The general election and the ensuing hung parliament, along with Brexit, could have an impact on pensions. A month into the new parliament, what is the current situation regarding pensions and what is the likely impact on investors?
A major concern has been what might happen to pension tax relief. Investors save into pensions out of untaxed income and get tax relief at their marginal tax rate of 20%, 40% or 45%. This is estimated to cost the government over £38bn a year and so has long been considered a possible target for cuts. George Osborne as Chancellor also looked at launching a pension Isa, with people saving for retirement out of taxed income, whilst the idea of ‘flat rate’ relief of say 33% – so more for lower earners, less for the wealthier – had also been mooted.
However, a statement made this week by the new Work and Pensions Secretary, David Gauke, confirmed that pension tax relief will be safe for now. He declared that he 'wouldn't expect to see any fundamental changes in the near future'. This is welcome news for investors in the short term but it is worth bearing in mind the government’s thinking in the medium to long term. It might be prudent therefore to maximise pension contributions now, if you are in a position to do so, ahead of any future changes.
One other politically contentious policy also appears to have been dropped – the planned replacement of the triple lock on pensions with a double lock in 2020. Under the triple lock, your state pension of up to a current maximum of £159.55 a week is guaranteed to increase each year by the higher of inflation, average earnings or 2.5%. Under the double lock, it would increase by the higher of inflation or average earnings only. Because of the Democratic Unionist Party’s support of the triple lock, this policy has been dropped.
However, you may still have to wait longer to get your pension, as there are plans to increase state pension age to 68 by 2046 and further changes are possible.
In terms of your pension investments, political uncertainty can lead to market uncertainty, so with both a hung parliament and Brexit in the frame, there could well be some volatility and fluctuations in the markets over the next couple of years. Having said that, the markets to date have held up pretty well so far and the level of volatility has been quite low. Of course, the Brexit negotiations are at an early stage, so more volatility could be expected as the talks proceed.
So with the hung parliament now in place, pensions have dropped out of focus to some extent – at least in the short term. However, if you are concerned about your pension investments going forward, or if you are looking to retire and take your pension in the next couple of years, it could make sense to talk to an independent financial adviser.
Contact Kellands to discuss your pre-retirement and retirement planning needs today.