How to maintain your pension out of Keir Starmer’s clutches
Pensions will be a key battleground in the run-up to the General Election. Last week’s televised debate certainly made that clear.
Rishi Sunak boldly claimed that the state pension would be taxed for the first time under Labour. He repeatedly warned of the wave of tax shocks coming our way should the party win at the polls.
And with little detail from Sir Keir Starmer about Labour’s plans, many fear he could be planning a raid on retirement savings to pay for other funding. Pensions are rich pickings after all – and there are plenty of ways for a cash-strapped Government to siphon money out of them.
There are growing concerns that Labour could cut the amount savers can pay into their pension each year, reduce the generous tax relief that you receive on contributions, or slap extra charges on those with large amounts saved. There are also murmurs they could limit the current freedom to draw money out of pensions as and when we like.
Without a published Labour manifesto, Labour’s plans on pensions are still largely a mystery. But past statements from members of the party’s shadow cabinet indicate that many concerns surrounding pension policy could be justified.
While experts caution that you should not chop and change your retirement saving plans based on the whims of individual political parties, they agree that there are still steps you can take now to protect your retirement if you are concerned.
Tom McPhail, a pensions expert and director of public affairs at consultancy The Lang Cat, says he would encourage pension investors to ‘be bold now before the rules change’.
Sarah Coles, personal finance specialist at investment platform Hargreaves Lansdown, says that pension savers have a ‘window of opportunity ahead of the Election’ to take steps to protect their retirement savings.
We look at what changes Labour could make and the steps you can take today to shield your retirement nest egg against a looming assault.
What we know Labour will do
There is one controversial measure that the Labour party has been very clear on. Wealthy savers with large pension pots would face taxation once again, as Labour plans to reinstate a restriction called the Lifetime Allowance (LTA).
This is a cap on the amount of money people can have in their pensions without paying tax.
This was previously set at £1,073,100 until Chancellor Jeremy Hunt abolished the limit last year. (It had been gradually reduced since 2011, when it was £1.8million).
Currently, anyone with more than this does not have to pay tax on their savings, other than income tax when they make withdrawals.
However, Labour has pledged to reintroduce the restriction.
This means savvy pension savers could be hit with tax bills of up to 55 per cent.
There has been no detail on the level at which it might be introduced or from when this change might apply.
Other ways Labour could raid nest eggs
The amount you can pay into your pension each year could be slashed. Currently, you can pay in up to £60,000 a year and receive tax relief. This is known as your ‘annual allowance’.
You can also carry this allowance forward if you haven’t used it all for up to three years.
Tim Blowers, a chartered financial planner at financial adviser Old Mill, says it is ‘widely speculated’ that Labour might reduce this allowance. Mr Starmer may also change the rules around carrying forward unused allowances – a particular issue for owners of small businesses, who sometimes make very large pension contributions in a single year after selling their business.
Becky O’Connor, of pensions group PensionBee, warns: ‘It’s worth remembering that a Labour victory could see the tightening of inheritance tax rules in the future,’ she says.
Tax relief could be stripped back
AT the moment when you contribute into your pension, you receive tax relief on it at your marginal rate of income tax. This means, for example, that a basic rate taxpayer receives 20 per cent tax relief on any money that goes into their pension, a higher rate taxpayer receives 40 per cent and an additional rate taxpayer 45 per cent.
Shadow Chancellor Rachel Reeves had previously indicated she may replace this with a flat rate of tax relief at 30 per cent.However, a Labour spokesman said last week that the party had no plans to change tax relief and it will not be in the manifesto, so savers may have more time to plan for any changes to the current system.
Freedom of access may be limited
In 2015, the Tories brought in sweeping changes to how you can access your pension.
Instead of being forced to buy an annuity with your pension, which gives a guaranteed yearly income, you are now free to take as much or as little money out as and when you please, including a 25 per cent tax-free lump sum.
Tom McPhail, from The Lang Cat, says he is ‘slightly concerned’ Labour may look to row back on pension freedoms, though he adds that this could take some time to implement. He says: ‘Anyone approaching retirement and planning on using the freedoms would be well advised to keep an eye on Labour’s plans.’
No final decisions have been made on what might appear in Labour’s autumn budget beyond what has been announced already.
Inheritance tax in the gunsights
Pensions are an incredibly tax efficient way of passing money on to your family.
Unlike other investment accounts, any money saved in pensions is currently not counted as part of your estate, and if you die before the age of 75 your descendants don’t pay tax on the money.
