The stage has been set: Treasury officials uncovered a £22bn black hole in the spending promises the new government inherited in July; the prime minister has warned of tough and painful choices.
Those aged over 66 on low and moderate incomes have already been hit by the abolition of universal entitlement to the winter fuel payment. Is it now the turn of those who save significant amounts into pensions to take a punishment detail?
My reading of the tea leaves is this is a very different Labour government to those of the past, such as Denis Healey who wanted to “squeeze the rich until the pips squeak”.
We have a fully trained former Bank of England economist at the helm in number 11, and the chancellor has a rather different remedy for the nation’s ills she has inherited: growth.
It is through growing the UK economy that Rachel Reeves intends to increase the tax take, to pay for the hospitals the country needs and to deliver the real terms increases in public spending she promised the Labour delegates at the autumn party conference.
Pensions have a key part to play in this growth. It is by enticing us to place more of our pension investments in Britain, and more of them in growing companies and infrastructure and rather less in shares of the usual FTSE 100 suspects, that we will get this hoped for growth.
Scare stories abound in the national press and I dare say advisers are getting calls from worried clients. But please tell them not to cash in all their pensions in a blind panic.
My three tips for what to expect on October 30 are:
- Pensions tax-free cash to be reduced in a steady programmed manner. Perhaps a 10-year schedule taking the current maximum of £268,275 down to £100,000 in small steps. No cliff edges, nothing to take precipitative action over. You will be able to continue to advise customers to take cash when their spending plans need it. Once fully implemented this could save £2bn a year.
- Including defined contribution pension pots at death in the estate for inheritance tax. This could raise £0.3bn a year immediately, and rather more over time as behaviours change. It seems a perverse incentive of the current tax system that death taxes lead many advisers to suggest retired clients should not spend their pension pot.
- The introduction of employer national insurance, at a gentle rate of 1 per cent, on employer pension contributions. Nothing so large or dramatic that could frighten employers off pensions, but starting to row back a little on the generosity of schemes like salary sacrifice. This could raise between £1bn and £2bn a year.
Eagle-eyed observers will have spotted that a Pensions Review is already underway and being led by Emma Reynolds, the minister with uniquely a seat in both HM Treasury and the Department for Work and Pensions. This review is all about shifting pension investments to re-align with the government’s growth agenda.
Although that Pensions Review is moving at pace, it is too early for it to influence this Autumn’s Budget. Rather its measures can be included in the 2025 pension schemes bill we were promised in the King’s Speech.
Advisers should tell clients to sit tight ahead of the Budget. There will be some revenue-raising pension changes, but perhaps not as bad as speculation suggests.
Looking ahead, it might be better advice to warm up clients that the new thing in pensions is going to be investing in Britain, and as with all investment trends, those who get in early on the ground floor enjoy the biggest rise.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
