Labour’s budget plans may significantly impact retirees, from cuts to winter fuel payments to potential pension reforms including means-testing, inheritance tax changes, and stricter pension access rules.
Pension Reform Plans: What Rachel Reeves’ Budget Means for Pensioners
By Arezki AMIRI
Published on 9 October 2024 13:58
Rachel Reeves' first budget as Labour's Chancellor signals that pensioners might face significant changes. Although Labour has pledged not to raise taxes for “working people,” the party appears to be targeting retirees with potential cuts and reforms.
My ambition for Britain knows no limits because I can see the prize on offer if we make the right choices now.
This Labour Government will rebuild Britain and deliver on the promise of change. https://t.co/HezsQgoX7o
— Rachel Reeves (@RachelReevesMP) September 23, 2024
One of the key measures includes scrapping winter fuel payments for over 10 million pensioners, with further pension reforms potentially on the horizon. Here's a breakdown of the changes Labour may implement:
Winter Fuel Payments to be Reduced
Currently, all pensioners receive winter fuel payments ranging from £200 to £300 annually to help cover heating costs. Under new Labour plans, these payments will now be limited to only those receiving pension credit, excluding millions from the benefit.
Pension credit is available to single pensioners with weekly incomes of up to £218 or couples with joint incomes of up to £332 per week. This restriction is set to affect over 10 million retirees.
Potential Means-Testing of the State Pension
One of the more radical ideas being considered is means-testing the state pension, which could reduce or eliminate payments for wealthier retirees. Currently, individuals over 66 with 35 years of National Insurance contributions receive £11,502 annually.
Sir Edward Troup, an adviser to Rachel Reeves, has floated the idea of targeting higher-income pensioners. Experts, however, warn that this move could destabilize retirees' financial security.
If means-testing were implemented, a system akin to the personal allowance taper might be used. For every £2 earned above a threshold, retirees could lose £1 of their state pension. This could completely remove state pensions for those with significant extra income.
Revisiting Pension Freedoms
Labour may also tighten the “pension freedom” reforms introduced in 2015. Under these changes, individuals could access their pension pots more flexibly. Labour might look to raise the age for accessing pensions from 55 to 60, or require a guaranteed minimum long-term income before withdrawing funds.
Possible Expansion of Inheritance Tax on Pensions
Though Labour denies any plans to tax pension pots directly under inheritance tax (IHT), financial experts warn it could be a tempting revenue source. Currently, pensions are IHT-free if passed on before the age of 75, but Labour might consider bringing them into the IHT scope. If enacted, families could face hefty tax bills, such as £65,000 on an inherited £100,000 pension pot.
Expanding Auto-Enrolment for Pensions
Labour has promised a review of pension contribution rates under the auto-enrolment scheme, which currently mandates a minimum contribution of 8% (split between employer and employee). There are also calls to include the self-employed under this system. However, with ongoing cost-of-living challenges, it remains unclear whether such reforms will gain momentum.
However, any reform could run into difficulties due to cost of living pressures, despite the political intention to improve the pension system.