We run through three controversial pension rules that could be tinkered with, following June’s general election.
Out of the blue, Prime Minister Theresa May has announced plans to hold a general election, which has been pencilled in to take place on 8 June. Providing May’s calls are answered in parliament (needing support from 66% of MPs) the pensions landscape is unlikely to stand still for long.
Below, we run through three aspects of the pension landscape that could see changes following June’s general election.
State pension triple-lock
The triple lock, introduced by the Conservative-Liberal Democrat coalition, is a guarantee that the state pension will rise each year by at least 2.5%, or the rate of inflation, or growth in earnings - whichever is highest. In its 2015 election manifesto, the Conservative party pledged to extend the triple lock until 2020. There were concerns that this promise would be broken in the event of a Brexit vote, but in November's Autumn Statement the government confirmed it will remain in place for the remainder of this parliament.
Various independent reports, include John Cridland’s recent review into the state pension age, have called on the 'triple lock' to be scrapped, as it is expensive.
Former pensions minister Ros Altmann has also campaigned for change, stating last summer that the triple lock has "outlived its purpose" and should be turned into a double lock, based on inflation and earnings.
"The cost of the triple lock on the public finances from 2020 onwards is enormous. If you reduce it to a double lock you save billions of pounds," said Altmann.
But Labour has pledged to keep the triple lock. Last week shadow Chancellor John McDonnell said he will keep the triple lock in place until 2025. In contrast, the Conservatives have pledged to maintain the triple lock until 2020 but have not clarified their position beyond that date.
However, according to Tom Selby, senior analyst at AJ Bell, logic suggests the general election is likely to be a bun fight for the so-called ‘grey vote’. He says that with this in mind, May "will be nervous about potentially angering the pensioners whose votes will be crucial in the final outcome of the election". Therefore the days of the triple lock may not be necessarily numbered.
State pension age
The age at which people can draw a state pension has been a hot political potato in recent years.
As things stand today, state pension ages for men and women will be equalised at 65 in October 2018, reach 66 in October 2020, and rise to 67 in the late 2020s. From then onwards state pension age is expected to rise again to 68 between 2044 and 2046.
But last month Mr Cridland’s review called on the government to increase the state pension age to 68 over a two-year period between 2037 and 2039. This is faster than the current timetable.
Royal London’s Steve Webb, the former pensions minister, points out the government has a legal duty (under the 2014 Pensions Act) to respond to Mr Cridland’s recently completed review.
Mr Webb adds that for the short term at least, the government is unlikely to adopt a hard stance. He says: "The prospect of an imminent election probably means an aggressive timetable with 20-somethings working into their 70s is off the table for now."
Pension tax relief
There have been concerns rumbling for some time now that the annual pension contribution allowance, currently capped at £40,000, could become less generous. These fears were once again reignited when Chancellor Phillip Hammond softened his attack on the self-employed by cancelling plans to increase national insurance contributions (NICs).
When announcing the U-turn, Mr Hammond said the cost implications of changing tack will be funded by measures to be announced in the Autumn Budget. The shortfall amounts to £2 billion.
This has sparked fears that the Conservative government (if re-elected) could introduce a flat rate of pensions tax relief, which would negatively impact higher earners. It would probably mean that the 40% tax relief those who earn more than £43,001 a year would be cut, perhaps down to 30% or even to the basic rate level of 20%. In any case, the cut will save the government money.
"If Theresa May secures a bigger majority, radical reform of things like pension tax relief becomes much more likely," says Mr Webb. "A key question is whether the parties will have time to put detailed plans in their manifestos or whether we will get vague promises of reviews with all the detailed work done after the election.
"What is clear is that a new government and a possible new ministerial team are likely to mean yet more unwelcome uncertainty over the future of pension tax relief."
This story was originally written for our sister magazine, Money Observer.