liberal Democrats went for a “here’s one I made earlier” approach, repeating their 2015 pensions tax commitment almost word for word. They say they would “establish a review to consider the case for, and practical implications of, introducing a single rate of tax relief for pensions” which would be set above basic rate relief and below higher rate relief.

To implement this, a Government that included Tim Farron’s party would have to top up pension contributions made from post-tax income and continue taxing emerging benefits in retirement. One challenge to this policy is: why not just tax the money once and pay a smaller top-up? For that reason, taxing pensions like ISAs and adding a Government top-up (the policy that George Osborne had to abandon ahead of the Brexit referendum) looks like a more serious option if a future administration of whatever stripe does contemplate wholesale change. HM Treasury may see the Lifetime ISA (LISA) as a foot in the door for a new pensions tax system, and the Conservative manifesto mentions the LISA as an example of the long-term savings products that they want to promote. Mr Osborne may be using his new position as editor of the London Evening Standard to criticise Mrs May, but this is one part of the former Chancellor’s legacy that the new regime does not appear eager to unpick.

Away from personal taxation, Labour propose extending Stamp Duty Reserve Tax to other asset classes – they appear to have corporate bonds, and equity and credit options in their sights – and to remove an existing exemption on some share transactions. This is purportedly targeted at high-frequency traders but some of the anticipated £5.6 billion of annual revenue would come from pension funds.

Labour also intend to increase corporation tax (as do the Liberal Democrats, to a lesser extent) whilst the Conservatives would cut it further. For some employers, the case for bringing forward deficit contributions may be stronger under the Conservatives and the case for pushing them back until later in the Parliament might be stronger under Labour.

Defined benefit pensions regulation

The Pensions Regulator’s annual statement, released during the campaign, says it expects recovery plans to be relatively short where distributions to shareholders exceed deficit contributions. We have not seen any politicians asked for their views on this.

However, the Conservatives have said that they want to give the Regulator the power to “scrutinise unsustainable dividend payments that threaten the solvency of a company pension scheme”, as well as takeovers. They announced that “any company pursuing a merger or acquisition valued over a certain amount or with over a certain number of members in the pension scheme would have to notify the Pensions Regulator, who could then apply certain conditions.”

This could translate into a compulsory clearance regime. Alternatively, the Regulator could be empowered to act proactively rather than waiting for detriment to occur. February’s Green Paper said that both options would be explored but it was cautious – for example, saying that compulsory clearance would “need to be very narrowly limited to avoid potentially significant disadvantages to business”.

The guiding principle here ought to be that pensions regulation should not stand in the way of corporate transactions which make business sense and do not harm the pension scheme, but should prevent the scheme from being materially weakened. The Conservatives’ language on the campaign trail has been robust but it’s not clear how far the regulatory pendulum will swing if they are returned to power.

For its part, Labour has promised to “amend the takeover regime to ensure that businesses identified as being ‘systemically important’ have a clear plan in place to protect workers and pensioners when a company is taken over”.

Defined contribution pensions and long-term care

None of the manifestos significantly pre-empt this year’s Government review of automatic enrolment policy – in particular, there is nothing about when or whether minimum contributions will rise above the fully phased in 8% of qualifying earnings due to apply from 2018. Labour’s manifesto says it will “end hidden fees and charges”. Whoever wins, it seems likely that, if any changes are made to the charge cap, the only way is down.

The biggest controversy of the campaign has surrounded the Conservatives’ stance on long-term care. Their manifesto appeared to abandon earlier Government proposals to cap individuals’ long-term care costs, saying these would have “mostly benefited a small number of wealthier people”; instead, it promised that the taxpayer would meet care costs in full once the recipient’s assets fell to £100,000. The Conservatives have since said that there will be a cap after all, but (at the time of writing) have said nothing about the level.

When a cap was originally proposed, the hope was that insurance policies could cover the finite costs that people might face, but Health Secretary Jeremy Hunt said last year that the Government had found it “difficult to persuade” insurers to offer these products. Depending on where the cap is set and on whether these obstacles can be overcome, future policy might yet encourage people to take lump sums out of their pension pots at around the time of retirement to insure against the potential long-term care costs that could be incurred before the taxpayer steps in.

State Pensions

Labour, the Liberal Democrats, and the Nationalist parties in Scotland and Wales have all recommitted themselves to David Cameron’s Triple Lock, which sees the Basic State Pension and the New State Pension rise each year by the highest of national average earnings growth, CPI inflation and 2.5%.

The Conservatives say they would keep the Triple Lock until 2020 and then drop the 2.5% part. On the Office for Budget Responsibility's (OBR) central forecast, switching to this Double Lock would not make any difference to the pension increases awarded in the next Parliament, but it could save money if inflation and nominal earnings growth are lower than expected. Over the long term, the OBR assumes that the Triple Lock is equivalent to increasing pensions each year by an average of earnings +0.34% (usually it would be just earnings; sometimes it would be much more); with the Double Lock that would be earnings +0.26%. So pensions would still rise relative to average earnings, just not quite as much.

Would the Conservatives adhere rigidly to the Double Lock if inflation and earnings growth were very low? In the final Prime Minister’s questions before the election, Mrs May brought up the (RPI-linked) 75p increase in the weekly Basic State Pension that Gordon Brown had awarded 17 years earlier. A Prime Minister who believes small cash increases are politically damaging might not award them herself.

Labour’s manifesto rejects what it calls “the Conservatives’ proposal” to increase the State Pension Age above 66. (In fact, the increase to 67 by 2028 was enacted by the Coalition Government, and was nodded through by Labour MPs.)

In contrast, the Conservatives say they will “ensure that the State Pension Age reflects increases in life expectancy”. That means little: it’s how the pension age reflects increases in life expectancy that matters. The fastest rise that the Government was considering before the election would see the State Pension Age reach 68 in 2030 – just in time to catch the unusually large cohort born during the 1960s baby boom.

So come the early 2030s, there could be about 1.5 million 66- and 67- year-olds each year who would be receiving a State Pension (at a cost to the Exchequer) under Labour’s plans but not under the Conservatives’. Of course, promises that far into the future may be heavily discounted by voters (and that’s if the voters are aware of them and prepared to believe that they will be delivered).

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