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The state pension has caught the headlines again as we approach the 12th December general election. Labour leader Jeremy Corbyn has pledged £58bn to 3 million women born in the 1950s, who have arguably been left out of pocket by the planned state pension age rise in 2020. The Conservatives, in reply, have argued that raising the state pension age to 66 in October 2020 equalises the system for everyone and that Labour’s redress plans are uncosted.
The outcome of the coming general election is, of course, uncertain. Whilst many polls at the time of writing would suggest an imminent Conservative majority, there is still considerable voter volatility and a hung parliament is still very much on the cards. In such a scenario, political commentators have noted the possibility of a Labour minority government or coalition, propped up by other minor parties such as the Greens, independent MPs or SNP.
The purpose of this article is to outline some of the key features of the state pension as we enter 2020, and to discuss how the election outcome could possibly affect this area of your financial plan in the coming year. Please note that this content does not constitute financial advice, and you should consult your financial adviser before making big decisions about your pension.
The State Pension: A Brief Recap
Regardless of who wins the election 12th December, the fundamental structure of the current state pension system is likely to remain the same. In 2019-20, the new full state pension bestows £168.60 per week (i.e. around £8,767.20 per annum) assuming you have accrued at least 35 years of qualifying National Insurance Contributions (NICs).
Remember, the amount of state pension you get is not means-tested based on your household income. Rather, it is largely based on your individual NICs throughout your own career. So, if you are living together as a married couple, each of you should be entitled to a state pension (assuming both of you have made at least 10 years of NICs).
This is an important area of your retirement plan to discuss with your financial adviser. After all, if you both qualify for the full new state pension, then in 2019-20 you could achieve a combined income of £17,534.4 from your pension (i.e. £8,767.20 x 2). Suppose, for instance, that both you and your spouse are 64 years old and plan to retire in 2 years’ time. You are on course to complete your 35 year of qualifying NICs, allowing you to claim the full new state pension. Your spouse, however, would still need another 2 years of qualifying NICs to attain the same benefit. You could discuss this with your financial adviser, to assess what the best options are.
One option might be to simply retire in 2 years’ time, and accept that your spouse will have a lower state pension income. Perhaps you can afford it due to other sources of income, such as private and workplace pensions. Alternatively, your spouse might consider looking at the past 7 years of their NICs to identify any gaps in their record. In many cases, “topping up” a year or two of missing/incomplete contributions could be all this person needs to complete the full 35 years.
What if Labour/The Conservatives Win?
As mentioned above, the main fundamentals of the state pension system are unlikely to change regardless of a Conservative/Labour victory. The most important change would possibly be the implementation of Labour’s plans to grant women up to £31,300 in compensation over the rising state pension age, depending on their date of birth.
Both parties are currently committed to maintaining the state pension “triple lock”, which ensures that your state pension income rises in line with inflation. This helps to ensure that the spending power of your state pension is retained over time. There are political rumblings, however, in the House of Lords for the triple lock to be removed, since many peers deem its continuation to be unsustainable.
Both parties also publicly want to maintain the winter fuel payments system, free TV licences for over-75s and the older person’s bus pass into 2020. It’s worth noting that the Conservatives are not currently announcing any big changes to VAT, National Insurance or Income Tax.
One important area for higher-income pensioners to take notice, however, is Labour’s plan for income tax. For those earning over £80,000 per year a 45% tax rate would be introduced, whilst income over £125,000 would be taxed at 50%. Capital gains tax and dividend tax is also set to be brought in line with income tax. This manifesto could potentially add thousands (or tens of thousands) to a higher-income retired person, so it’s important to contact your financial adviser if you think you might be affected.
Final Thoughts
Whilst 2020 is unlikely to witness an overhaul of the state pension system in 2020 after this December election, the election outcome will have important implications for the system. There will likely be different winners and losers and losers, depending on who emerges victorious.
Fortunately, financial advisers and planners exist to help people take sensible measures to plan accordingly for these different outcomes. Here at Cedar House, we can offer such assistance if you require help gathering and assessing your options.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or enquiries@cedarhfs.co.uk.