Starting off the new tax year: what’s on the Government’s policy agenda?

July now feels like a long time ago. So much has happened both politically and economically since Labour swept to their landslide victory in the General Election, that it’s easy to forget that this is still, in some ways, a fledging government.

However, nine months into their new role, it’s an opportune time to ask how the new Labour Government is faring; and with the start of the new tax year, which pensions, investment and savings policies are on its ‘to-do’ list.

The honeymoon period has now faded. Not only has the Government faced international challenges – including Trump’s tariffs – it also has its own domestic financial upheavals to contend with.

In the recent Spring Statement, it managed to juggle its finances to regain £9.9 billion headroom. But it’s clear a small glitch could send those carefully laid plans awry. Although, the Government has not made things easy for itself by writing a manifesto which rules out rises to the main taxes, and choosing to be unflinching when maintaining its self-imposed fiscal rules.

As we enter the next phase of its tenure, now is a good time to assess how the Government has fared so far. With domestic finances so precariously positioned – against an unstable international outlook – many of its policies come back to the central theme of improving UK growth.

Changes for pensioners – taking with one hand; giving with another

The new Government was barely out of the starting block when it announced an end to winter fuel payments for pensioners, unless they are claiming pension credit. This decision caused fury among retirees and campaigners, restricting this benefit, worth up to £300, to low-income pensioners.

Despite this onslaught of objection, the Government stuck to its guns. The ‘silver lining’ to this measure was the surge in pension credit claims – 81% increase – although the fact over half were denied shows how complicated this particular benefit is.

Not every pensioner needs the financial support the winter fuel payment gives. However, instead of looking at this one element in isolation, a better route would have been to thoroughly review the state pension. Labour stuck to its manifesto promise to honour the triple lock guarantee by increasing the state pension by 4.1% in April. However, the single state pension is now getting perilously close to the frozen personal allowance and will exceed it if it increases by the lowest level of 2.5% over the next two years.

Paying out a state pension and then immediately clawing some of it back through tax would be an administrative nightmare. The Government could instead increase the personal allowance for everyone or create a new higher personal allowance only for pensioners, however both are unattractive options.

What is missing is the frank conversation about how long the UK can sustain the triple lock, and whether a thorough review of the state pension is needed instead – how much, from what age, and how should it increase. But whether the Government wants to embark on that debate is doubtful.

Unlocking pensions for investment growth

Many of the policies on the Government’s to-do list have been inherited from the previous administration, and the current Treasury and Pensions Ministers are as equally keen as their predecessors to redirect ‘untapped’ pensions wealth into investing in the UK.

Very soon we will get the first bit of legislation to allow this to happen. The Pension Schemes Bill is expected to make it easier to access part of a defined benefit surplus, with the trustees acting as gatekeeper. The freed funds could be used to augment member benefits or paid to the employer.

This proposal may send a chill down the spine of anyone who remembers why the current rules were brought in. No doubt 2025 is a different world than the early 2000s, and the funding of pension schemes has evolved. But the main principle of not playing fast and loose with members’ promised pensions still holds. These proposals come with risks, and if things go wrong, it will be pension scheme members who pay the ultimate price.

Encouraging pension schemes to invest in the UK is easier if the Government is appealing to a handful of pension schemes rather than thousands. New legislation will push consolidation of master trusts. But whether it should be done purely based on size is doubtful. Bigger is not necessarily better, and some members may see their master trust consolidated even though doing so doesn’t offer them better outcomes.

The Government, however, is attacking this full throttle. Chancellor Rachel Reeves is expected to follow up on these legislative changes in her Mansion House speech with a renewed compact, where workplace pension schemes promise to invest in the UK. Whether that is in the best interests of their members remains to be seen.

Are changes on the horizon for pension tax rules?

Ahead of every fiscal event there are a few rumours circulating that the Government will change the tax rules for pensions. In the run up to last year’s Autumn Budget, these rumours went into overdrive, with the result being that many people took their tax-free cash or increased pension contributions ahead of potential changes.

