This July, the Labour Party won a historic victory in the general election, bringing an end to 14 years of Conservative leadership.
Two weeks later, chancellor Rachel Reeves announced a landmark “pensions review” as part of the new government’s mission to “boost growth and make every part of Britain better off”.
This news followed shortly after the announcement of a new Pension Schemes Bill in the King’s Speech on 17 July. So, it appears that Labour has pension reform clearly in its sights.
While it remains unclear what these changes might be and how long the review process could take to complete, read on to find out about reforms already underway and potential changes the new government might introduce that could affect your clients’ pensions.
A new Pension Schemes Bill aims to boost the average size of pension pots at retirement
Labour has already announced a new Pension Schemes Bill, which includes the following measures:
- Preventing people from losing track of their pension pots through the automatic consolidation of defined contribution (DC) individual deferred small pots.
- Consolidating the defined benefit (DB) pensions market through commercial “superfunds”.
- Implementing a “value-for-money” framework, which will include a standardised test to ensure all pension schemes are providing value to savers.
- Requiring trustees of occupational pension schemes to offer retirement income solutions – not just a savings pot – including a default option for members.
- Using a “traffic light” system to rate funds. Poor-performing funds may be required to improve, or close and move assets to a higher-rated fund.
The government estimates that implementing these measures could boost the pension pot of the average earner by around 9% at retirement.
Expansion of pensions auto-enrolment has already been legislated for
All employers must offer a workplace pension scheme and automatically enrol eligible workers in it.
Some changes to auto-enrolment have already been legislated for under the previous Conservative government. The Pensions (Extension of Automatic Enrolment) Act 2023 introduced the following key changes:
- Lowering the starting age of auto-enrolment from 22 to 18
- Calculating contributions from the first penny earned, rather than the current £6,240 starting point – so more employees will be eligible for auto-enrolment.
As yet, no date has been set for when the legislation could come into effect. Before it does, the new Labour government will need to complete a consultation to determine how these reforms will be implemented.
So, it could be some time before these changes are rolled out.
People Management reports that chancellor Rachel Reeves is also considering increasing the minimum level for pension contributions to 12%. Currently, the minimum contribution rate in the UK is 8% and only 3% of that must come from the employer.
While such a change might benefit individual savers, it could put additional financial pressure on many businesses.
Potential reforms Labour might consider as part of their pensions review
In addition to the changes already underway, Labour might consider introducing the following changes after the pensions review or in their first Budget on 30 October.
A flat rate of tax relief on pensions
Currently, pension savers receive tax relief on contributions at their marginal or highest rate of Income Tax.
However, the Institute for Fiscal Studies (IFS) has recommended that the current system be replaced with a flat rate of 30% tax relief for all pension contributions, regardless of an individual’s income.
In 2016, Rachel Reeves wrote an article for the Times, in which she stated her support for a 33% flat rate of tax relief.
While Labour says they currently have no plans to make such a change, a flat rate of tax relief could mean that your higher- and additional-rate clients might have less in their pension pot at retirement.
Reduce or remove the 25% tax-free lump sum
Under current legislation, many savers can withdraw as much as 25% of their pension pot as a tax-free lump sum, up to a limit of £268,275. This Lump Sum Allowance (LSA) is one of the key reasons why saving into a pension is so tax-efficient.
Yet there is speculation that Labour might reduce or remove this generous tax relief.
Indeed, during Labour’s election campaign, Keir Starmer talked about scrapping the pension LSA.
However, he subsequently discounted this statement as an “old-fashioned mistake”. Additionally, such a change is likely to prove unpopular. So, it seems likely that the LSA will remain as it currently stands for the foreseeable future.
Make pensions liable for Inheritance Tax
Currently, pensions usually fall outside a person’s estate for Inheritance Tax (IHT) purposes, making them a tax-efficient way to pass on wealth.
Since Labour came into power, there has been increasing speculation that changes to IHT are afoot. One potential reform the government might consider is to make pensions liable for IHT.
Of course, we won’t know what Labour’s plans are until the pensions review concludes. Yet, bringing pension funds into a person’s estate for IHT purposes could raise much-needed revenue for a government that is seeking to plug a £22 billion “black hole” – as claimed by the chancellor.
Increase the minimum pension age
The current minimum age to draw from a defined contribution pension is 55, rising to 57 on 6 April 2028.
Labour could seek to increase this further – perhaps to age 60 – in a bid to help people make their retirement savings last longer.
Such a change could significantly affect your clients’ financial plans.
However, it’s impossible to predict exactly how Labour will amend current pension rules. Any changes are unlikely to be confirmed until after the pensions review is completed and Rachel Reeves’ first Budget is delivered on 30 October.
Get in touch
If your clients would like to know more about how the pensions review might affect their finances, we can help.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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