What Labour's General Election win could mean for your pension

A pledge made by Rishi Sunak to protect the state pension from being subject to income tax will be swept away by the Conservative loss.

And finance industry experts believe that private pensions will be next in line for a tax shake-up as Labour bids to fill a black hole in the nation’s finances. Labour has promised to conduct a comprehensive review of the pensions and retirement savings system.

Ideas likely to come under consideration include looking at changes to the tax relief offered on pension contributions from salaries.

Also on the line is the ability of pensioners to take a tax-free lump sum from their pension pot, and whether people should be able to pass on a pension to loved ones free of tax.

Other issues include measures to encourage people to save more into their private pensions, and efforts to ensure UK pension funds are invested in the UK rather than overseas.

Triple lock plus

The Conservatives pledged in their manifesto that someone entirely reliant on the State Pension in old age would not have to pay income tax. This was rejected by Labour during the general election campaign and will now be dropped.

Pension contributions tax relief

Currently, workers paying into a private pension get different levels of tax relief depending on their income. This means that well paid individuals get tax relief at 40-45 percent on their contributions, but it is a lower 20 percent for those who pay basic rate tax.

One possibility is that these rates will be equalised at – perhaps – 30 percent.

Becky O’Connor, Director of Public Affairs at PensionBee, said: “While not confirmed by the Labour party, it has previously called for a flat rate of tax relief on pension contributions.

“A flat rate of tax relief of 30-33 percent could act as a stronger incentive for basic-rate taxpayers to pay into a pension, without causing too much of a disincentive for higher and additional rate taxpayers currently benefiting from 40 percent and 45 percent tax relief on contributions, respectively.”

Private pension tax-free lump sum

Currently, a retiree can take 25 percent of their pension pot as a lump sum completely free of tax. That amounts to £250,000 to someone with a pot worth £1 million.

Many older Britons are reliant on these lump sums to ensure financial security in old age and pay down debts, such as outstanding mortgages.

Passing pensions down the generations

People who have built up substantial private pension pots can currently pass these on to their adult children free of tax if they pass away before the age of 75. A number of think-tanks that are close to Labour have suggested ending this tax break.

Becky O’Connor, Director of Public Affairs at PensionBee, said: “Defined contribution pensions are generally free from inheritance tax, meaning beneficiaries won’t pay tax on what is left to them inside a pension.

“This can act as an incentive to save into pensions and provides peace of mind that hard-earned savings can be used by family members.

“While it is worth the new government considering whether this incentive is working as it should, we do not see a need to rush to make any changes here until we can better understand how inheritance tax changes will impact saving behaviours.”

Extension of Auto-Enrolment

Labour is expected to increase the number of workers who save into a private pension to guarantee security in old age.

This would require employers to enrol all their workers, including those on low wages and everyone from the age of 18, into a private pension scheme. This will be potentially costly for employers.

Becky O’Connor, of PensionBee, said: “With continual doubt cast over the future of the State Pension, it’s more important than ever for people to begin saving as early as possible to ensure they don’t face an income shortfall in later life.

“We hope the new government continues with plans to extend Auto-Enrolment by scrapping the lower earnings limit for contributions and reducing the enrolment age to 18.

“Contributions made earlier in working life can be the most valuable because of the effect of compounding growth.”

Pot for Life

Labour will be under pressure to set up a new “pot for life” regime. The idea is that as a worker moves between jobs and careers over their lifetime, they will have a single pension pot that moves with them.

Becky O’Connor said: “The new government must outline the next steps for the ‘pot for life’ solution to solve the issue of lost pension pots in the UK.

“The amount of money being lost track of in old pensions is already eye-watering, with more than £50 billion at risk of being left behind and this figure only projected to rise, as the number of pots accumulated through work rises and with it, the number of lost pensions.

“Introducing a pension ‘pot for life’ solution is popular among Brits, with PensionBee research revealing that 75 percent of savers would consider opting for this model.

“This popular concept could be relatively easy to introduce, ultimately allowing people to take greater control of their long-term finances.”