Speculation is growing that we soon could see significant changes to pensions, including some of the valuable tax benefits that they currently offer, as the new Labour government seeks to reduce the budget deficit.
Labour’s manifesto pledged to carry out a wide-ranging pension review, which is expected to cover the current auto-enrolment system, and to explore ways that pension consolidation can help simplify things for savers. However, given that it’s only a few weeks since the party came to power, we’ve yet to see any real detail on what the party’s wider plans for pensions are. We’re likely to have more clarity when Labour delivers its first budget statement on October 30.
Here’s what we know so far, and why it’s really important to not let political changes deter you from saving for the future.
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Triple lock to stay
One firm commitment that the Prime Minister Sir Keir Starmer has made is that Labour will maintain the pension triple lock. This means that the State Pension each year is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%.
The State Pension this year rose by 8.5% in line with earnings growth, taking the new State Pension to £221.20 a week, and the full basic State Pension to £169.50 a week. You can learn more about the triple lock and why it matters in our article What is the pension triple lock?
Labour has also promised to support WASPI women, who were waiting for the previous government’s response to an Ombudsman report calling for compensation when the election was called. The report looked into the Department for Work and Pension’s failure to properly notify women born in the 1950s that the State Pension age would be changing from 60 to 66 over the course of the 2010s. WASPI campaigners, who have been fighting for compensation for several years, say that the DWP’s oversight affected over 3m women and caused many of them a significant degree of emotional and financial stress.
Will I still be able to take my 25% tax-free cash?
Many people are concerned that Labour might clamp down on current rules which allow you to take 25% of your pension savings tax-free from the age of 55 (rising to 57 from 2028).
At the moment, you can take a maximum pension tax-free cash lump sum of £268,275 out of your pension, or 25% of the old Lifetime Allowance. This is known as your Lump Sum Allowance (LSA). Find out more in our article How much tax-free cash can I take from my pension?
Scrapping these rules would prove hugely unpopular with pension savers, and could be perceived as a disincentive to put money away for retirement, so it seems unlikely that Labour would do away with them altogether. However, it is possible that the new government might look at reducing the maximum tax-free lump sum you can take, perhaps to £150,000 or £100,000.
Bear in mind that taking out your 25% tax-free lump sum, especially if you do this early on, can have a significant impact on your retirement income later on, so you should seek professional financial advice on the best course of action to take based on your individual circumstances. You can read about all the pros and cons in our guide Should I take a tax-free lump sum from my pension?
Will pension tax relief remain the same?
Unlike the Conservatives, Labour made no pledges in the run up to the election that pension tax relief would remain untouched if the party were to be elected.
The new Chancellor of the Exchequer Rachel Reeves has previously said she would support the introduction of a flat rate of pension tax relief, of around 33% which, whilst benefiting basic rate taxpayers, could leave higher and additional rate taxpayers worse off.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown explained: “Tax relief is currently set at your marginal rate of income tax, so if you are a basic-rate taxpayer you’ll get 20% relief. It’s a government top up that boosts your pension contribution.
“This means that a £100 contribution to your pension in effect only costs you £80. The benefits get bigger the more you earn. Higher-rate taxpayers only need to pay in £60 to get the top up to £100 and additional-rate taxpayers only need to pay in £55. It’s a significant incentive.
“If we were to see a flat rate of tax relief, like the rumoured 33%, introduced then it would be good news for basic-rate taxpayers as a £100 contribution would now only cost £67. However, higher and additional-rate taxpayers would get less than they got before, and this could affect how much they contribute.”
It’s very unlikely that any changes to pension tax relief, if introduced, would be retrospective, so tax relief you’ve benefited from in the past should be safe. However, if you’re worried that tax relief could be restricted in future, you may want to consider making the most of current rules now.
At the moment you can earn tax relief on pension contributions of up to 100% of your earnings, or £60,000 a year, whichever is lower. If you’re earning £70,000 a year for example, that means you’d be able to pay up to £60,000 of this into your pension.
Any pension payments you make over the current £60,000 threshold are subject to usual income tax rates. You also can carry forward any unused Annual Allowances from the previous three years, provided you belonged to a pension scheme during those years. You can learn more about carry forward in our guide Pension carry forward explained.
Impact on pension allowances
Labour’s manifesto didn’t mention reintroducing the Lifetime Allowance, which was the maximum amount you could save into your pensions over your lifetime, without having to pay any extra tax charges when you take money out. It was abolished by the current Chancellor Jeremy Hunt in April 2024 to encourage pension savers to stay in the workplace longer and continue paying into their pensions.
At one point Labour said it wanted to reinstate the Allowance to prevent high earners enjoying this tax break, but its reintroduction would have proved incredibly complex and could have resulted in the highest earners stopping work early to avoid being hit by tax charges.
The fact that it wasn’t included in the manifesto means that most assume Labour has scrapped plans to reintroduce it. Find out more about pension allowances in our articles Labour u-turns on pension Lifetime Allowance and How do pension allowances work?
Auto-enrolment shake up
Millions of people aren’t putting away nearly enough to provide them with a comfortable retirement, so the Labour government may look to increase current auto-enrolment limits, or expand auto-enrolment to include more workers.
At the moment, if you’ve been auto-enrolled into your employer’s workplace pension scheme, the minimum contribution is 8% of ‘qualifying earnings’. Of that 8%, your employer can’t contribute less than 3%, but they can pay as much of the 8% as they want. If you’re not sure how much you should be putting away for the future, read our article How much should I save for retirement?
Rachel Vahey, head of public policy at AJ Bell, said: “The government may take this opportunity to implement changes to lower the automatic enrolment age to 18 and start counting pension contributions from the first pound of salary. It could even start thinking about the question of pension adequacy and how to scale up minimum contribution rates beyond the current level of 8% of qualifying earnings.”
You can find out more about how the system works at the moment in our guide How does pension auto-enrolment work?
A change in investment approach
The party has promised that part of its review of the current pension system will focus on promoting further investment in the UK.
Tom Selby, director of public policy at AJ Bell said: “According to Labour, at the turn of the century, UK pension funds and insurers held 39% of shares listed on the London Stock Exchange. By 2020, they held just 4%. In the US, pension schemes hold 50% of their assets in equities, compared to 27% in the UK.
“Clearly any shift in asset allocation by these schemes will need to be done in a way that doesn’t harm member interests, but given the amount of money sloshing around in defined benefit schemes in particular, even relatively small changes could make a sizeable difference to the UK economy.”
Finally…
It’s vital not to make any knee-jerk decisions based on what you think might happen to the pensions system now that Labour is in power, and if you’re unsure how to proceed, to seek professional advice.
Tom Selby of AJ Bell said: “The pledge not to increase National Insurance, income tax or VAT led to feverish speculation of exactly what might be in new chancellor Rachel Reeves’ fiscal crosshairs, particularly if growth remains as elusive as it has been for the past two decades.
“And if there is a vacuum for speculation about potential revenue raising tax measures, it is inevitable the prospect of a potential pension tax raid will rear its ugly head. It is vital savers and investors ignore the noise ahead of Reeves’ first major fiscal set-piece, likely in September or October, and focus instead on their long-term goals.”
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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