The recent change in government in the UK has inevitably led to questions being raised about the plans for pension reform as a result of their somewhat limited mentions of pensions in the run up to the election and the subsequent announcements of the Pension Schemes Bill and Pensions Review.
In this brief article, we consider the potential impacts on individual savers and what you may need to consider. We explain what we currently know and what is yet to be decided. If you are thinking about retirement, or are currently at, or in retirement, this article aims to provide you with information and peace of mind on the constant rumour circle we see in the media on this topic.
Labour’s general stance during the election campaign was that its spending plans did not require additional revenue and that a Labour government would focus on trying to generate extra resources by growing the economy rather than changing taxes. It pledged to avoid increasing income tax rates, National Insurance, VAT or the main rate of Corporation Tax[1] but the new chancellor, Rachel Reeves has since said that taxes are likely to rise in the Autumn Budget.
It’s possible that the reduction in tax relief on pension contributions for higher and additional rate taxpayers will be an area that the government will target to raise revenue. Rachel Reeves has previously supported a flat rate of pension tax relief for all workers of 33%[2], regardless of income level. Labour has since confirmed that this is not its policy[3], and it is aware that any changes to pension tax relief will be politically unpopular, and challenging to implement fair treatment for different types of pension scheme.
We could potentially see changes proposed by the new government that affect individuals across the whole income spectrum. This could be done in a number of ways, including removing or reducing the additional or higher rate of tax relief on pension contributions, introducing a flat rate of tax relief on contributions, or by reducing the maximum annual allowance back down from the current level of £60,000.
Keir Starmer mistakenly gave the impression that the current option to take a 25% tax-free lump sum from your pension would soon expire[4]. Labour consequently said they had a “firm commitment” not to change the system[5], and Labour spokespeople confirmed that the tax-free lump sum will not be removed, although they did not confirm if it would be reduced.
The entitlement to 25% tax-free cash is one of the most popular and generous aspects of the UK pension system and is a big reason why people choose to save into a pension over other investment vehicles. Removing such a popular benefit would be deemed a radical change, and one that would not sit well with millions of savers, which leads us to believe it is unlikely that it will be abolished.
However, it is not clear if reducing tax-free cash is a potential policy that the government may consider introducing. The current limit of £268,275 is not due to increase with any form of inflation, which will result in a real term reduction of tax-free cash for individuals with larger pots, even if the current policy remains unchanged.
The Lifetime Allowance (LTA) placed a limit on how much an individual could normally save in pensions during their lifetime tax efficiently. This was removed by the last conservative government in April 2024. Labour promised at the time to reintroduce the LTA “immediately” if elected[6], although at the time of the election, their manifesto did not include anything on the LTA, and the party’s fiscal plans at the election did not include any revenue from doing so. It is important that we point out that not committing to bring the LTA back is not the same as committing to not bring it back.
Labour’s manifesto has committed to applying the Triple Lock throughout this Parliament to 2029, which guarantees the State Pension rises each tax year by the highest of average earnings growth, inflation, or 2.50%. This was welcome news to pensioners, as the chancellor later told 10 million pensioners that they will lose their winter fuel payments.
The rising cost of the triple lock has been a hot topic in recent years, in part due to the 8.50% rise in Basic State Pension and New State Pension applied in April of this year . Despite this, both the conservatives and now the Labour government have pledged to continue with it for the duration of this Parliament.
A review of when State Pension Age should rise to 68 is due by 2029[7]. Labour has not said when this will be conducted, although it seems more likely they will bring forward the proposed hike to age 68, rather than push it back. Under current legislation, the increase in State Pension Age to age 68 is currently scheduled to take place over two years in 2044-2046, after an increase to age 67 due in the years 2026-2028.
From 6 April 2028, the NMPA, the age at which you can normally access your pension benefits is increasing from age 55 to 57[8]. This change is likely to be problematic for some people, as they will be able to access their pension at age 55 but will then be locked out of their pension until they turn 57. Those born between 6 April 1971 and 5 April 1973 could be impacted by this, which is an estimated one million people.
For example, someone born on 5 April 1973 will have 24 hours to access their pension, before being locked out on the 6 April 2028 for a further two years until they turn 57.
WTW has experienced financial planners available to help you plan for the retirement you want, please contact us for a free initial consultation to see how we can help and support you.
The above views are based on the information available to us at this time and are likely to change as and when more information is provided by the Labour government.
