In their first six weeks in office, the new Labour government has got straight to work, with a range of measures announced in its first King’s Speech.
Following the election and the appointment of Emma Reynolds as the new Pensions Minister (and Treasury Minister), we thought it would be useful to share the key points of the Labour manifesto and the King’s Speech.
Auto-enrolment (AE) extension – putting legislation into practice
Some changes to expand the scope of auto-enrolment (AE) have already been legislated for, including:
- Lowering the starting age of AE from 22 to 18
- Calculating contributions from the first penny earned, rather than from the current £6,240 starting point.
These are waiting to be put into practice. There is also increasing pressure to increase the minimum AE contribution percentage level (12% is generally agreed within the pensions industry as a more realistic and meaningful minimum). However, the ongoing cost of living pressures could make reforming AE politically difficult.
A new Pension Schemes Bill
During the King’s Speech, the government announced a Pensions Schemes Bill, which they say could lead to a 9% boost to the average pension pot over a worker’s career.
Key elements included:
- Automatic consolidation of small pension pots (typically created when workers move jobs).
- Pension providers to offer more retirement solutions to savers.
- Commitment to a “value-for-money” (VFM) framework.
The Financial Conduct Authority (FCA) reports that schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance and service quality. Once the final framework is decided, these schemes would be publicly rated red, amber, or green.
Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes. This should lead to consolidation, and better value pensions, without individual savers having to act.
No changes to the pension Lifetime Allowance (LTA)
During the election campaign, Labour also confirmed that, in a change from its previous stance, they have no plans to reintroduce the pension Lifetime Allowance (LTA).
The LTA capped the amount individuals could hold in pensions without paying an additional tax charge when they accessed the funds. Labour has said it will not reintroduce the charge to provide certainty for savers, and because they say it would be too complex to bring back the former rules.
In place of the LTA, two new allowances came into force on 6 April 2024.
- The Lump Sum Allowance (LSA) caps the amount that can be taken tax-free during a saver’s lifetime in the form of a “Pension Commencement Lump Sum” or the tax-free element of an uncrystallised lump sum at £268,275.
- The Lump Sum Death Benefit Allowance (LSDBA) caps the amount of lump sum death benefits and serious ill-health lump sum that can be paid without tax at £1,073,100.
It is likely these new allowances will be retained – certainly in the short term.
No changes to other Pension Allowances
There have been no commitments to change other pension allowances.
The Annual Allowance (AA) – the amount an individual can save into a pension each year without an additional tax charge – remains at £60,000.
The normal AA reduces on a “tapered” basis for high earners down to £10,000.
These ignore any potential “carry forward” of unused relief.
Maintaining the State Pension “triple lock”
Labour has committed to keeping the “triple lock”, ensuring the State Pension rises each year by the highest of inflation, average wage increases, or 2.5%. The commitment means that the policy is likely to stay in place until 2030 at least.
While there has been no suggestion that the government will change the State Pension Age, one possible change could be a rise in the minimum age at which individuals can access their pension.
It currently sits at 55 but is due to rise to 57 in 2028. A rise to 60 has been suggested, as making people wait longer before they can access their money could, in theory, make retirement funds last longer in the future.
A greater focus on investing in the UK and alignment with climate ambitions
Building on the so-called “Mansion House reforms” announced by Jeremy Hunt in July 2023, Labour has said that they will act to increase investment from pension funds in UK markets.
Rather than making UK investment mandatory, Labour may simply decide to introduce disclosure requirements around investment in UK equities.
However, if they did place restrictions on investments, this could affect the growth potential of pensions given the poor performance of London-listed companies in recent years compared to American companies.
Labour also argues that Britain’s world-leading financial services industry has a major role to play in mobilising trillions of pounds in private capital to address climate change.
Labour has an ambition to make the UK the “green finance capital of the world”, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.
Speculation on pensions reform
While Labour has been tight-lipped on a range of financial issues, there is speculation that they could reform pensions in one of several ways.
- Possible changes to the tax relief regime, with past suggestions of a 33% flat rate of tax relief, though not confirmed as current policy.
- Potential reforms to the 25% tax-free lump sum, possibly linking it to generating a minimum level of income and only allowing lump sums once income is secure. (This would require a significant reversal of the Pension Freedoms legislation that has been in place since 2015).
- Pensions could become liable for Inheritance Tax (IHT) in the future, changing the current treatment where pensions usually fall outside an individual’s estate on death.
Additional relevant information on Labour’s pension plans:
- Pension consolidation – Labour’s emphasis on consolidating pension pots aligns with broader industry trends towards reducing fragmentation in pension savings, which is expected to lead to better outcomes for savers.
- Focus on financial inclusion – Labour may also consider measures to improve pension inclusivity, ensuring that lower-income workers and those in non-traditional employment have better access to pension savings.
- Impact of green finance mandates – The push towards aligning pension funds with climate goals may require significant adjustments in how pension investments are managed, potentially influencing the long-term growth of pension assets.
Upcoming Autumn Budget (scheduled for 30 October)
Labour’s first Budget is scheduled for 30 October, where further tax and pension reforms might be unveiled.
We will keep you posted of any further relevant developments.
This summary provides an overview of Labour’s key pension policies and speculated future directions based on their recent actions and statements. The content of this article is intended for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
