The UK has a new Prime Minister - will new pensions policies follow?

Boris Johnson has been confirmed as the UK’s next Prime Minister. As he begins to form a new government, the country now has an opportunity for significant policy shifts, not all necessarily connected to the issue of the day, Brexit. Karen Goldschmidt and David Everett, partners at LCP, analyse how pensions may be affected, and the areas the new PM should be focusing on.

“Insofar as pensions policy is concerned, an early test will be what ‘fixing the Lifetime allowance’, promised by Boris Johnson in his leadership campaign, looks like. We have no idea at this stage what he intends to do, but it is worth mentioning that the complexity and unintended consequences of lifetime and annual allowances we see today is a direct result of successive Government tinkering with the pensions tax architecture to create a source of funds following the 2008/09 economic downturn,” says David Everett, LCP partner.

“From the DWP’s point of view, once any ministerial changes have bedded down, the Pensions Bill should be ready to go – with key measures including additional Regulator powers and a new DB funding framework. It is not clear whether measures to assist DB consolidation will make the cut. But this Bill will only see the light of day if it is part of No. 10’s game plan and only if the Johnson Government survives early tests that will surely come its way,” adds Everett.

Unutterable complexity

“We all know the pensions tax system needs review owing to its unutterable complexity – and its unintended consequences, an example of which has been seen clearly impacting the NHS,” says Karen Goldschmidt, LCP partner.

NHS remedies

“Mr. Johnson has gone on record to say he will review the pensions tax regime in response to concerns that pension tax rules are driving NHS doctors to reduce hours or retire earlier. The government issued a consultation yesterday with proposals to “help” the situation while the current pensions tax structure continues. But the more holistic solution lies with changing the whole pensions tax regime, especially the tapered Annual Allowance,” says Goldschmidt.

Low-hanging fruit

“Such a review of the current pensions tax regime is also on the cards for the new Prime Minister because cutting back pensions tax relief is seen politically as low-hanging fruit; an easy source of funds for the many spending commitments made,” adds Goldschmidt. “However, I would strongly argue any reforms must be carefully considered, rather than being pursued simply to generate revenue or “fix the NHS”.”

“In terms of the current challenge of dealing with the tapered Annual Allowance for private sector DB schemes – many schemes responded more promptly than the NHS Scheme in implementing a broad, accessible, and fair ‘Scheme Pays’ system,” says Goldschmidt. “As a result, for those in private sector hit by a tax charge, Scheme Pays’ means some of the cash flow issues impacting those in the NHS Scheme do not arise; tax charges are spread over a lifetime, not met in a one-off lump sum. Another benefit of using Scheme Pays is that it is clearer for a member to see that, even net of an Annual Allowance tax charges, pension accrual is usually still worthwhile.”

Clarity of comms is key

“Given the number of NHS Scheme headlines lately, private sector pension scheme trustees should prioritise clear communications, so that their members are crystal clear what their scheme is making available. This is likely to be of particular importance for those filing their 2018/19 tax returns, and those still earning defined benefit pensions like those in the NHS in 2019/20; more accruing members may be hit by the charge than ever before because the three past years unused allowance that can be carried-forward to ‘help out’ in 2019/20 returns could all have been hit by the taper.”