The outcome of the 2024 UK General Election has marked a significant turning point for the country's political landscape. With a new Labour government in power, it is natural to ponder the potential impact on various aspects of the economy, including the tax treatment of UK pensions. We have seen before that both Labour and Conversative governments have made significant and rapid changes to the nature of pension savings in the last 20 years. Wealth Planning Director Ian Cosnett explores this topic further and outlines what changes might be on the horizon.
Obviously, it is important to recognise that changes to the tax treatment of pensions would require legislation and approval from Parliament. The following points are based on potential scenarios and should be seen as speculative, rather than definitive.
Four aspects of pensions Labour could potentially change
Reviewing pension tax relief:
One area that could be subject to change is pension tax relief. Currently, individuals receive tax relief on their pension contributions. The level of relief and annual limit available depends on the individual's income tax rate and earnings.
It is possible that the new government may review the existing system and adjust the tax relief structure and/or limits.
This could lead to various limits and allowances increasing or decreasing depending on Labour’s policy priorities.
This may be an opportune time to discuss with your financial adviser making or bringing forward any planned large single contributions into a pension prior to the government’s first Budget in the autumn to ensure tax relief is received at expected rates.
In the months leading up to the election, Labour made significant noise about reversing the Conservative abolition of the lifetime allowance (the overall cap on your pension savings eligible for tax relief). Labour had previously indicated that it would reverse this as the government's plan to abolish the allowance was the “wrong priority, at the wrong time, for the wrong people”. However, the proposal did not appear in the Labour manifesto and the Financial Times reports it has been dropped because it would add uncertainty for savers and be complex to reintroduce.
Changing the age of access to pensions
Another area that could be reviewed is the age at which individuals can access their pension savings. Currently, the minimum age to access a private pension is 55, rising to 57 on 6 April 2028, subject to certain exceptions. The new government may consider revisiting this age limit and could potentially increase or decrease it or the rate of change, depending on its policy priorities.
Taxation of pension withdrawals
The tax treatment of pension withdrawals, particularly the tax-free cash element, in July will not be at risk, according to a report in Investment Adviser (quoting a Labour spokesperson).
Pension freedoms
The introduction of pension freedoms in 2015 revolutionised the way people access their pension savings. It is unlikely that the new Labour government would seek to reverse these freedoms entirely. However, given the party has expressed concerns about people accessing their pensions early due to the cost of living crisis, it may consider introducing new regulations or safeguards to ensure individuals make informed decisions regarding their pension withdrawals.
It is important to remember that any changes to the tax treatment of pensions would need to strike a balance between encouraging retirement savings and ensuring a fair and sustainable system. The Labour party will likely consider various factors, including economic conditions, public opinion, and long-term fiscal implications, before making any policy moves
To sum up, while the impact of the UK General Election on the tax treatment of pensions remains uncertain, it is reasonable to expect that Labour may review and potentially make changes to the existing system.