State Pensions To Help Pay for COVID Response

The Treasury may be getting ready to raid pension pots to help cover the UK's Covid response, The Sunday Telegraph reported this weekend.

According to the newspaper's 'well-placed anonymous source, government officials controlling the purse strings are mulling over three possible pension reforms to ramp up earnings and repay the country's staggering Covid debt.

The newspaper reported that three plans were being considered to try and boost revenue.

These include lowering lifetime allowance by £200,000, meaning anyone whose total earnings breach the upper threshold would need to pay a higher tax rate; applying for flat-rate tax relief, meaning higher earners pay more; or taxing employer pension contributions.

On Monday, Prime Minister Boris Johnson assured pension savers that despite rumours of reform, the so-called pensions' triple lock' was not in the Treasury's crosshairs.

The triple-lock was a 2019 manifesto pledge to protect the value of state pensions by annually increasing pension payouts by the higher of 2.5%, average public sector wage growth, or inflation.

However, unusually high wage growth in the public sector due to high demand for public health and social care workers throughout the pandemic has caused some to speculate that a freeze on the triple lock might be in order.

In May, the Office of National Statistics reported that public sector wage growth sat at 5.6% - landing the government with a £4 billion bill if it intends to honour its triple-lock pledge by raising state pension payouts to match.

AJ Bell Financial Analyst Tom Selby said:

Given the parlous state of the UK's finances, further speculation about the future of all areas of Government spending – including retirement savings incentives – was inevitable.

However, all three of the pension tax reforms apparently in the Chancellor's sights would be hugely risky, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment.

Age is a defining factor among the British electorate, with older voters far more likely to support the Conservative party than Labour. According to YouGov, nearly 7 in 10 pensioners voted Conservative in the 2019 election.

Despite the risk of treading on the delicate ground with key voters, The Telegraph's 'senior government source' presented pension reforms as the most palatable option for the party, saying: "[it] would work politically because the short-term impact on an annual basis would be virtually imperceptible for most people."

Political optics aside, Tom Selby pointed to the practical difficulties of reforming public pensions and potential drawbacks for key workers in the long term:

Introducing a flat-rate of pension tax relief, an idea often touted by think-tanks would present genuine practical challenges and would likely result in tax rises for public sector workers in defined benefit schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic, he said.

The Office of Budgetary Responsibility reported that the UK government borrowed £300 billion last year, worth 14% of the country's total economic output (GDP).

Relatively speaking, this is the most borrowed by any government in a single year since the end of the Second World War.