Pension predictions: what do the years ahead have in store?

From the pension age to tax relief and the triple lock, Steve Webb shares his forecasts on future policy.

As I sit to write my final column for Money Observer, I think about the topics that future columns might have covered, and particularly about the changes to pensions that are likely to lie ahead. It is always risky to put forecasts down in writing, but here is my best guess about what the future holds for the UK pension system.

Starting with tax relief, it is hard to see that the current system can hold for much longer. At a time of severe pressure on public finances, the relatively high cost of pension tax relief is likely to come under even more scrutiny than normal.

While it would be politically toxic to scrap reliefs already given, including the right to a tax-free lump sum, a much tighter regime for future contributions seems quite possible.

This could include further cuts in annual and lifetime limits or more radical measures such as a move to a flat rate of tax relief – something that the previous chancellor is now publicly advocating.

Such a move would be highly complex; but if a government is ever going to grasp this nettle, it will be early in a parliament when it has a decent majority. Whichever route they go down, I hope we will see a comprehensive review of the purpose of tax relief and a new system that will not then be subject to constant annual tinkering.

Still in the area of raising revenue, I think we are likely to see the ending of certain national insurance contribution (NIC) exemptions for pensioners. At present any liability to pay NICs stops at state pension age. With well over a million people in paid work past pension age, it seems highly likely we will see NICs levied on their earnings. More radical suggestions are to levy NICs on private pension income, but I think that might be a step too far for now.

On the state pension, it is hard not to see further increases in state pension age, with a legal timetable for a pension age of 69 or 70 put on the statute book for younger workers. Although life expectancy improvements have slowed down, and the long-term impact of the current pandemic is yet to become clear, the current timetable for state pension age increases is out of line with the policy that people should spend two-thirds of their adult life in work and one-third in retirement. Whereas changes to pension ages for those closer to retirement have been hugely controversial in recent years, making changes which will not come into effect for decades is likely to be politically feasible.

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‘Triple lock’ in danger

In terms of the amount of state pension payable, it would be surprising if the pensions ‘triple lock’ survives in its present form. Unprecedented fluctuations in prices and earnings in the current crisis stand to create some very strange results for the triple-lock calculation, and I am sure that the Treasury will be looking for ways to modify the way in which annual state pension increases are calculated.

Something not much discussed yet, but which I expect to become more important, is further reform to the way in which the state pension is calculated. Although the new ‘flat rate’ system is much simpler, and growing numbers of people will simply get the flat rate at retirement, the underlying calculation remains complex. This is because of the need to provide ‘transitional protection’ in the move from the old scheme to the new scheme in 2016. However, while referring back to the old system and entitlement as at April 2016 seems reasonable in 2020, it is hard to see that still doing these calculations in 2030 or 2040 would make any sense. We could eventually see a move to something closer to a ‘Citizen’s Pension’ where all retirees who satisfy a residence test receive a flat-rate amount.

In terms of the workplace, the biggest challenge is likely to be people not saving enough. Current mandatory rates of contribution are too low to fund a decent retirement, and the current economic shock means raising mandatory contribution rates is probably off the table. For now, many people are cushioned by past service in traditional ‘final salary’ pensions, but the contribution of these is dwindling with every passing year. As the economy recovers, the issue of getting people to put more money into their workplace pension will resurface. If no action is taken, we can all expect to be working much longer, regardless of what the government decides to do about state pension ages.

Steve Webb is a partner at pensions consultant Lane Clark & Peacock.