How the Conservative manifesto could affect personal finances

Thursday, November 28, 2019 - 15:20

The Conservative election manifesto might not be as radical as Labour’s but there are still plenty of proposals that would have an impact on people’s finances and long term savings.

AJ Bell’s analysts consider the key pensions and personal finance pledges put forward by the party.

National Insurance and income tax U-turn

National Insurance rates have rarely been so discussed as the past week and the Tory manifesto makes clear that they would raise the threshold at which you pay the tax from the current £8,632 to £9,500 in 2020-21. Despite Boris Johnson previously pledging the £2.5bn plan would save taxpayers £500 a year, this initial move will save between £85 and £100, depending on whose estimates you believe. A future aspiration to look at moving the threshold to £12,500 would save around £500 a year, at current prices.

It’s quite a shift from Boris’s previous pledge to move the rate at which people pay the 40% rate of income tax from £50,000 to £80,000, which would only benefit those earning £50,000+. By shifting National Insurance rates rather than income tax thresholds Mr Johnson extends the giveaway to the lowest earners, in particular those earning less than the current £12,500 personal allowance.

Unlike Labour, the Conservatives have committed to not raising National Insurance, income tax and VAT, echoing the same pledge made in their 2015 manifesto. This has already been the source of an embarrassing U-turn by the party under Theresa May, with a plan to raise National Insurance contributions for the self-employed being scrapped after uproar at breaking a key manifesto pledge. It’s interesting that the party have chosen to keep this promise considering these are the main sources of revenue raising for the Government.

Rather than introducing new pledges, the Tories have instead promised to maintain benefits for older people. They will keep the winter fuel payment, bus passes, the triple lock and other pensioner benefits. The Conservatives have continued to foist the problem of TV licenses for over-75s on the BBC, saying they support maintaining the benefit but that the BBC needs to fund it.

Social care

The Tories haven’t grasped the nettle of how to solve the social care crisis in the UK. Instead it has pledged £1bn a year to plug gaps in the system until a cross-party agreement on reforming the entire social care system can be agreed. Social care is a political hot potato that has been passed between parties for years, so it’s not surprising that in such a crucial election it hasn’t become a key manifesto pledge. However, the Tories have said their starting point for negotiations would be that no-one should have to sell their home to meet care costs – which would be a boost for middle England who have large housing wealth but not vast savings pots.

First-time buyers

Boris previously put helping first-time buyers and reforming the sluggish housing market front and centre in his campaign to be prime minister. But rather than cutting stamp duty for everyone buying homes worth up to £500,000 – his previous pledge – instead the Tories will focus more on first-time buyers, including looking at an alternative to Help to Buy and improving terms for renters.

The Conservatives also pledged to encourage the mortgage industry to increase the availability of long-term, fixed-term mortgages for first-time buyers, in particular for those with small deposits. This borrows an idea from the US, where 30-year mortgages are more normal. However, a significant mental shift is required for Brits to sign up to these long-term mortgages, as even 10-year deals are rarely used in the UK – in part because of the often eye-watering exit penalties should you want to get out early.

Childcare

After Brexit and climate change, this has become an election focused on families and childcare. Not to be left out the Tories pledged to increase the funding for childcare, but by offering up £1bn more – specifically focused on after school and holiday childcare. This compares to Labour’s pledge to boost childcare funding by £5.5bn and Lib Dem’s £14bn commitment.

State pension age increases

Perhaps the big question on pensions was whether the Conservatives would follow Labour down the state pension rabbit hole and make a big state pension offer.

It is perhaps unsurprising the party has not matched Labour’s shock promise of a £58 billion restitution package for women affected by rapid increases in their state pension age in recent years.

The fact the state pension age isn’t mentioned at all in the Conservative manifesto document suggests the Tories have no intention of altering the existing timetable of increases after Labour pledged to freeze the state pension age at 66. Under these plans, the state pension age will rise to 67 by 2028 and 68 by 2039.

This sets up the state pension as arguably the key battleground of this election campaign besides Brexit.

While the Conservatives are undoubtedly now exposed given the importance of securing votes from older people, the party are clearly still keen to demonstrate at least a degree of fiscal responsibility during an election which has been characterised by a spending race to the top.

