Will the UK Election Change Your Pension?
The upcoming UK general election in early June gives the incoming government the chance to review and change public policy. The expectation is of a large conservative majority. In the light of the government’s need to reduce the public debt and intention to avoid raising taxes, the new government is going to be looking for ways to spend less.
Pensions are in the firing line. Here are three key ways that we might expect policy to change, what it means for you, and what you might consider doing to ensure that your retirement plans are not knocked off course…
- Increasing retirement age: This is already happening. And a new government could go further, faster. The government has talked about increasing retirement age proportionately to life expectancy, which means that within our lifetime, the retirement age might increase to perhaps 70. While this has little short term benefit to the national purse, it has enormous long term benefit, saving hundreds of billions in the medium term.
- Removal of the ‘triple lock’: Currently, the state pension is pegged to the highest of inflation, average earnings growth, or 2.5%—whichever is higher. As a result of this, pensioners have done better than most other groups in society in recent years. The cost of the triple lock is significant, and I’d expect a conservative government to change this for a lower targeted increase.
- Reduction in tax relief: Tax relief at higher rate is available on annual contributions up to £40,000. It costs approximately £50 billion a year to provide this tax relief. At a time when the government needs to find funds, this looks like a certainty for reduction. The government could either limit tax relief to the basic rate, reduce the annual allowance, or both!
Assuming that the worst happens and the government attacks all three areas, then the question becomes—what does it mean and what should you do about it? Here are a few thoughts for consideration:
If you want to benefit from the state pension and it won’t be paid until you are between 66 and 70, then good health is a prerequisite for enjoying a long life in retirement and fully benefiting from the state pension.
Don’t rely on the state pension
Private pension provisions, investments, and savings are likely to be increasingly important as part of an income portfolio that brings cash from various sources. The state pension is probably unsustainable in the longer term—certainly in its current guise. And that means more and more that your personal ability to fund your retirement is critical.
Improve the performance of your investments and savings
Your personal ability to provide for retirement doesn’t just rely on how much you put aside in investments and savings, but it is impacted by the long term performance of those investments and savings! The challenge for many savers is that they are achieving derisory returns from their pensions, shares, ISAs, and bank and building society accounts. Our clients typically achieve 7-15% annual returns, year after year, and that is transformational in building a decent fund.
If tax relief is going to be reduced—and it could be as soon as the first budget after the election—then I encourage you to make the maximum provision in the current year. You might also look at your contributions in the last three years and if you did not contribute the maximum then, use the carry forward provisions to use up all your allowances. If you don’t have a personal pension and you want to make the most flexible contributions then, talk to my company, Avantis Wealth, which can assist.
You might like a complimentary copy of my special report; The F.R.E.S.H Investment Strategy, which explains exactly how to do better with your cash, pension and ISA savings. Just email me at email@example.com and request a copy—you’ll be glad you did.