As a new political dawn breaks, many wonder what will be the first areas to come under the scrutiny of Keir Starmer and the Labour government. Tax reforms have been one of the biggest talking points in the lead-up to the election, in particular VAT on private schools and a possible capital gains tax raid.
But there is one area of our personal finances that you can be sure Labour will be closely monitoring: pensions.
The party has pledged that it won’t reintroduce the lifetime allowance or touch the state pension triple lock. But other areas could be up for grabs.
I’ve written before that you should always invest based on the wider economic landscape and not what politicians are saying at that moment. History has shown that manifesto promises can be meaningless and that governments have a habit of springing surprises that no one dreamt of.
Labour might be tempted to extend inheritance tax (IHT) to include pensions. At the moment, pensions are not included as part of your estate and in most cases can be passed on free of IHT.
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The number one target, however, is pension funds. The party’s manifesto said that it would “act to increase investment from pension funds in UK markets”, making it clear that the new chancellor, Rachel Reeves, will press ahead with the Mansion House reforms announced exactly a year ago by Jeremy Hunt.
The reforms included an agreement by 11 of the UK’s biggest defined contribution pension firms to allocate 5 per cent of their default funds, which 90 per cent of defined contribution savers are in, to unlisted assets by 2030. While this isn’t limited to UK equities, they are expected to be a big part of it. In other words they want to encourage pension funds to put more of their cash into UK assets.
With limited potential to tax or borrow more, using pension fund money to deliver government objectives starts to look very attractive. Plenty of money can be found within our pension schemes — the UK has the largest pension market in Europe, worth over £2.5 trillion, according to the Mansion House report. This is why governments have always been so keen on them. They see that wealth as an opportunity to generate growth and tax revenue.
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It’s already happening. Legal & General, which operates pension schemes for Tesco and NatWest, said last week that it will launch a fund that would feed pension savers’ cash into private equity, private debt and infrastructure. It will have a substantial bias towards the UK.
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But politicians and pension firms forget, just like asset managers do, that it’s not their money. It’s your money. They may think that it could be put to better use to help the UK grow, and that may well be the case, but they don’t have the right to force that to happen.
Hunt claimed that the Mansion House reforms could deliver an extra £1,000 a year in retirement for today’s young savers. But he failed to mention that putting small British start-ups in your pension would be risky business.
A fund manager running a portfolio of global shares will have their performance compared to that of the MSCI World Index, which has a 4 per cent weighting to the UK, according to AJ Bell. Anyone who goes above this weighting must have strong beliefs that their UK stocks will do well, or they risk underperforming.
We’d all like to see the UK economy thrive but that shouldn’t come at the expense of pension savers having to take additional risks with their savings.
A pension is for life, not a five-year parliament. If the government wants to offer some certainty, and spur more people to save, setting up an independent cross-party commission to look at long-term and sustainable pension reform would be the way to go.
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For now, we all need to watch our pensions. Because the new government certainly will be.