Increases in the state pension age need to be seen in the context of decades of rising longevity. When the modern state pension was introduced in 1948, an average 65-year-old could expect to receive it for just over 13 years. Today, that same 65-year-old would likely live almost 23 years. This means the number of people over state pension age is expected to grow by around 4 million in the next 20 years or so.

Until recently the state pension age had remained static in the face of these demographic trends. Because the UK operates a pay-as-you-go system – meaning today’s taxpayers pay for today’s state pensions – putting off state pension age rises risks loading an extra burden onto the working population.

Voters therefore need to remember that, regardless of what has been promised in this election, the cost of freezing the state pension age will eventually land somewhere.

State pension Triple-lock

While Boris Johnson hasn’t blinked on the state pension age, the Conservatives have moved to match Labour’s promise on the triple-lock.

The triple-lock was introduced by the Coalition and links the state pension to the highest of average earnings, inflation and 2.5%.

This is a hugely valuable income guarantee for pensioners, although the logic of a 2.5% underpin is hard to fathom. Essentially its continuing existence means the real value of the state pension will increase at random and in a way that is difficult to account for as it is tricky to guess what the economy will do over months, let alone years.

A much more sensible policy would set a level for the state pension which is deemed fair and then link this to earnings or inflation, or both.

However, the triple-lock has become something of a totem for ‘doing right by older people’ to the point where little thought appears to be put into its purpose.

Pension tax relief – confirmation of the quick fix for NHS plus likely a review of the taper

The Government has already signed off on a cobbled together annual allowance taper fix in the hope of preventing an NHS winter crisis – and the negative headlines that would go with it – prior to the Conservatives’ manifesto launch.

Under the proposals, senior doctors affected by the tax charge will be able to pay through their scheme as they can do today. However, for the 2019/20 tax year the Government has pledged to make good any tax charges through higher pension benefits.

This feels like a sticking plaster to cover an arterial wound, and a much simpler solution would be to just scrap the taper altogether. Not only would this deal with a major strain on the NHS but also drastically simplify the pension tax regime for all workers.

Ditching the taper should only be viewed as a short-term solution, however. The UK’s pension tax regime is far too complicated and we know this complexity puts many people off saving for retirement. There are also bear traps such as the money purchase annual allowance that risk drastically hindering people’s ability to build a decent retirement fund.

Rather than constantly tinker and chip away at a ridiculously complex system, the next Government – whoever it may be – needs to take a longer-term view of pension tax relief and build a simpler framework that can stand the test of time.

Review of the net pay anomaly

Just like the annual allowance taper, the net pay pensions scandal isn’t new but the Conservatives have failed to taken any meaningful action to deal with it while in power. The problem exists because ‘net pay’ schemes deduct pension contributions from earnings before tax, meaning those who don’t pay any tax at all – i.e. the lowest earners – don’t receive the tax relief they are entitled to.

It is particularly cruel this anomaly in the system hurts the lowest paid who need the tax relief boost the most. Hopefully this manifesto commitment will be turned into action if the Conservatives are victorious at next month’s election.

Introduce Pension Scheme Bill measures – including pensions dashboards

Given the Pension Schemes Bill published before the election campaign started has broad cross-party support, it is no surprise to see the Conservatives reiterate their backing for the three key policies it contained.

Pensions dashboards therefore look set to become a reality whoever wins power, although there is disagreement over whether private sector providers should be allowed to offer their own versions.

While Labour backs a state-run dashboard, the Conservatives want to allow private providers to offer their own versions.

This is one area where parties need to set their differences aside and focus on delivering something which maximises utility and allows as many people as possible to review their pensions online.

We will also see tough new rules designed to ensure bosses don’t neglect their defined benefit pension scheme promises, including the threat of prison sentences in cases where there is evidence of wilful negligence.

Finally, legislation to allow ‘collective defined contribution schemes’ to be made available in the UK will be passed under a Conservative Government. This measure is primarily aimed at the Royal Mail, which has pledged to offer such an arrangement in place of its defined benefit arrangement.

These articles are for information purposes only and are not a personal recommendation or advice.


ajbell_laura_suter's picture

Laura Suter is Personal Finance Analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.