Posted on: 21st November 2019
Following the recently published election manifesto by the Green Party, and Senior Analyst at AJ Bell, Tom Selby, assessed the potential implications that could affect people’s plans for. When considering the possibility that the next government will be a coalition of numerous minor parties, Selby believes that the views of these parties have never been as important as they are now.
It is worth noting that these are merely predictions by AJ Bell and may not necessarily reflect the budget plans made by the Green Party.
predicaments: the reduction of tax-free drawdown on to £40k
Tom Selby comments: “It’s never a good sign when you’re left having to guess exactly what a manifesto pledge means. But given drawdown isn’t ‘tax-free’, we think the Green Party are talking about limiting the tax-free cash people are entitled to from age 55 at £40,000.
“A move in this direction would put at risk the fragile savings culture being nurtured in the UK through automatic enrolment.
“The ability to withdraw up to a quarter of your fund tax-free is one of the few benefits of pensions most people genuinely understand, so limiting it would create one less reason to save for retirement.
“Given that a lack ofprovision remains one of the most pressing challenges facing society today, this retrograde step would risk damaging the retirement prospects of an entire generation.
“It would also be unfair on younger people whose ability to build up tax-free cash entitlement will be constrained in a way that previous generations weren’t.
“Furthermore, we assume those who have already saved in a pension on the basis that 25 per cent would be tax-free from age 55 would receive some sort of protection under the proposals. Failure to do this would cause untold damage to trust in pensions.
“If that is the case then the Green Party need to spell out how this transition, which would create extra complexity for savers and providers alike, would work from a practical perspective.”
Limit pension tax relief to the basic rate (20 per cent)
Selby also discussed predictions for tax relief and said that “Limiting tax relief at 20 per cent – the lowest rate currently available – would risk putting people off saving for retirement. In particular, vast swathes of middle England who are currently entitled to 40 per cent relief might be less willing to provide for their future.
“As with tax-free cash, there is also an intergenerational fairness issue here too. While older workers will have had the chance to claim tax relief at their highest marginal rate while saving in a pension, younger workers will be limited to half this amount.
“Given this generation has by-and-large missed out on defined benefit provision too, young people could legitimately feel that, at least when it comes to pensions, the Green Party are kicking them when they’re down.”
Increase the single-tier state pension to £178 a week (and pay this to WASPI women first)
“Increasing the single-tier state pension by roughly £10 a week and pegging the payment to prices makes far more sense than the existing ‘triple lock’, which increases its real value at random intervals depending on the level of average earnings and inflation.
“However, the Party risks courting serious controversy here for two reasons. Firstly, only increasing the state pension in line with inflation would mean scrapping the earnings link as well as the 2.5% de minimis that currently exists.
“Next year, for example, the state pension will rise in line with July’s average earnings figure of 3.9%. If inflation had been used instead, the benefit would only be increasing by 1.7%.
“Secondly, paying the new higher amount to WASPI women first risks creating new unfairness for those who are forced to wait longer.
“Additionally, it is unclear how the Green Party’s proposal would affect those who currently receive less than the full single-tier amount.
“Those who had previously contracted-out of the state pension and paid lower National Insurance, for example, would have their single-tier amount reduced under the existing system. People also need to have a 35-year National Insurance contribution record to be entitled to the full £168.60 a week payment.
“If the £178 pension were made available to all regardless of their NI record or previous history, that would represent a massive giveaway to older people.”
Letprepare your pension for any political climate
Though these are only predictions by AJ Bell, it would be wise to keep a watchful eye on how the upcoming election will direct the future for pensions and investments. To ensure you save wisely for retirement, no matter the political climate, seeking independent financial advice is crucial. Get in touch with Haven IFA to see how we can help.