The new Prime Minister will be announced next week. The biggest question is what support will be offered to households and businesses facing often catastrophic increases in energy bills. However, both candidates have also talked of many other possible changes which could affect your personal finances, pensions or investments.
Steven Cameron, Aegon’s Pensions Director, sets out what else to look out for, whether as an immediate announcement or as part of an emergency Budget, possibly later in September.
The new prime minister will be unveiled next week. And whether it is Liz Truss or Rishi Sunak it is clear that dealing with the cost of living crisis at the top of their in-tray. But Aegon’s pension director, Steven Cameron says there are a number of pension issues which could also feature in a forthcoming ‘emergency’ Budget, which could happen later in September.
Below he sets out the key financial and pension challenges for the new government.
Cost of living and headline inflation rate
The nation awaits news on how the government will offer future support to consumers and businesses as the cost of fuel continues to skyrocket leading to some predicting inflation reaching 18 per cent or more early next year. If the energy price cap continues to jump up every three months, the question is who will receive government support and to what extent.
The alternative believed to be under consideration is to freeze energy prices with no further increase in the cap, supported by a funding deal between government and energy companies, with the shortfall repaid longer term, possibly through income and other taxes. One key difference under this approach is it may avoid the headline inflation rate rising ever higher. While this may offer welcome reassurance to many, it could have implications for state benefits which are uprated in line with inflation, including the state pension.
State pension triple lock
Both candidates have in the past committed to retain the state pension triple lock until the next General Election. This grants an increase of the highest of consumer price inflation, national average earnings increases or 2.5 per cent each year. Inflation is already in double figures and could rise further before the crucial figure for September is announced mid-October.
Some workers may question the fairness of a 10 per cent or above increase for pensioners when they are receiving far lower wage increases. However, state pensioners got far less than the rate of inflation last April and could find their purchasing power is further worsened if inflation continues to rise, with some predicting it could be 18 per cent early next year.
Freezing thresholds – ‘stealth taxes’
Back in 2021, to help recoup the costs of Covid support, the government announced a freeze until 2026 on income tax thresholds. This included the level of earnings when people start paying both basic and higher rate income tax. These thresholds would usually have increased in line with inflation each year, but the freeze means that as individuals’ earnings rise year on year, they pay income tax on a greater proportion of their incomes, in some cases dragging more people into paying higher rate tax.
This was designed to gradually collect more tax revenue, and at times of low inflation, might have gone largely unnoticed. In 2021, no-one could have predicted today’s skyrocketing inflation, and while wage increases have been lagging behind rising prices, the impact is now very significant.
In the current cost-of-living crisis, it would be extremely hard to justify keeping the freeze for the full five years originally planned. While it would be difficult to make changes immediately, an announcement to end the freeze and start to increase thresholds again from next April, might be included in an emergency Budget.
While of lower immediate priority, other thresholds and limits which were also frozen are causing issues elsewhere. For example, the pensions ‘lifetime allowance’, the maximum you can have in your pension before incurring a tax charge, has been frozen at £1,073,100. While this may seem a lot, keeping it frozen for five years will mean many more individuals who’ve done the right thing and saved for their retirement could face a tax penalty when they come to take their pension benefits.
Reversing the increase in National Insurance rate
Liz Truss, if Prime Minister, has committed to reverse the 1.25 basis point increase in employee and employer National Insurance Contributions introduced last April. The money raised by the increase was to provide additional funding to support the NHS recover from the pandemic and over time to pay for the Government’s share of its new social care deal.
While reversing the increase would lead to an increase in take-home pay for some, it would not make any difference to those earning under the £12,570 National Insurance threshold. It would also create a shortfall in NHS and social care funding which would need filled through other means.
National Insurance contributions from today’s workers fund the state pensions of today’s pensioners, so the less is collected through NI, the greater the challenge of continuing to fund state pensions, which are expected to rise at a record double digit rate under the triple lock.
Where your pension is invested
It’s likely that the new Prime Minister will want to take advantage of being free from EU rules to make it easier for pension schemes to invest in a wider range of investments. One particular focus has been on encouraging greater investment in ‘unlisted’ assets such as long-term infrastructure projects which can support a move to net zero, create greater economic growth and also hopefully produce higher returns for pension savers. The Government won’t force changes here, but if the rules are relaxed, you may find your workplace pension gradually changes where your funds are invested.
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