Pensioners, and therefore pensions, are a critical battleground in UK elections.
There are around 13m people already drawing a state pension, and tens of millions more for whom the private pension savings system will be vital for their future retirement prosperity.
There are two competing realities in terms of pensioner incomes today. Firstly, on average pensioners have done substantially better than the rest of the population in the past 10 years.
They were largely insulated from the recession. Arguably they should no longer benefit from the privileged status they have enjoyed of late.
However it is also true that there are still pockets of pensioner poverty which the means-testing system does not fully address. In addition, we have reached peak pay-out from the final salary private pension system; in the immediate years to come, succeeding cohorts of pensioners will on average be getting less from their private pensions, and so may be more reliant on the state.
What a state
The next government will need to look at a joined-up savings policy which touches on state pensions, on private pension savings, and now arguably, on the question of social care too.
On the state pension, it’s primarily a question of: “when do we get it and how much will it increase by in retirement?”
The uprating of the state pension to offset inflation has been achieved through the Triple Lock (the best of inflation, earnings growth, or 2.5 per cent).
This is unsustainably generous in the long term.
Labour and the Lib Dems have already promised to keep it for the next parliament; the Tories have opted for a double-lock from 2020, dropping the 2.5 per cent element.
On state pension age, the Tory government was due to announce its conclusion to a recent review just ahead of the election. The party has shelved this until after June 8 but it’s likely to move towards raising the state pension age to 68 by around 2039.
In contrast, Labour is planning to freeze state pension age increases at 66, which would undoubtedly be popular among the beneficiaries but less so among those who have to pay for it.
Labour has also recently committed to retain the winter fuel allowance and to support the women campaigning for compensation for the recent increases in their state pension age to 65 and 66.
Saving private pensions
Our private pension system has become something of a mess in recent years, with the good bits, such as the pension freedoms and auto-enrolment, being counter-balanced by a bewilderingly complex set of allowances, caps and hidden tax-charge traps to catch out the unwary. It is still possible to do well out of private pensions and their tax breaks, but you have to work increasingly hard at it.
Pension tax breaks cost the treasury £48bn a year, which is more than our entire defence budget. The money is badly targeted and poorly understood, with between two thirds and three quarters of savers not understanding how tax relief benefits them.
Electoral hot potato
The auto-enrolment programme has brought millions of savers into pensions but left many more out.
After the election, a review of pension taxation is inevitable. If Labour wins then expect higher earners to see their tax breaks slashed. A Tory victory would probably still result in a more redistributive system and in either case it is likely that overall tax breaks will fall.
It is to be hoped that however this happens, some of the more complex and penny-pinching rules such as the Lifetime Allowance and the Money Purchase Annual Allowance are scrapped. To their credit, the Liberal Democrats have made an explicit commitment to review the tax treatment of private pensions.
It’s also likely we’ll see a review of the protections afforded to final salary scheme members, with the Conservatives promising to strengthen the powers of the Pensions Regulator, and Labour talking about stronger workers’ rights: it looks as if employers may have their feet held to the fire, whoever wins the election.
On auto-enrolment, the priorities are likely to be giving a fairer deal to lower earners, who still either miss out completely, or who get lower average contribution rates, and helping the self-employed.
This latter group are arguably the worst off, with just one in ten benefiting from pension tax breaks to save for retirement.
The long-overdue question now being explored in this election, and which awaits the next government, is how to dovetail pensions policy with social care.
Individuals must be encouraged and rewarded when they provide for themselves. However it is a welcome reality check to acknowledge that social care is becoming a hugely expensive liability which we cannot duck; the allocation of costs between state and individuals is still very much a work in progress.
Tom McPhail is head of policy at Hargreaves Lansdown.