Labour is coming for your pension freedoms

A Labour government could mean the end for the pension freedoms introduced by George Osborne in 2015.

Under current rules, pension savers are free to take as much out of their pensions as they wish once they reach minimum pension age (currently 55 but set to rise to 57 in 2028).

Usually this means you can take 25pc of your pension savings tax free, with the balance being subject to income tax when you draw it out.

However, emerging data shows that in many cases savers are using their pension pots to meet short-term cash needs, rather than to provide a sustainable income through their retirement.

On the one hand, this is entirely reasonable; it is their money. However, a future Labour government may take a slightly different view of the situation.

Labour has never been hugely enthusiastic about the pension freedoms. While they cautiously accepted the reforms in 2014 when they were announced, a subsequent report commissioned by Rachel Reeves and published in 2016 pointed to a more restrictive approach.

That report highlighted the risks of the freedoms, cast income drawdown as high risk and proposed steering savers towards safer products approved by the regulator.

The Financial Conduct Authority (FCA) maintains data on people’s transactions with their retirement savings pots, which gets updated twice a year. The latest report confirms a trend for people to cash in smaller pots of money in one go. In fact, full encashment of pots worth less than £30,000 outnumber all the other hundreds of thousands of transactions, such as annuity purchase, drawdown etc, put together.

This supports research from the DWP a few years ago, which shows people tend not to view an individual small pension pot in the context of their overall retirement savings, or their longer-term retirement income needs.

People also tend to underestimate their life expectancy, which can lead them into making short-term decisions which may not serve them so well in the long run.

The FCA data shows that for all income drawdown pots worth up to £250,000, the commonest rate of income withdrawal is over 8pc a year, which is highly unlikely to be sustainable in the long term.

They also found that take-up of the Government’s free retirement guidance service, Pension Wise is falling.

In addition, the FCA data showed many people cashing in very large pension pots in one go, in some cases pots worth hundreds of thousands of pounds.

Again, it is their money to use as they choose, but in the process they would have paid tens of thousands of pounds in tax.

Unfortunately, there is no research or data available to show whether people are making well-informed decisions with their pensions.

Whilst auto-enrolment has been a great success in getting more workers saving for retirement, it hasn’t solved the pension crisis.

The population is ageing; within 20 years around a quarter of the population will be aged over 65 and this trend has been exacerbated in recent years by a falling birth rate.

Since the 1970s, the fertility rate has been below the 2.1 births per mother necessary to maintain a stable population. In recent years it has dropped more sharply, from just under 2 in 2010, to below 1.5 today. This means as the years roll forwards, there will be a smaller working age population paying taxes and buying things, to support a larger and larger retired population.

This presents a huge challenge for public policymakers. It explains why they are so keen to see the capital tied up in the pension system invested into the UK economy to stimulate economic growth, which is the only thing that’ll get us out of the hole we’re sliding into.

Against this backdrop, it wouldn’t be surprising for the next government to take action. This could include increasing the minimum age at which you can access your private pension savings, pushing it up to perhaps age 60; it could mean putting restrictions on taking cash out, such as requiring you to first secure a minimum amount of guaranteed long-term income.

I also wouldn’t be surprised to see Labour imposing some form of increased death taxes on larger pension accounts, such as making pension funds liable to inheritance tax.

Tom McPhail is director of public affairs at financial consultancy the Lang Cat