Tom Selby, director of public policy at AJ Bell, comments following UK Election.
He said: “With a stonking Parliamentary majority, new prime minister Keir Starmer has a serious mandate to pursue the reforms set out in Labour’s manifesto. The party has been crystal clear throughout the campaign it will prioritise economic growth and ‘wealth creation’ in government, although details of exactly how these will be achieved, or what it might mean for people’s pensions and investments, have been relatively thin on the ground.
“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.
“This is not just about tax, however, with a series of reforms already in train, issues requiring attention from different government departments and reviews promised. For millions of savers and retirees after years of constant chopping and changing of rules and limits, Reeves’ commitment to stability will have been welcome. Brits will be hoping the chancellor practices what she preaches when it comes to retirement policy by delivering at least some certainty over the next five years.”
Five key personal finance policy priorities the new government should address
- Labour’s pensions review and the need for stability
“Although Labour’s manifesto was relatively light on detail, its ‘Plan for Growth’ document published in January provides an insight into what the key areas of focus are likely to be for the new government.
“A review of pensions has been promised, with the aim of improving outcomes and encouraging greater levels of investment in UK Plc. The latter will likely mean a continuation of the ‘Mansion House’ agenda started by the previous government, which has placed a particular focus on boosting private equity holdings in occupational pension schemes.
“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. Staggeringly, a single investment of £300 million by the Canadian Pension Plan into a UK company exceeded the total amount of all UK pension investment in private equity and growth capital in the same year.
“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.
“While ensuring the investments held by auto-enrolment default funds are appropriate is clearly important, ultimately the biggest driver of retirement outcomes is contribution levels. It is therefore likely the next government will need to think carefully about the question of pension adequacy and how to scale up minimum contribution rates beyond the current level of 8% of qualifying earnings.
“Any new chancellor will always have the temptation to tinker with pensions taxation, particularly during a challenging fiscal environment. While the current regime of allowances is ripe for simplification, it is crucial any reforms in this area are focused on the long term and encouraging more people to save and invest for their future. The decision by Labour to ditch plans to reintroduce the pensions lifetime allowance, a reform that would have added complexity and discouraged investment risk, is hopefully a positive indication that Labour will take a pragmatic approach in power. Given people saving in a pension are often committing to lock their money up for decades, some stability in pensions policy, particularly around the tax rules and limits, would be welcome.”
- Simplifying and supercharging ISAs
“A new government with a fresh mandate post-election will have a huge opportunity to deliver lasting reforms for the benefit of savers and investors. The fact Labour has committed to ISA simplification is a huge positive, but to deliver genuine benefits to millions of Brits the new government needs to be radical.
“AJ Bell has long campaigned for the ISA landscape to be simplified by combining the best features of the existing six types into a single ‘One ISA’. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors.
“This move would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic. Platforms could then build a more flexible ISA with the ability to move freely between cash and investments – something that would tie in with wider efforts to boost the number of people investing for the long term, including in UK Plc. Increasing the overall ISA allowance to £25,000 would help support this agenda without the complexity of the proposed ‘British ISA’, an ill-thought-out policy that should be binned by the new administration.
“As part of this review of ISAs, policymakers should also consider super charging the Lifetime ISA by scrapping the exit penalty and increasing the minimum property limit from £450,000.”
- Maintaining the Advice Guidance Boundary Review momentum
“Making ISAs and pensions easy to understand is just part of the challenge – it is also vital to improve the help available to people, both by improving guidance and encouraging more people to take regulated financial advice.
“The Advice Guidance Boundary Review initiated by the Treasury and the FCA, in particular proposals to enable more personalised ‘Targeted Support’ guidance, has the potential to be a game-changer. More useful guidance, higher take-up of regulated advice and simpler products could provide the foundation for a saving and investing revolution in the UK.
“The fact Labour has already explicitly stated its support for the Advice Guidance Boundary Review is extremely encouraging and should mean that, regardless of the outcome of the general election, these plans are pushed through without serious delay.”
- Connecting people with lost pension pots
“Automatic enrolment has been a success story so far, dramatically boosting the number of people saving for retirement. Those reforms require an upgrade to boost minimum contributions post-election, but there is also the mounting issue of ‘lost’ pension pots to tackle.
“Around £27 billion of retirement money is estimated to be ‘lost’ in the UK, in part because each job move can create a new auto-enrolment pension pot. Reforms to create pensions dashboards, which will allow people to see all their retirement pots in one place, should make a big difference. The timetable has been delayed multiple times, so it is crucial the new government presses ahead with the introduction of dashboards as planned.
“In the meantime, anyone who needs to find pensions from previous employers can try AJ Bell’s free pension finder tool, which can take the hard work out of tracking down old pensions. AJ Bell has also created a simple, value-for-money Ready-made pension to take the hassle out of combining your pensions.”
- Tackling HMRC’s tax troubles
“Over a decade on from former chancellor George Osborne’s bombshell pension freedoms announcement at the March 2014 Budget and the tax system that governs flexible retirement withdrawals remains faulty.
“The latest official figures reveal over £1.2 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. In the 2023/24 tax year alone, a record £198 million was repaid to people who had been clobbered with an unfair – and often unexpected – tax bill.
“Depressingly, the true over-taxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with self-assessment might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
“It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach that hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days. The new government needs to urgently review this approach and deliver a solution that taxes withdrawals correctly.
“More broadly, HMRC desperately needs some serious investment. A recent National Audit Office (NAO) report revealed taxpayers spent an astonishing 798 years on hold to HMRC in the 2022/23 tax year, and the situation is likely to become even more strained as frozen thresholds and cuts to dividend and capital gains tax allowances drag more people into the taxman’s clutches.
“HMRC’s burgeoning waiting room is down to both the growing number of taxpayers needing help navigating the UK’s labyrinthine tax system and longer hold times waiting to speak to someone. A freedom of information request by AJ Bell shows that the average wait time to talk to someone at the tax office has quadrupled in a decade, from four minutes in 2012/13, to well over 16 minutes in 2022/23.
“Waiting times have absolutely soared in the past few years. In 2019/20 the typical wait time was 6-7 minutes, but the average hold time taxpayers now endure has rocketed since then. Of course, many will have waited far longer if they had to contact the taxman at peak times.
“HMRC’s own performance statistics showed a record number of calls last tax year, despite phone lines having been shut over the summer months. There was also a significant uptick in use of its webchat and digital services. The new government will face difficult choices with regards to how it spends its limited resources, but ensuring the tax office is fit-for-purpose must be a priority.”