However, Becky O’Connor, of pensions group PensionBee, warned this may change. ‘It’s worth remembering that a Labour victory could see the tightening of inheritance tax rules in the future,’ she says.
These measures could have a significant impact on your future retirement. Any changes are unlikely to come in before April next year, but there is a chance that Labour will act faster if elected, so if you want to make changes it is best to act sooner rather than later. Here are the easiest steps you can take today that will have the biggest impact.
Being as generous as you can with your pension this year could also pay off from a tax perspective
Pay into your pot early this year
If you are planning to make a large pension contribution this year, particularly one that makes use of unused allowances in recent years, acting fast is sensible, advises Tim Blowers.
He says it is wise to make these before the General Election on July 4, if possible, in case of any immediate announcements.
This means that if the amount you can pay in each year is slashed, you will have been able to make a larger contribution beforehand.
Being as generous as you can with your pension this year could also pay off from a tax perspective. Alice Guy, head of pensions and savings at Interactive Investor, says it would mitigate any risk of a cut in tax relief further down the line, especially if you are a higher earner. She says: ‘What we do know is that current pension allowances are generous and if you can afford it, then it makes sense to take advantage of the existing rules.’
Avoid 55 per cent tax, consider cashing out
If you have a pension that is at, near, or above £1,073,100 (the old Lifetime Allowance), you may want to shield yourself from any potential 55 per cent tax bills.
When you decide to start taking your pension, your provider should run an automatic test to tell you whether you are above the limit and, if so, how much tax you owe. If you start to draw down today, you may avoid any future tests.
Daniel Hough, financial planner at wealth manager RBC Brewin Dolphin, says that in some cases it may be sensible to take money out of your pension before any Labour lifetime allowance comes into force, so that your pension isn’t tested against any reinstated allowance later.
This will depend on other factors however, he warns, and is not clear cut. ‘I have seen instances where acting now would be in a person’s best interest and waiting would suit others better. There are no hard and fast rules,’ he says.
Could you escape lifetime allowance rules?
There is a chance you could be exempt from any reintroduction of lifetime allowance rules.
In the past, when governments have made successive cuts to the cap, HM Revenue & Customs has introduced protections.
These allow savers who are close to, or have hit the limit, to apply for an exemption, and retain the higher limit. Similar protections could be introduced but there is no guarantee.
Jason Hollands, of investment group BestInvest, says there is a narrow window of opportunity for those who had previously stopped paying into their pensions because of the former upper limit.
These savers can add to their pensions ahead of any potential changes, he says. He believes that window lasts until the first Labour Budget, rather than Election day.
Divert savings out of pensions into Isas (but only if you have a large pot and are years from retirement)
In some cases, those with very large pension pots approaching the lifetime allowance may want to divert some of their retirement savings into Isas or other tax efficient accounts, says Becky O’Connor of PensionBee.
This may be the case if you are several years off retirement and close to breaching the previous threshold, as it will lessen the likelihood you will hit it later.
However, by doing this you will forego any tax relief that you would have received on pension contributions.
This could leave you out of pocket if the allowance is not reinstated.
Becky O’Connor adds: ‘Another prudent approach may be to wait and assess the impact of any policy changes if and when they are made.
‘It is unlikely that reforms will be implemented immediately, so affected savers may not need to rush into making a decision.’
Under 40? Look at lifetime Isas
Savers under the age of 40 can boost their savings with an account called the Lifetime Isa (Lisa).
Sarah Coles, of Hargreaves Lansdown, recommends opening one of these as an alternative to a pension in case any changes are made to tax relief.
These accounts can be used for retirement or to buy a first home worth up to £450,000, and the government adds a 25 per cent bonus onto any savings you make, with a maximum annual bonus of £1,000.
She says: ‘This way you have secured your access to the Lisa, and if anything changes around pension taxation, you will have an additional option for retirement saving.’
Keep calm – pensions are for the long term
With the Election fast approaching, anyone who wants to make the most of their pension ahead of any changes needs to consider their plan of action.
However, it is important not to let fears about possible changes to the rules take precedence over a sensible savings strategy.
Daniel Hough says: ‘In the event of a Labour victory, there is no guarantee that what has been said in the build-up to the Election is exactly what will happen afterwards.’
Sarah Coles of Hargreaves Lansdown says: ‘Remember pensions are multi-decade investing vehicles.
‘Selections should be made without undue regard for who is in power, and instead made with your age, risk tolerance and retirement income requirements in mind.’
After all, a pension is for life, not just for Labour.
