As we head towards the last week of campaigning, TV screens fill up with the habitual images of party leaders on whistle-stop tours, engaging in obligatory photo opportunities for pint-sipping and baby-hugging along the way.
In terms of hard policies though, there’s not likely to be any game-changing vote winners announced in these remaining days, and pensions is no exception. The three main parties, plus UKIP, the SNP and the Green Party have all now published their manifestos and the overall picture is one of general consensus.
Pensions Tax Relief
The issue where there seems to be the broadest agreement is reducing tax-relief for the highest earners. The exact way of achieving this varies amongst the parties, but there does seem to be a groundswell of opinion that generous tax-relief for the already well-off can be sacrificed in the parties’ scramble to fund some other promise which might lure more voters.
For the Labour Party, seeking to woo the vote of the under-25s, with its policy of cutting the university tuition fee cap from £9,000 to £6,000 will be funded by a trio of tax relief restrictions. The party would cut the lifetime allowance, from £1.25m to £1m, reduce the Annual Allowance to £30,000 from £40,000, and for those earning over £150,000, restrict tax relief to 20%, down from the current 45% level.
While the genuinely wealthy may be seen as fair game for these changes, unions in the public sector (who ideologically and financially support Labour) have pointed out that this could affect some professionals in public sector schemes, who, though they may be relatively well-paid, are far from the so called “fat cats” the policy is targeted at.
The Conservatives on the other hand plan to achieve tax-relief savings by reducing the lifetime allowance to £1 million (from £1.25m), and tapering down the annual allowance on a sliding scale for those whose income exceeds £150,000. This would work so a person’s annual allowance would drop by 50p for every extra pound of income over £150,000, meaning that a salary of £175,000 would lead to a reduction in annual allowance to £27,500. When income hits £210,000, the minimum annual allowance of £10,000 would be reached, so any additional income would not attract a further reduction.
The increase in the tax take from this would fund the eye-catching, and (in Conservative eyes) potentially vote-winning policy to raise the inheritance tax threshold to £1 million for married couples and civil partners.
The party’s electoral arithmetic seems to be that the inheritance tax changes might tempt votes from those who have traditionally supported other parties, while it considers it unlikely that at the ballot box, it would actually lose the support of high-earning Conservative voters faced with restrictions to pensions tax relief, even if this causes some annoyance to them.
The Liberal Democrats have committed in principle to a reform of the way pensions tax relief works, but would first commission a review body to come up with options as to how this might ultimately operate. This review would specifically investigate the practicalities of a single, unified rate of tax relief, which would likely be more generous than the current 20% level for basic-rate taxpayers, but would of course mean that higher-rate and addition-rate taxpayers would see their tax relief cut.
The State Pension
Again, the mood of music coming from the three main parties, plus the SNP and UKIP, is strikingly harmonious; all of them wish to retain the so-called “Triple Lock” system to protect the value of the State Pension, introduced by the current coalition Government.
The Triple Lock guarantees that state pensions will rise each year by the highest of average UK earnings growth, the rate of CPI inflation or 2.5% annually.
The Conservatives, Lib Dems and the SNP also share overt support for the single-tier state pension (which would combine together the basic State Pension together with the State Second Pension and any benefits arising from contracting-out) to be introduced from April 2016.
Labour have not expressly included the adoption of a single-tier State Pension as a manifesto commitment, but given that it has not opposed the Coalition’s announced plans on the issue, it seems that it too would move towards a single-tier State Pension.
Most of the parties have a policy that only they are promoting. For the SNP, their “pet policy”, reflecting the lower life expectancy in Scotland compared to the rest of the UK, is to delay the planned increase in the State Pension Age beyond 66. UKIP on the other hand, would extend the pensions of war-widows to spouses after the date of their re-marriage. For their part, the Lib Dems have committed to permitting existing annuities to be sold, whereas the other parties are only reviewing this as a potential option.
There isn’t much here about the smaller parties. Aren’t these parties the new joker in the pack?
We are constantly hearing that the 2015 election campaign is the least predictable in history, largely because of the uncertainty arising from perceived support for the smaller parties, most notably UKIP and the SNP. Certainly they could affect the overall outcome and the shape of any possible coalition.
What is rather more doubtful is whether the pension-specific policies in their manifestos will have any real relevance. The best outcome for a smaller party is to be invited into a coalition (or at least an arrangement to support a Government without a working majority), and to extract concessions from the leading party as the price for its loyalty.
For UKIP, those concessions are likely to revolve around relations with the EU and immigration. For the SNP, its vociferous opposition to the Trident nuclear deterrent, and desire for Scotland to be insulated from ongoing economic austerity measures are where it would likely look to.
The bottom line is that pensions just aren’t important enough to be a deal-breaker for the smaller parties eager to play a part in the next Government.
What do we think all this means for pensions when the election dust has settled?
It seems inevitable, whatever the result next Thursday, that pension tax relief will be reduced in one way or another, and the current triple-lock system will remain in place for the State Pension.
It seems pensions may have become a soft target, because all the parties have been looking to other policies to court voters, at the expense of individual retirement savings. This risks undermining the importance of pension savings as an investment priority for savers.
In the short term, the reduction in tax relief for higher (but not necessarily wealthy) earners could take away some of the financial incentives to save through a pension.
In the long term however, the cumulative effect of progressive reductions in the lifetime and annual allowances over recent years, compounded by further changes following the election, risks creating a climate of scepticism as to the fundamental value and benefit of pensions as a retirement saving vehicle.