Laith Khalaf, head of investment analysis at AJ Bell, has been looking back at some of the biggest personal finance changes enacted since the Conservatives came to power in 2010. In the following analysis, the tories’ changes to pensions, isas, taxation, interest rates all fall under his microscope.
“Now that Labour has dropped plans to reintroduce the lifetime allowance to the pension system, there aren’t too many yawning chasms between the two main parties on matters of personal finance, though the manifestos may yet throw up some significant dividing lines. Labour is clearly keen to hammer home the message that the last fourteen years have been wasted by the Conservatives in power. Voters will make up their own mind whether that is true in general when they go to the polls in July. On the personal finance front there have been some bold and positive achievements in the last fourteen years, though it is by no means an entirely rosy picture, and to the extent that welfare spending falls under the heading of personal finance, the austerity programme remains highly controversial.
“It’s probably fair to say that many of the positive developments occurred under the leadership of David Cameron and George Osborne, and more recent policies, particularly on tax bands, are actually undoing some of the work of the early 2010s. In recent years the government has had to deal with the extraordinary costs of the pandemic and the energy support package, alongside the huge amount of political oxygen absorbed by Brexit, so it’s perhaps unsurprising any putative progress has stalled and even gone into reverse. This isn’t an exhaustive list, but here are some of the big changes to personal finances we have seen since the Conservatives came to power in 2010.”
Pension freedoms
“Pensions have been a huge area of change over the last fourteen years, though most of the big changes took place when the Coalition government of 2010 to 2015 implemented a series of reforms which tore up the pensions rule book. Probably the boldest reform was the introduction of the pension freedoms in 2015, which allowed savers to access their pensions as they wished, and caused an almighty collective double-take from the pensions industry when it was announced in 2014.
“The freedoms were the ultimate rabbit pulled from the hat, coming out of nowhere and blindsiding the entire pensions industry. Steve Webb became the poster child for the reform after his own Marie Antoinette moment when he proclaimed people could use their pension pots to buy Lamborghinis if they wished. One suspects his tongue was very much in his cheek. As a result of the reform people are no longer herded into buying an annuity with their pension and can make flexible withdrawals whenever they want, provided they are above pensionable age. Prior to the changes the retirement market was highly dysfunctional with many consumers falling into buying poor value annuities sold to them by their pension provider.
“The pension freedoms swept away a sclerotic, malfunctioning system and revolutionised the way people draw their pension income, which has been especially timely given the incredibly low annuity rates produced by loose monetary policy. Prior to the pension freedoms around 90% of people bought an annuity, even though most didn’t like the idea. Now that number has been turned on its head with only around 10% of retiring savers opting for an annuity. Whatever you think of the merits of annuities, that statistic in itself is a conclusive referendum on the pension freedoms.”
The new state pension
“Sweeping reforms were made to the state pension with a new flat rate entitlement introduced in 2016, replacing the older system which partly linked pension payments to earnings, snappily called the State Earnings-Related Pension Scheme (SERPS) and then subsequently S2P or the State Second Pension. The result was a much simpler state pension, but one which limited the amount of retirement income which could be built up, to the detriment of higher earners. The new state pension was set at a higher rate than the basic state pension which it replaced, and reduced the need for pensioners to rely on means-tested benefits, which were not well understood and consequently under-utilised. The State Pensions reforms were pushed through by the Liberal Democrat pension minister Steve Webb, though their origins can be traced back to the Pensions Commission, an independent body set up in 2002 to address the retirement savings gap.”
The triple-lock
“The triple-lock on the state pension was one of the first things brought in by George Osborne when he became chancellor in 2010, though it was implemented from April 2011. However, in its first year of operation the government chose instead to uprate by the former measure of RPI, to avoid a huge own goal because in that year RPI was actually higher than any of CPI, earnings and 2.5%. Questions over the sustainability of the state pension have sharpened since the introduction of the triple-lock. Whether the triple-lock is a legacy we are now saddled with or benefiting from depends entirely on your point of view, and probably your age. The triple-lock has now become a sacred cow, with both Labour and Conservatives committing to its continuation, and any future politicians who dare to downgrade it are likely to be met with a barrage of highly critical headlines.
“However the debate on whether to uprate the state pension in line with earnings or prices is not new, though what Osborne and Cameron added into the mix was the extra protection afforded by a minimum 2.5% rise. The statutory duty to uprate pensions at least in line with inflation was originally introduced by Ted Heath’s conservative government in 1973, though before it was enacted in 1975, Harold Wilson’s incoming Labour government improved the uprating to the higher of earnings and inflation. The earnings link was ditched in 1980 by the newly elected Thatcher government on the basis the double-lock was unaffordable in the long term.
“That retrograde step for the uprating of the state pension followed a period of high inflation, a humbling IMF bailout, and the winter of discontent. A similar mandate for some extremely strong fiscal medicine would probably need to materialise before it becomes politically possible to downgrade the triple-lock from here. The current high levels of government debt and taxation, combined with huge financial pressure on public services, haven’t been enough to tempt either of the two main political parties to stick their head above the parapet on this issue ahead of this election. Indeed, the Conservatives have chosen to double down on the policy with their idea of the ‘triple-lock plus’.”
