Pensions  

Election campaign should focus on the social care crisis

Election campaign should focus on the social care crisis

As yet another election looms, what might the result mean for pensions policy? It is true that the main issue driving this election is Brexit, but there are important domestic issues that are in need of attention, including how to finance the ageing population. It is also true that the prime minister wants to discard the Cameron/Osborne legacy in favour of her own agenda.

Free hand

If Mrs May does win the predicted landslide, she will have pretty much a free hand to press ahead with a new domestic agenda. Clearly, with very large fiscal and trade deficits, there will be an ongoing need to control public spending, but if the PM really wants to help "ordinary working families" who have felt abandoned by traditional policies, she could well make major changes to areas such as pensions.

I certainly hope that the Brexit agenda does not distract the government from continuing with reforms that will improve pension outcomes for more people. For example, last year, the government ducked the difficult decisions on pension saving incentives. Having consulted on radical reforms, the chancellor chose to leave the system intact. He believed he could not count on enough Tory support for abolition of higher rate relief while MPs were in a rebellious mood prior to the referendum. He thankfully backed away from turning pensions into Isas for younger people, which would have derailed auto-enrolment and been unworkable for many pension providers. But tax relief reform remains unfinished business. 

The present system is unsustainable for the long term. Moving to a flat-rate upfront top-up for everyone, more generous than basic rate tax relief and easier to understand, would give ordinary working families better pensions in future. Perhaps this could be a 30 per cent government bonus on each contribution, explicitly itemised, with a lower annual allowance to control costs. This could also pave the way to abolish the illogical and damaging lifetime allowance, which penalises good investment performance, encourages GPs to retire early just to avoid exceeding the LTA and makes it almost impossible to plan pensions properly. With a strong majority, the government could push through long overdue reform of pension incentives.

Such reforms would ensure all low earners obtain the government incentives they are due, overcoming the injustice that currently imposes a 25 per cent penalty charge on the lowest earners’ pensions if their employers use a net pay scheme instead of relief at source.

Remodelling

The way would then be clear to remodel the so-called Lifetime Isa. Mixing saving for a house deposit (usually best in cash for a shorter time horizon) with investing for retirement (usually best in long-term assets for a 20-30 year timescale) will leave many younger people worse off. A clear separation between pensions, with a more generous government bonus than basic rate relief, and other types of saving, would avoid the muddled messages and potential mis-selling risks of Lifetime Isas.

I hope the next government will take the auto-enrolment review seriously. It is important to improve pension outcomes for women and lower earners, as well as encouraging auto-escalation so that contribution levels do not stay stuck at the minimum level. Women need the behavioural benefits of auto-enrolment, but currently can be excluded if they have part-time jobs that pay below £10,000 a year.