Brexit and pensions – triple lock on state pension and tax relief in peril

24th June 2016

Pension experts have warned that pension tax relief could face the axe in the wake of the United Kingdom’s decision to leave the European Union.

They have also suggested that the triple lock system by which the state pension is upgraded may also be in peril.

Hargreaves Landown’s pension expert Tom McPhail says: “Pension tax relief costs the exchequer billions every year and there may now be increased pressure to balance the Budget; the government top up to our retirement savings could be an early casualty.  The current Chancellor George Osborne had threatened an emergency Budget in the event of a Leave vote. Whether this happens or not, the possibility of further curbs to pension tax relief has now increased, so investors would be well-advised to make the most of the available tax relief while they still can.”

AJ Bell senior analyst Tom Selby says: “The Government said during the referendum campaign an Emergency Budget would be necessary in the event of a Brexit vote in order to balance the books. This could see the future of pension tax relief – which was open to review prior to the referendum – once again thrown into doubt.

“Pension tax relief costs the Exchequer an estimated £34bn a year, so drastically slashing this incentive will be deeply tempting for a Government desperate to raise cash if, as many have predicted, the economy heads into a tailspin.”

The experts also suggest that the triple lock on the state pension may come under scrutiny.

McPhail says: “During the Referendum campaign the Prime Minister warned that a Leave vote could mean the end of the Triple Lock on state pensions (annual increases of the greater of CPI, Earnings growth and 2.5%). This assertion was made on the basis that the economy would take a down-turn and that public spending might not be able to sustain the expense of this policy.

“The State Pension is expensive, costing around £90 billion a year; it is a very big slice of the DWP budget so any changes to the state pension could involve substantial savings. According to analysis conducted in 2011, the cumulative cost of the Triple Lock, relative to the old RPI link, between 2011 and 2026 would be £45 billion. If the Chancellor does now carry out his threat of a scorched earth Budget, then the Triple Lock could be an early casualty.

“We could also see a more rapid increase in state pension ages; John Cridland is already starting work on his review on behalf of the DWP.”

McPhail has also urged pension investors to look to the long term.

He says: “For long term pension investors who may be seeing the value of their retirement savings falling today, the key message is to do nothing unless you have to. We are likely to experience a period of volatility in the markets and uncertainty in the wider economy, in these conditions, acting in haste is unlikely to serve well. If you are years from retirement and making regular savings, then just keep going; falls in the market mean buying investments at a lower price.

“If you are close to retirement, then try to avoid selling funds and shares right now. Annuity rates may move in response to changing interest rates, however this is not certain. International and domestic demand for Gilts and Sterling denominated investment grade bonds will influence annuity rates, as will expectations of inflation and to a lesser degree, short term interest rate movements.

“If you are in retirement and drawing an income from your investments then a good default strategy is to draw the natural yield (dividends from equities, interest on fixed interest stocks) as this means you aren’t cashing in the capital value of your investments at a time when they are falling in value. This means you are likely to generate an income of around 3% to 4% on your portfolio.”


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