State pension age
“The Conservatives also presided over a rise in state pension age, though much of this had already been legislated for in the Pensions Acts of 1995 and 2007. However the Conservatives accelerated the increase in state pension age through the Pensions Acts of 2011 and 2014, with the effect that the state pension age will now rise to 67 by 2028 for both men and women. That compares to plans to raise the state pension age to 67 by 2036 when they assumed power in 2010. Existing legislation allows for one further rise in state pension age to 68 by 2046, though the current government has committed to a review within the first two years of the next parliament which could see this move brought forward to 2039.
“Increases in state pension age are occurring across much of Europe as governments seek to keep a lid on rising costs in the face of higher life expectancy, so the UK is hardly ploughing a solitary furrow here. However, further rises to state pension age might be the sacrificial lamb that pays for maintaining the triple-lock. A higher state pension age raises searching questions about intergenerational fairness, with younger people now facing a longer wait to get their entitlement. It also means a much greater emphasis is thrown onto private pension provision, with many workers viewing their state pension with suspicion and confusion. A recent survey by AJ Bell showed that over half of UK adults don’t know when they’ll receive the state pension, with 72% saying they expect the goalposts to move before they get there.”
Automatic enrolment
“The Coalition government also presided over the introduction of automatic enrolment in 2012, though much of the groundwork was already laid for this transformational reform by the Pensions Act of 2008, legislated by Gordon Brown’s Labour government. Nonetheless the Coalition government proceeded with the plan and there was plenty of detail to fill in. One of the most controversial elements introduced on the Coalition government’s watch was the charge cap on default funds used in automatic enrolment schemes, which came in at 0.75%. This effectively ruled out the possibility of the default being an actively managed fund for all but the biggest schemes, and helped fuel the boom in passive funds, which has arguably led to less capital being allocated to the UK stock market. Having made it difficult for traditional active fund managers to get a foothold in the automatic enrolment market, the current government is now bending the charge cap rules to allow performance fees to be levied on pension scheme members, in a questionable bid to encourage default funds to invest in private equity. This is a bit like keeping your trusty sheepdog out of the chicken coop then opening the door for the local fox to stroll in.”
ISAs
“The ISA landscape has been totally transformed since 2010, mainly for the better, but with a concerning proliferation of ISA options in more recent years. The first innovation came with the introduction of the Junior ISA in November 2011, but the big step change really came in the 2014 Budget with the announcement of George Osborne’s ‘New ISA’ package of reforms. When the Conservatives came to power in 2010, the ISA allowance stood at £10,200, but Osborne then implemented a big leap in the allowance from £11,880 to £15,000 from July 2014. These reforms also saw a merging of the allowance for Cash ISAs and Stocks and Shares ISAs, with the former seeing a huge increase from £5,940 to the new £15,000 allowance.
“In his final budget in 2016, Osborne raised the ISA allowance significantly again to £20,000 from April 2017. In the same Budget he also introduced the Lifetime ISA allowance to provide support for first time buyers and those saving for retirement, again from April 2017. That built on the Help to Buy ISA, announced in the March 2015 Budget and launched from December 2015. In between those two announcements, George Osborne had also found time to launch the Innovative Finance ISA, announced in the Summer Budget of 2015 and taking effect from April 2016.
“This explosion of ISA accounts in a short space of time increased consumer choice but also created complication in the ISA system, substantively for the first time. Proposals have been put forward to build on this dubious part of Osborne’s legacy by introducing the British ISA, adding a seventh chapter to the ISA canon. AJ Bell has long campaigned for simplification of the ISA system. ISA savers can be thankful for the expansion in the ISA allowance under Conservative rule, but the proliferation of different types of ISA isn’t conducive to simple decision-making.”
Personal allowance
“Changes to the personal allowance since 2010 have been somewhat palindromic, with big increases at the start of the period now pared back by a six year freeze in the threshold which will see an estimated 4 million people brought into paying income tax. In his first Budget in 2010, George Osborne set a goal to increase the personal allowance to £10,000 from £6,475 when the Tories assumed power. While Osborne announced the policy, it actually came from the other side of the coalition, having been a key pledge in the 2010 Liberal Democrat manifesto. This progressive legacy of the last fourteen years therefore owes more to Nick Clegg and Danny Alexander than George Osborne and David Cameron.
“The rise to £10,000 was achieved by April 2014 and was estimated to have relieved 2.7 million people of the burden of paying tax on their income. Assuming the personal allowance does indeed remain frozen at £12,570 until 2028, that still implies a 94% rise from the 2010 level. That sounds a bit less impressive on an annualised basis as it’s equivalent to a 3.8% average annual increase from 2010 to 2028, while CPI has actually averaged 2.9% from 2010 to date, which is what you might normally expect to govern the increase in the allowance.
