How does the Election Impact my Pension Contribution?
The third general election since 2015 has come and gone. The Conservatives achieved a landslide victory on 12 December, securing 365 seats while Labour suffered its worst result since 1935.
While Brexit and spending pledges dominated much of the campaign, all major parties put forward a number of pension policy proposals and intentions. While this is nothing new for an election, it may actually be more relevant this time around as the path to Brexit appears clearer.
Let’s explore what the Conservative victory means for your pension, pension contribution and finances in general.
Tapered Annual Allowance
Most people are allowed to contribute up to the same amount as they earn into a pension each year. This is normally capped at £40,000 (known as the annual allowance) but for very high earners (‘adjusted income’ above £150,000) this gradually reduces to £10,000 as income reaches £210,000 (known as the tapered annual allowance).
If workers contribute more than their allowance they face very high tax bills.
This is a particular problem in the public sector, including the NHS, where defined benefit (DB) pension scheme arrangements mean that workers have limited control over the contributions they make toward their pension. This is because contributions are a function of earnings and time worked.
Notably, this has led to highly-paid doctors cutting their working hours to avoid large tax bills, which can be as high as £87,000 in some cases!
The Conservatives are aware of the issue and they promised an urgent review within 30 days of winning the election. No single proposed solutions stands out at the moment but we can be sure this will be high on the government’s agenda given the highly-publicised impact on the NHS.
Raising the NI Threshold
This is the amount of annual earnings above which National Insurance contributions are payable; they initially want to raise the threshold to £9,500 and later to £12,500, from the current £8,632.
This will initially mean a tax cut of roughly £100 for most workers, rising to approximately £450 down the line.
While this means more take-home pay for many, it might also make it more difficult to be eligible for a full State Pension, if the lower earnings limit (currently £6,136) is raised alongside the primary threshold (currently £8,632 as we saw above). The lower earnings limit is the amount of annual earnings above which you get benefits related to National Insurance (including the State Pension) even though you don’t pay any until you reach the primary threshold.
See also the government's guide on National Insurance.
Pensions Scheme Bill 2019-20
The Pensions Schemes Bill 2019-20 was announced in October 2019 and was making its way through parliament when the election was called. The Conservatives plan to re-introduce the bill.
The major provisions of the bill are:
- Foundations for the Pensions Dashboard which will allow individuals to view information about their State Pension, workplace, and personal pensions in one place. This includes regulatory and information disclosure requirements.
- A framework for Collective Defined Contribution (CDC) schemes, which are a middle ground between defined contribution (DC) and defined benefit (DB) schemes – the risk does not sit entirely with the employer (DB schemes) or employee (DC schemes) but is shared. In CDC schemes, contributions are invested collectively and the scheme targets a level of income for its members at retirement, but this is not guaranteed as in DB schemes.
- New powers for The Pensions Regulator (TPR). Following high-profile collapses such as that of Carillion which put pension benefits into doubt, the powers of the TPR were extended with a view to better safeguarding scheme members’ benefits.
Another technical loophole which hurts some workers is related to net-pay schemes. If people earn below the income tax annual allowance (£12,500 in 2019/20), and pension contributions are made from their gross pay (i.e. before tax is taken off), they don’t benefit from tax relief as they ‘should’ since none of their earnings are taxable anyway.
The Conservatives plan to address this as well.
All major parties committed to maintaining the triple lock. This means the State Pension will continue to increase by the higher of consumer price inflation, wage inflation, or 2.5%, each year.
Other Policy Points to be Aware of
All parties expressed a commitment to improve savings among the self-employed and make pension scheme investments more sustainable. The Conservatives also want to ‘unlock’ money in pension funds to fund scientific innovation.
A contentious issue remains the rapid equalisation of the State Pension age for women, stipulated by the 1995 and 2011 Pensions Acts. While Labour promised compensation, the Conservatives set aside no money for this.