PensionsMay 31 2017

Election 2017: Analysing the manifesto commitments

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Election 2017: Analysing the manifesto commitments

The prime minister’s announcement of a snap general election during one of the most politically fraught periods in recent history was an unexpected addition to the government’s roster of pressing issues. But it comes as no surprise that the election has put pensions and tax firmly under the spotlight, with various pledges threatening to further disrupt the notoriously volatile regulatory landscape.

Now that the three main parties have released their manifestos, Money Management takes a look at the implications of their pensions and tax-related personal finance commitments.

 

Pensions triple-lock

The pensions triple lock was widely identified as a likely target for overhaul following the election announcement. The Conservatives had vowed to keep the lock in place for the duration of the current Parliament, which in the event ended in May 2017 rather than 2020.

The release of the Conservative Party manifesto saw the party pledge to reduce the surety to a double-lock, removing the 2.5 per cent increase element previously in place. But the change, which means pensions will rise in line with the higher of inflation or average earnings, will not take effect until 2020.

Labour, on the other hand, announced a pensions pledge card in mid-April that included committing to the triple-lock until 2025, with the Liberal Democrats also vowing to keep the lock for the entirety of the next parliament.

David Finan, financial planner at Jardine Finan, believes the Liberal Democrat and Labour stance fails to account for the cost of the triple-lock.

Mr Finan says: “It’s just a vote catcher. I’m quite sure they have no more belief in [the triple-lock] being justified than the Conservatives have. It’s an easy promise to make, but when you start adding up all the promises, they’re impossible to deliver without significant tax increases.”

 

State pension age

In February, the Work and Pensions Committee said retaining the triple-lock, as it stands, risked widening inequality due to the fact that “making the triple-lock sustainable would mean pushing the state pension age (SPA) over average life expectancy in poorer areas of the UK”.

According to its research, there is as much as a 25-year difference between the lowest life expectancy for males in England (67.5 for those in central Blackpool versus 92.9 for those living in the borough of Westminster). But despite committing to replacing the policy with a double-lock, the Conservative Party manifesto makes no mention of this kind of equation and vows to “ensure the state pension age reflects increases in life expectancy”.

Andrew McMillan, financial planner at Equanimity, believes the lock will heighten inequalities. 

Mr McMillan says: “If you increase the age that you can take your pension, it unfairly disadvantages those who have a lower life expectancy due to where they live and the job they do. That’s categorically what will happen. Personally, I’d like to see someone at least discussing some sort of solution to that issue.”

David Newman, head of pensions at Close Brothers Asset Management, suggests having the SPA “decided outside party politics via an Independent Pensions Commission”. The SPA is set to increase to 68 by 2046, but may increase faster due to recommendations made by the Cridland Review earlier this year. The government has postponed its response to the review – due in May – until after the election.

Discussing the possibility of earlier state pension access, which Labour has backed to an extent through its vow to maintain to the 2020 SPA of 66, and launch a review into the matter, Mr Newman says: “Earlier access for certain groups who may have shortened life expectancy would seem fair to many people, but it raises the questions of how this could be managed while keeping administration costs low.”

Pensions tax relief

The pensions industry has harboured suspicions that an overhaul of tax reliefs is around the corner, but the manifestos say surprisingly little on the subject. The Liberal Democrats are the only main party to have put forward plans to alter the system. The party’s manifesto pledges to review the case for introducing a single rate of tax relief “set more generously than the current 20 per cent basic rate relief”.

Jardine Finan’s Mr Finan sees the prospect of a flat rate as “a vote winner without being a cost to the government”. 

“The flat rate would be very popular. If it were to be done, it would likely be about 25 per cent,” he adds.

Conversely, Close Brothers’ Mr Newman says: “A single rate above 20 per cent may encourage basic-rate taxpayers to consider further contributions to pensions, but there is the danger that if higher earners wanted to maintain relief on a marginal rate basis they would make pension contributions via a salary sacrifice basis.

“To stop this happening would mean ending salary sacrifice for pensions, and it raises the question of whether it would be easy to distinguish these from what may be termed as ‘normal’ employer contributions. If there is then a need to revisit the basis of employer contributions tax status, this could end up undermining the good work of auto-enrolment.”

The Conservatives are also planning a tightening of rules for pension schemes, promising a crackdown on those who leave schemes underfunded.

 

Income tax

Personal taxation pledges from the Conservatives have a familiar ring to them. The party has reasserted that it will increase the personal allowance to £12,500 and keep the higher rate at £50,000 by 2020, as well as ruling out a rise in VAT. But there has been little detail on other measures now the party has abandoned the Cameron-era pledge not to raise taxes. Labour has vowed to renew its pledge “not to extend VAT to food, children’s clothes, books and newspapers and public transport fares”.

On income tax, the Liberal Democrats have proposed a 1p rise on basic, higher and additional income tax rates to raise £6bn for the NHS and social care services, which could help ease the burgeoning issues in those areas.

Labour has ruled out income tax increases for those on less than £80,000 a year. The plan could see the annual allowance taper threshold (AATR) reduced to £80,000 to limit the prospect of affording people higher tax relief on their pensions contributions. 

Mr Newman agrees that the latter is a possibility, and says: “The AATR is complicated for people to understand, and if more individuals are caught into the net of reduced annual allowance and the difficulties of calculating exactly how much they can put into a pension each year without suffering tax consequences, especially for those with fluctuating incomes, we could see discontent increasing significantly.”

 

Later-life care

The most controversial pledges to have emerged in the run up to the election is the Conservative stance on later-life care. The party’s manifesto reveals plans to move away from a proposed care costs cap, and raise the threshold of personal assets for state care from £23,000 to £100,000 –  with property now included in the means test. 

It also plans to introduce a system enabling those who receive care at home to use the value of their properties to defer payments, meaning they can pay it off when the property is sold or when the care recipient dies.

Fierce criticism of the plans saw Theresa May subsequently announce a cap on costs would also be enforced after all.

Rachael Griffin, financial planning expert at Old Mutual Wealth, believes that by bringing property into means testing clashes with the recently implemented Residence Nil Rate Band (RNRB), which essentially means that in the event of a relative’s death family homes can be passed on to descendants free of inheritance tax.

“By bringing this social care aspect in it kind of makes the band irrelevant if you end up needing care.

“Let’s say I have to pay £300,000 worth of care using debt against my house until such time as the local authority will step in and help. If I were to die, then from an inheritance tax perspective, I’d only have £100,000 in my estate in terms of assets, so you would never get to the RNRB space because the value of the house would be that much lower.”

“For people who want to try and do some kind of planning [in the event of] this, it way well be that we see people using life assurance policies more.”