No sooner had Rachel Reeves sat down after the recent Spring Statement, speculation started of a pensions raid in the Autumn. Constant uncertainty about shifting pensions goalposts is no way to create a stable environment to encourage people to save and plan for their long term. AJ Bell has called on the Government to pledge not to change pension tax rules for this parliament, giving people confidence to plan.

One area in which we know we will see change is taxation of pensions on death. In the Autumn Budget the Government proposed extending inheritance tax (IHT) to pensions. However, it was overwhelmed with hundreds of responses to its proposals expressing horror at the administrative nightmare this would create for personal representatives and families.

I hope very much the Government thinks again. Current taxation of pensions on death is very generous, so it’s understandable the Government would like to see the pendulum swing the other way. But there are better ways of achieving this than trying to impose the complex and unwieldly IHT rules to pensions.

We expect to hear more from HMRC on its chosen path in the summer. In the meantime, the starting gun has already been fired, and some pension savers are considering the implications of future government action and their current options. Many are thinking about how to extract the current wealth they hold in their pensions, and what to do with it. They could spend it, gift it to loved ones (using IHT gift allowances) to help with current life dilemmas such as getting on the property ladder or paying school fees, or choose to shelter it from IHT through exploring various trust options.

Helping people with financial decisions

Another area the new Government has picked up from the previous administration and run with is the progression of targeted support. The introduction of this new initiative should enable firms to give consumers personalised suggestions for what action to take, based on the characteristics of their cohort. People are crying out for help, and this should aid them when making financial decisions, as well as nudging more into seeking regulated advice.

After an FCA consultation and some successful testing by firms, we should see draft rules by the middle of the year.

The DWP is also considering how to help defined contribution pension savers with the tricky question of how to convert their pension pot into a retirement income. In the forthcoming Pensions Schemes Bill it will put forward the concept of guided retirement – requiring trustees to offer a default retirement solution to members that both provides them with longevity protection but also doesn’t box them into a corner, not being able to change their mind. This sounds like a conundrum; I am not sure how these two objectives can co-exist. But we can expect to see a range of solutions emerge from trust-based workplace schemes and master trusts as this legislation progresses.

Pensions Dashboards – hitting the first milestone

Pensions Dashboards have been a dream for so many years but are now inching towards reality. Large FCA firms and very large pension schemes were set to connect to the dashboard ecosystem by 30 April. Smaller firms and schemes will gradually also come on board, including public sector schemes and the state pension.

However, before we put out the flags, it’s worth remembering the public launch date for the initial Government dashboard is some way off. It will only be rolled out once the Government is satisfied it’s working well, and users have an extremely good chance of seeing all their pensions on the dashboard in one place.

Are we going to see ISA reform?

Finally, buried deep in the Spring Statement papers was the Government’s intention to look at options to reform ISAs to get the balance better between cash and equity investment, and boost outcomes for savers and investors.

This has set off a train of speculation on exactly what the Government intends.

It has recently come under a barrage of lobbying from some City officials calling for a lower subscription, say of £4,000, to cash ISAs, to encourage people to switch from cash ISAs to investment ISAs. There has also been idle talk of imposing a lifetime cap on the amount an individual can build up across all ISAs.

Both prospects will introduce complexity into an already confused ISA environment. There is no evidence that a lower subscription will nudge people into embracing investing; our research found only one in five cash ISA holders would migrate to investing in the UK stock market if the cash ISA allowance was reduced or abolished. Over half would simply stick the money in a taxable savings account.

Instead, the Government has the opportunity to radically simplify the upfront choice available to investors, initially by merging cash ISAs and stocks & shares ISAs into a single main ISA product. This should be bolstered by the introduction of targeted support, which will enable millions of people to make better-informed decisions about their finances, including investing for the first time or transitioning from cash to investing.

Packed agenda ahead

There is no doubt the pensions and savings landscape continues to be poised for a packed agenda. The Government is completely focused on using growth to pull the UK up by its financial bootstraps, and the ‘untapped’ wealth held in pensions and retail investments presents an enticing way of achieving this ambition.