State PensionMay 17 2017

What you must know about Lib Dems' pension promises

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What you must know about Lib Dems' pension promises

Reform of tax relief and a commitment to the triple lock for the duration of the next parliament were the key pension proposals in the Liberal Democrats manifesto unveiled today (17 May).

The triple lock guarantees to increase the state pension each year by the highest of earnings growth, prices growth or 2.5 per cent.

Tom McPhail, head of policy at Hargreaves Lansdown, said the Liberal Democrats should be proud of the triple lock, as well as their state pension reforms, and the positive impact they have had in improving pensioner incomes.

He said pensioner incomes have come through the 10 years since the global banking crisis in far better shape than the majority of the working age population.

However he said this doesn't mean that the triple lock can be maintained indefinitely.

Malcolm McLean, senior consultant at Barnett Waddingham agreed that the triple lock was supposed to be a temporary fix when it was brought in by the coalition government in 2010.

He said: "It is generally accepted that over the long term the 2.5 per cent underpin will prove very expensive to maintain and should probably be dropped in favour of either a link to earnings, a link to inflation (CPI) or the better of the two (so-called double lock)."

The other Liberal manifesto pension proposal, lifted straight from their 2015 manifesto, is a plan to "establish a review to consider the case for, and practical implications of, introducing a single rate of tax relief for pensions, which would be designed to be simpler and fairer and would be set more generously than the current 20 per cent basic rate relief."

David Robbins, senior consultant at Willis Towers Watson, is concerned about how such a flat rate would work in practice.

He said: "This would mean taxing income saved through pensions both on the way in and on the way out, and applying a government top-up in between.  

"That would be anything but simple. For higher rate taxpayers, a net tax charge would also have to be siphoned off employer contributions. Everyone in a defined benefit scheme would have to have a value put on employer-financed accrual for tax purposes.

"If this 'two taxes and a top-up' regime were introduced, it would probably be a stepping stone for the much simpler Pension Isa model that (former Conservative chancellor) George Osborne favoured - it would make a lot more sense just to tax income saved through pensions once and to apply a smaller top-up."

Barnett Waddingham's Mr McLean said a flat rate of tax relief "will probably be one of the reforms that the next chancellor (whoever that may be) may be willing to contemplate in the next parliament.

He added the future of higher rate tax relief is something all the political parties are likely to have in their sights.

The flat rate tax idea had some support from Hargreaves Lansdown's Mr McPhail.

He said: "The next government must be able to articulate a coherent joined-up policy agenda for the UK's savings and investments.

"That agenda should include a review of pension tax relief, which is expensive, inefficient and poorly understood. We welcome this proposal and hope the other major political parties will look to make similar commitments."

Tom Selby, senior analyst at A J Bell, said: “If there is to be reform to pension tax relief, it should be done in a measured way and agreed cross-party.

"An independent review of pension tax incentives would help foster this consensus, and all parties should commit to not tinkering with the system once any changes have been introduced. The last thing we want is a huge reform programme to be introduced by one government, only to be torn apart by its successor."

There is also a proposal in the Liberal Democrat manifesto to withdraw eligibility for the winter fuel payment to pensioners who pay tax at the higher rate (40 per cent).

Barnett Waddingham's Mr McLean said such a move  would not produce huge savings and would be administratively difficult to operate.

He said: "I would be surprised if after the extra administrative costs are taken into account the savings amount to much more than £100m a year. On its own it hardly seems worth doing."

The Liberal Democrats also promised they would keep the free bus pass for all pensioners while at the same time establishing a new Young Person's bus discount card for young people aged 16 to 21 giving a two-thirds discount on bus travel.

Mr McLean said: "This appears to be a nod towards more inter-generational fairness which is often raised as an issue in the perceived better treatment of the pensioner community."

The Conservatives are expected to launch their manifesto tomorrow.

stephanie.hawthorne@ft.com