- Use pension assets to invest in the UK economy
Labour appears supportive of reforms already being discussed that would enable money held in some Defined Benefit and workplace Defined Contribution schemes to be used to invest in projects and companies deemed supportive of the UK economy.
The manifesto included the promise to ‘act to increase investment from pension funds in UK markets. We will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC.’
This one, therefore, seems on the table although the details are still to be ironed out.
- Reintroduce the Lifetime Allowance?
The Lifetime Allowance, which placed a limit on what could normally be held within pensions before additional tax was applied, was removed by the last Conservative government in April. The move was criticised by Labour in opposition and the party face questions over whether it would reintroduce the Lifetime Allowance.
There was nothing in the manifesto about it, however, and Labour has said that it will not reintroduce the limit. That suggests the change is unlikely for now and would be politically difficult to make.
- Limiting Inheritance Tax (IHT) protection within pensions
Money held in pensions is treated differently on death from other assets. Pension money falls outside of a person’s estate for Inheritance Tax purposes and can be passed to beneficiaries without IHT applying. If death occurs before age 75 then no tax applies, and if after age 75 then the beneficiary will pay Income Tax at their marginal rate.
This has made pensions a valuable tool for those seeking to mitigate their IHT liability. Changing the tax treatment on death of pensions may prove a complicated task but there are levers the government could pull, short of a full overhaul, to make the system less generous if it wishes.
Industry voices have described the tax treatment on death of pensions as a ‘soft target’.
- Reduction of ‘tax-free cash’
As much as 25% of pension money can be accessed without tax to pay, up to a limit of £268,275. This ‘tax-free cash’ or Pension Commencement Lump Sum in the official jargon – is one of the most popular aspects of the pension system and one of the key reasons why saving within a pension is advantageous from a tax point of view.
There was a kerfuffle during the election campaign when Sir Kier Starmer was asked about the future of tax-free cash and replied that the current system would be reviewed in the coming years, were he to win the election. Labour spokespeople had to quickly confirm that he had spoken in error, and that the tax-free lump sum was here to stay.
No change, therefore, is expected.
- Pension tax relief
Money contributed to a pension can benefit from tax relief. Basic rate tax relief is added automatically, meaning an £80 contribution becomes £100 inside a pension, while extra relief is available for higher and additional rate taxpayers which can be claimed back through their tax return.
It means the biggest benefits are potentially available to those earning at higher levels. There has long been talk that the system could be changed to target the benefits of tax relief more to those on lower earnings. Previously Rachel Reeves, now Chancellor of the Exchequer, has argued in favour of a flat rate of 33% relief for everyone.
Labour has insisted that this is not its policy, and no longer Reeves’ view. Any change risks being unpopular and could be very difficult to implement.
That isn’t the same as ruling it out altogether and the system of tax relief can be expected to be under the microscope when Labour conducts its pensions review.
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