With an overwhelming parliamentary majority, new Prime Minister Keir Starmer has a serious mandate to push through the reforms set out in Labour’s manifesto. The party was crystal clear during the campaign that it would prioritize economic growth and “wealth creation” in government, although details of exactly how this would be achieved or what this might mean for people’s pensions and investment were relatively thin on the ground.
A pledge not to raise national insurance, income tax or VAT has led to feverish speculation about what exactly might be in the new chancellor’s fiscal crosshairs, especially if growth remains as volatile as it has been for the past two decades. And if there is a vacuum for speculation about potential revenue-raising tax measures, it is inevitable that the prospect of a possible tax raid on pensions will rear its ugly head. It is vital that savers and investors ignore the noise ahead of the new chancellor’s first big fiscal move, likely in September or October, and focus instead on their long-term goals.
However, it is not just about taxes, a number of reforms are already underway, matters requiring the attention of various government ministries and promised revisions. For millions of savers and pensioners after years of constant cuts and changes to rules and limits, Labour’s commitment to stability will be welcome. Britons will be hoping the party practices what it preaches on retirement policy by providing at least some certainty over the next five years.
Five key personal finance policy priorities the new government should address
1. Maintenance of simple pensions
Although Labour’s manifesto was relatively light on detail, the ‘Growth Plan’ document released in January provides an insight into the key areas the new government is likely to focus on.
A pension review has been promised to improve performance and encourage higher levels of investment at UK Plc. This will likely mean a continuation of the “Mansion House” agenda launched by the previous government, which focused in particular on encouraging private equity in occupational pension schemes.
According to Labour, at the turn of the century British pension funds and insurance companies held 39% of shares listed on the London Stock Exchange. By 2020, they held just 4%. In the US, pension schemes hold 50% of their assets in equities, compared to 27% in the UK. A single investment of £300 million by a Canadian pension plan in a UK company surprisingly exceeded the total of all UK pension investments in private equity and growth capital in the same year.
Obviously, any shift in asset allocation by these schemes will need to be done in a way that does not harm the interests of members, but given the amount of money being thrown around in defined benefit schemes in particular, even relatively small changes could have a significant effect on the UK economy .
While it is clearly important to ensure that the investments held by auto-enrolment default funds are adequate, ultimately the biggest driver of retirement outcomes is the level of contributions. It is therefore likely that the next government will have to think hard about pension adequacy and how to raise minimum contribution rates above the current level of 8% of qualifying income.
Any new chancellor will always be tempted to tinker with pension taxation, especially during a challenging fiscal environment. While the current allowances regime is ripe for simplification, it is crucial that any reforms in this area focus on the long term and encourage more people to save and invest for their future. Labor’s decision to abandon plans to reintroduce lifetime pensions, a reform that would add complexity and deter investment risk, is hopefully a positive sign that Labor will take a pragmatic approach in power.
2. Simplifying and supercharging the ISA
A new government with a new mandate after the election will have a huge opportunity to implement lasting reforms for the benefit of savers and investors. The fact that Labor has committed to simplifying ISA is a huge positive, but for the new government to deliver real benefits to millions of Britons, it needs to be radical.
AJ Bell has long sought to simplify the ISA environment by combining the best features of the existing six types into a single “One ISA”. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors.
The move would make it easier for investors to switch between cash and investments and move us towards a world where investments are just a feature of an ISA, rather than a defining characteristic. The platforms could then build more flexible ISAs with the ability to move freely between cash and investments – something that would tie into wider efforts to increase the number of people investing for the long term, including UK Plc. Increasing the total ISA allowance to £25,000 would help support this agenda without the complexity of the proposed “British ISA”, a poorly thought out policy that the new administration should approve.
As part of this ISA review, policy makers should also consider super charging Lifetime ISAs by removing the termination penalty and raising the minimum holding limit from £450,000.
3. Maintaining the momentum of checking the boundaries of recommendations
Making ISA and pension standards easier to understand is only part of the challenge – it is also essential to improve the help available to people, both by improving advice and encouraging more people to use regulated financial advice.
The review of advice boundaries initiated by the Treasury and the FCA, in particular the proposals to enable more personalized ‘targeted support’ advice, has the potential to be a game-changer. More useful guidance, greater use of regulated advice and simpler products could provide the basis for a revolution in UK savings and investment.
The fact that Labor has already explicitly stated its support for a review of the advice boundaries is extremely encouraging and should mean that, regardless of the outcome of the general election, these plans will be pushed through without serious delay.
4. Connecting people with lost pension pots
Auto-enrolment has been a success story so far, dramatically increasing the number of people saving for retirement. These reforms require an upgrade to raise minimum contributions after the election, but there is also the growing problem of “lost” pension banks to address.
It is estimated that around £27bn of pension money will be ‘lost’ in the UK, in part because each job move can create a new automatic pension fund. Reforms to create pension dashboards to allow people to see all their pension pots in one place should make a big difference. The schedule has been delayed several times, so it is crucial that the new government moves forward with the introduction of the dashboards as planned.
In the meantime, anyone who needs to find pensions from previous employers can try AJ Bell’s free pension finder tool, which can make finding old pensions a breeze.
5. Resolving HMRC tax issues
More than a decade on from former chancellor George Osborne’s bombshell pensions freedoms announcement in the March 2014 Budget, the tax system governing flexible retirement remains flawed.
The latest official figures show that more than £1.2bn has now been paid out to savers who were overtaxed on their first withdrawal and filled in the relevant HMRC form to claim their money back. In the 2023/24 tax year alone, a record £198m was refunded to people who were hit with unfair – and often unexpected – tax bills.
Depressingly, the actual figure for overtaxation is likely to be considerably higher. In particular, people on lower incomes who are less familiar with self-assessment may be less likely to go through the official process of getting money owed to them back. As a result, they will rely on HMRC to put their affairs in order.
It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact that Britons have flexible access to their pensions from the age of 55, instead persisting with a secretive approach that hits people with unfair tax assessments, often running into thousands of pounds and requires them to fill out one of three forms if they want their money back within 30 days. The new government must urgently review this approach and come up with a solution that taxes the withdrawals correctly.
More generally, HMRC is in desperate need of some serious investment. A recent National Audit Office (NAO) report revealed that taxpayers spent a whopping 798 years in HMRC’s hold in the 2022/23 tax year, and the situation is likely to get worse because of frozen thresholds and cuts to dividend and capital gains tax relief. to draw more people into the clutches.
HMRC’s growing waiting room is due to both increasing numbers of taxpayers needing help navigating the UK’s labyrinthine tax system and longer waiting times to speak to someone. A Freedom of Information request by AJ Bell shows that the average waiting time to speak to someone at the tax office has quadrupled in ten years, from four minutes in 2012/13 to more than 16 minutes in 2022/23.
Waiting times have increased significantly in recent years. In 2019/20 the typical waiting time was 6-7 minutes, but the average time taxpayers now endure has skyrocketed since then. Of course, many will wait much longer if they have to contact the taxman at peak times.
HMRC’s own performance statistics showed a record number of calls last tax year, despite phone lines being closed over the summer months. There has also been a significant increase in the use of its web chats and digital services. The new government will face difficult choices about how to spend its limited resources, but the priority must be to ensure the Treasury is fit for purpose.
Disclaimer: These articles are for informational purposes only and are not personal recommendations or advice. Tax and pension rules apply.