“Rishi Sunak fairly points out that the threshold freeze was deemed necessary to pay for the costs of the pandemic and the energy crisis, but that doesn’t detract from the pure mathematical damage this policy is doing to the Conservative legacy on the personal allowance. It’s also notable that George Osborne eliminated the difference between the personal allowance for working age people and pensioners, a wedge the current government is promising to reinstate through the ‘triple lock plus’.”
Dividend tax
“The 2010 Conservative manifesto contained a pledge to introduce measures which included ‘when resources allow, starting to reverse the effects of the abolition of the dividend tax credit for pension funds’. As it turned out, the Conservatives ended up taxing dividends more. In his summer Budget of 2015, Osborne swept away the previous system and introduced a dividend allowance with new rates of dividend taxation, which at the time was forecast to raise £6.8 billion for the Treasury over five years. This measure was partly targeted at company directors who chose to remunerate themselves through dividends rather than a salary, thereby avoiding National Insurance and facing favourable rates of dividend tax compared to income tax. Small shareholders were collateral damage in this tax raid, with basic rate taxpayers having to pay tax on their dividends under the new system, though investors were afforded a £5,000 tax-free dividend allowance to provide them with some modest shelter.
“This allowance was then cut to £2,000 from April 2018 by Philip Hammond, forecast at the time of the announcement at the 2017 Budget to raise £2.6 billion over 5 years. This was then followed up by further cuts by Jeremy Hunt in the wake of the mini-Budget in 2022, slashing the allowance to £1,000 in the last financial year, and to just £500 in this financial year, a tenth of its original value, and forecast to claw in a further £3 billion over five years for the Exchequer. The result is many small shareholders now face higher rates of tax on their dividends than they did in 2010, unless their investments are held in a pension or ISA.”
Savings tax
“The Conservatives have been kinder to the taxation of cash interest compared to dividend income. In his 2014 Budget George Osborne cut the starting savings rate from 10% to 0%, and extended the amount of savings this could apply to from £2,880 to £5,000. This was a tax giveaway of £1.1 billion over 5 years as calculated at the time. This was followed up by the introduction of the personal savings allowance in the 2015 Budget, which together with some minor changes to ISAs was costed as a tax giveaway of £3 billion. This personal savings allowance permits basic rate taxpayers to receive £1,000 of interest tax-free each year, falling to £500 for higher rate taxpayers and £0 for additional rate taxpayers. Unlike the dividend allowance, the personal savings allowance has been preserved intact by more recent chancellors. The harsher treatment of shareholders compared to cash savers sits uncomfortably with the current government’s avowed intention to encourage more money to flow into the UK stock market, and the FCA’s plans to get more people with high levels of cash to start investing for the longer term.”
Property
“You could comfortably write a book about the fiscal interventions in the housing market from 2010 to 2024, though it wouldn’t have a happy ending seeing as home ownership still remains elusive for so many. The ball really started rolling with the 2013 Budget and the introduction of the Help to Buy scheme, and has since included changes to stamp duty, both temporary and permanent, the introduction of Lifetime ISAs and Help to Buy ISAs, and mortgage guarantee schemes. There has been no shortage of desire to increase home affordability, but the criticism might be that measures to increase demand only end up pushing up prices when supply is so constrained. Sunak’s pledge to remove first time buyers from stamp duty for property purchases up to £425,000 will of course be welcomed by some looking to get on the housing ladder, but ultimately it’s a variation on a theme that simply hasn’t delivered the goods.
“At the same time the Conservatives have really ramped up the tax payable by landlords, with a 3% stamp duty surcharge levied on second home purchases from April 2016, announced by George Osborne the previous year. Osborne also cut headline rates of capital gains tax by 8% but left them unchanged for property profits, though Jeremy Hunt actually cut the higher rate of capital gains tax payable from 28% to 24% from the beginning of this tax year. George Osborne also restricted the tax relief landlords could receive on their mortgage interest payments to the basic rate, which was phased in over a number of years and completed by 2020. You might have expected fourteen years of Conservative government to be an armchair ride for landlords, but it’s been quite the opposite. Of course, property investors have benefited hugely from low interest rates over this period.”
Loose monetary policy
“Interest rates are of course now set by the Bank of England, though the government does set the inflation target and the chancellor signs off on the Quantitative Easing target. While it might now seem like a distant memory, most of the last fourteen years have been characterised by exceptionally low interest rates. This has created large distortions in financial markets, leading to an income drought for cash savers and bond investors, including pension savers buying an annuity. At the same time riskier assets like property and stocks enjoyed a boom as a result of cheap borrowing costs. This has been a global phenomenon, but nonetheless successive Conservative chancellors have nodded through measures proposed by the Bank of England to keep interest rates at deeply depressed levels. It may not have escaped their attention that one of the key beneficiaries of low interest rates was none other than the Exchequer. Now of course, the boot is very much on the other foot, with spiking interest rates causing a huge rise in the cost of servicing government debt.”
