With a huge parliamentary majority, new Prime Minister Keir Starmer has a serious mandate to deliver the reforms set out in Labour’s manifesto. The party has been crystal clear throughout the campaign that it will prioritise economic growth and “wealth creation” in government, although details of exactly how this will be achieved or what it might mean for people’s pensions and investments have been relatively scarce.
The 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 sights, especially if growth remains as elusive as it has been over the past two decades. And if there is a vacuum for speculation about possible tax measures to boost revenues, it is inevitable that the prospect of a possible pension tax attack will rear its head. It is vital that savers and investors ignore the noise ahead of the new Chancellor’s first major fiscal measure, likely in September or October, and focus instead on their long-term goals.
This isn’t just about tax, though, with a raft of reforms already underway, issues requiring attention from various government departments and promised reviews. For millions of savers and pensioners, Labour’s commitment to stability, after years of constantly scrapping and changing rules and caps, will have been welcome. Britons will be hoping the party practices what it preaches when it comes to pensions policy by providing at least some certainty over the next five years.
Five key personal finance policy priorities the new government must address
1. Keep pensions simple
Although Labour’s manifesto was relatively sparse in detail, the Plan for Growth published in January provides insight into the new government’s key focus areas.
A review of pensions has been promised, with the aim of improving performance and encouraging higher levels of investment in UK Plc. The latter is likely to be a continuation of the ‘Mansion House’ agenda initiated by the previous government, which focused in particular on encouraging private equity stakes in occupational pension schemes.
According to Labour, at the turn of the century, British pension funds and insurers held 39% of the shares listed on the London Stock Exchange. By 2020, that was just 4%. In the US, pension funds hold 50% of their assets in equities, compared with 27% in the UK. Astonishingly, a single £300m investment by the Canadian Pension Plan in a UK company exceeded the total amount of all UK pension investments in private equity and growth capital in the same year.
Of course, any shift in the asset allocation of these schemes will have to be done in a way that does not harm the interests of members. But given the amount of money involved in defined benefit pension schemes in particular, even relatively small changes can make a big difference to the UK economy.
While it is clearly important to ensure that the investments held by auto-enrolment default funds are appropriate, ultimately the biggest driver of pension outcomes is the level of contributions. It is therefore likely that the next government will need to think carefully about the issue of pension adequacy and how minimum contribution rates can be scaled up beyond the current level of 8% of qualifying income.
Any new Chancellor of the Exchequer will always be tempted to tinker with pensions tax, particularly in a challenging fiscal environment. While the current allowance regime is ripe for simplification, it is vital that reforms in this area are long-term and encourage more people to save and invest for their future. Labour’s decision to abandon plans to reintroduce the lifetime pension allowance, a reform that would have added complexity and discouraged investment risk, is hopefully a positive indication that Labour will take a pragmatic approach when in power.
2. Simplify and strengthen ISAs
A new government with a fresh mandate after the election will have a huge opportunity to deliver lasting reforms for the benefit of savers and investors. Labour’s commitment to ISA simplification is a big plus, but to deliver real benefits to millions of Britons the new government will need to be radical.
AJ Bell has long campaigned to simplify the ISA landscape 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.
This move would make it easier for investors to switch between cash and investments, moving us towards a world where investments are simply a feature of ISAs, rather than a defining feature. Platforms could then build a more flexible ISA with the ability to move freely between cash and investments – something that would tie in with wider efforts to increase the number of people investing for the long term, including in UK Plc. Increasing the overall ISA allowance to £25,000 would help support this agenda without the complexity of the proposed ‘British ISA’, an ill-conceived policy that should be binned by the new government.
As part of this review of ISAs, policymakers should also consider imposing additional tax burdens on the Lifetime ISA by removing the exit penalty and increasing the minimum holding limit from £450,000.
3. Maintaining the momentum of the Advice Guidance Boundary Review
Making ISAs and pensions understandable is only part of the challenge. It is also vital to improve the help available to people, both by improving guidance and encouraging more people to seek regulated financial advice.
The Advice Guidance Boundary Review initiated by the Treasury and the FCA, in particular proposals to enable more personalised ‘Targeted Support’ guidance, has the potential to be a game-changer. More useful guidance, greater uptake of regulated advice and simpler products could form the basis for a savings and investment revolution in the UK.
The fact that Labour has already explicitly stated its support for the Advice Guidance Boundary Review is extremely encouraging and should mean that these plans will be implemented without too much delay, regardless of the outcome of the general election.
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. Those reforms require an upgrade to increase minimum contributions after the election, but there is also the growing problem of ‘lost’ pension pots that needs to be addressed.
It is estimated that around £27 billion of pension money is ‘lost’ in the UK, partly because every job change can create a new automatic pension pot. Reforms to create pension dashboards, which 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 vital that the new government goes ahead with the introduction of dashboards as planned.
In the meantime, if you are looking for pensions from previous employers, try AJ Bell’s free pension finder. This tool makes it easy to track down old pensions.
5. Addressing HMRC’s tax issues
More than a decade after former Chancellor of the Exchequer George Osborne’s shock announcement of pension freedoms in the March 2014 Budget, the tax system that regulates flexible pension withdrawals is still flawed.
Latest official figures reveal that more than £1.2 billion has now been paid back to savers who paid too much tax on their first withdrawal and filled in the relevant HMRC form to get their money back. In the 2023/24 tax year alone, a record £198 million was paid back to people who were hit with an unfair – and often unexpected – tax bill.
Depressingly, the true figure for overcharging 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 to recover the money they are owed. As a result, they will be reliant on HMRC to sort out their affairs.
It is simply unacceptable that the government has failed to change the tax system to deal with the fact that Britons have flexible access to their pension from the age of 55, instead sticking with an obscure approach that leaves people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want their money back within 30 days. The new government must urgently review this approach and provide a solution that taxes withdrawals correctly.
More broadly, HMRC is in dire need of serious investment. A recent report from the National Audit Office (NAO) revealed that taxpayers were locked up with HMRC for a staggering 798 years in the 2022/23 tax year, and the situation is likely to become even more tense as frozen thresholds and cuts to dividend and capital gains tax exemptions push more people into the taxman’s clutches.
HMRC’s growing waiting room is due both to the growing number of taxpayers needing help navigating the UK’s labyrinthine tax system and to longer waits to speak to someone. A Freedom of Information Act request by AJ Bell reveals that the average wait to speak to someone at the tax office has quadrupled in a decade, from four minutes in 2012/13 to just over 16 minutes in 2022/23.
Waiting times have increased dramatically in recent years. In 2019/20 the typical wait was 6-7 minutes, but the average wait that taxpayers now have to endure has increased dramatically since then. Of course, many will have had to wait much longer if they had to contact the tax office at peak times.
HMRC’s own performance statistics showed record numbers of calls last tax year, despite the phone lines being closed over the summer months. There was also a significant increase in the use of webchat and digital services. The new government will face difficult choices about how it spends its limited resources, but ensuring the tax office is fit for purpose must be a priority.
Disclaimer: These articles are for information purposes only and do not constitute personal recommendations or advice. Tax and pension rules apply.