He didn’t get a huge amount of sleep last night but Tom Selby is still going to have a stab at drawing some early conclusions on what the general election result could mean for UK savings policy.
Jeremy Corbyn’s only gone and won it! Except, of course, that he hasn’t – he’s lost. But by a hell of a lot less than everyone expected. Which is a kind of victory in itself – isn’t it?
You might be able to tell I haven’t had a huge amount of sleep. Nevertheless, with the dust barely settling on Labour’s stunning performance – or should that be Theresa May’s abject failure? – in the snap election, I am going to have a stab at drawing some very early conclusions on what this could mean for UK savings policy.
Intergenerational fairness to the top of the agenda
Having spent this morning discussing just how Labour defied the pollsters’ morbid predictions, one clear factor was that young people have voted in their droves. According to Sky News, turnout among 18 to 24-year-olds topped 66%, compared with just 43% in the 2015 election.
The vast majority of these people are likely to have backed Corbyn’s socialist movement, perhaps spurred by a manifesto that included a pledge to scrap university tuition fees.
Policymaking is almost entirely driven by electoral arithmetic, which is why over-65s are often prioritised by governments. The state pension triple-lock is a classic example of a policy that favours older voters over younger people.
This increased participation among young people could drastically shift this paradigm. Take plans to increase the state pension age that were being readied before Theresa May called the snap election. While nobody can defy gravity when it comes to the ageing population, telling young people they will have to wait until the age of 70 to get their pension could now be viewed as electoral suicide.
The Conservative minority government – if it survives – might also be tempted to make the Lifetime ISA – a product targeted at people aged 18 to 39 – more attractive, either by scrapping the exit penalty, increasing the annual amount people can invest or expanding the criteria for tax-free withdrawal.
Radical pension tax relief reform off the table – for now
Prior to the election, many had speculated fundamental reform to pension tax relief could be revisited. It is easy to see why – the NHS and social care budgets, in particular, are being squeezed and tens of billions of pounds is spent incentivising people to save in pensions every year. Furthermore, the Lifetime ISA’s 25% bonus could easily be viewed as a precursor to introducing a flat-rate of pension tax relief set at the basic rate.
But with Brexit the priority and room for manoeuvre in the House of Commons wafer thin, ambitious policymaking of this nature seems extremely unlikely. There remains, however, the ever-present danger further tweaks to the annual or lifetime allowances could be made in the new Chancellor’s first Budget.
Given the complexity that already exists in the system, this would be extremely unwelcome, and we urge the new government to consider establishing an independent pension tax commission to take this central tenet of our pensions framework out of the political fire.
Domestic policy agenda faces delay
With the immediate focus understandably on market reaction and political jockeying for position, it is easy to forget a huge domestic policy agenda could now be thrown into question. Alongside increases to the state pension age, a vital review of automatic enrolment has already been derailed by the election. It now seems highly likely this piece of work will be pushed back to 2018.
There may also be doubt about a radical overhaul of the social care system – including introducing a £100,000 asset floor and an as-yet unspecified cap on lifetime costs. The new prime minister, however, will undoubtedly be wary of breaking a manifesto commitment in the current political environment.
In addition, a cut to the Money Purchase Annual Allowance from £10,000 to £4,000 was supposed to be implemented on 6 April but the election announcement meant it never became law. Former Treasury financial secretary Jane Ellison previously suggested the legislation would be applied retrospectively – but she was one of the Conservative victims in last night’s election. Given the uncertainty we now face as a country, abandoning or delaying this ill-thought-through proposal would be the best course of action.
Arguably most worrying, a proposed crackdown on pension fraudsters – including a ban on cold-calling – risks being delayed or even lost altogether in the post-election shake-up. This would be a potential disaster for millions of savers who will continue to be targeted by these criminals. It is crucial the entire industry continues to hold the government’s feet to the fire as we enter this new era of political upheaval.
Tom Selby is a senior analyst at AJ Bell