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Labour manifesto comment: Trust reform risks unintended consequences and pension measures could be costly

16/05/2017

If you are writing about the Labour manifesto and associated documents, please see the following commentary from Old Mutual Wealth head of retirement policy Jon Greer, and tax & financial planning expert Rachael Griffin covering the following:

  • Proposals to review trusts and introduce a public register of trust assets and beneficiaries.
  • Tax on property held in overseas trusts
  • A flexible state pension age
  • The future of the state pension triple lock
  • Changes to the social care system

Old Mutual Wealth tax and financial planning expert Rachael Griffin comments on trusts and property taxation:

Rachael GriffinThese proposals threaten to rip up the rule book on legacy planning. There will be concerns that in attempting to improve efficiency and fairness in tax policy, policymakers re-invent the system with unintended consequences.

The policy costings document outlines a proposal to review tax reliefs and the use of trust structures for tax planning purposes. Trusts are a long-established mechanism for legitimate inheritance tax planning and they are an effective mechanism for maintaining control over your affairs in later life and when you eventually pass. For instance, it is common to place a life insurance policy in trust so that the family of a deceased parent can access funds immediately, without the strain and possible financial difficulty involved in the probate process. Without placing the policy in trust, it is not uncommon for families to take on debt to tie them over until they are able to secure probate.

Privacy is very important to people, not because of money laundering or tax avoidance, but often as a result of complex family situations. So the proposals for a public register of trust assets and beneficiaries will also concern some people. Many people want to be able to provide for loved ones on death, without the emotional upset which could arise if the arrangement is made public. It could also put beneficiaries in a vulnerable position, where their future inheritance is made public.”

Also included in the manifesto costings are proposals for a new tax on properties purchased through an overseas trust. Proposals to make such property subject to UK inheritance tax were taken out of the Finance Bill when it was slimmed down after the snap election was announced. It is not clear if Labour’s plans will be an alternative to these measures or an addition to them. Either way, anyone with property held in a trust arrangement will need to seek professional advice to understand how these changes may affect them.

Old Mutual Wealth’s head of retirement policy Jon Greer comments on state pension age and the triple lock:

Jon GreerLabour propose a new review of state pension age, with a view to introducing a flexible state pension age. An independent report for the government published as recently as March found limited appetite for a variable state pension age and it will be tricky to implement a system that is both fair, flexible and affordable.

Rising life expectancy means the cost of the state pension will continue to grow. This is because state retirement costs are funded on a pay-as-you-go basis, with working-age taxpayers funding the current retired population.

The question is whether the state pension age will simply rise for everyone, or whether it is possible to remove the universal state pension age and instead introduce a variable retirement age.

Labour have effectively rejected universal increases to the state pension age, and instead say they will explore a solution through a flexible state pension age. That flexibility would be complex to administer but would give those approaching retirement similar flexibility in their state pension as they have with their private pension.

In terms of the indexation of state pension benefits, the short-term proposal from Labour is to retain the triple lock over the next Parliament. This is not costed since it represents a continuation of existing policy. However, over the long-term the triple lock will have the effect of ratcheting up pension costs dramatically. Calculations show that if the triple lock were retained beyond the middle of this decade then that element of the state pension alone could end up costing around 1% of GDP.

It will be interesting to see whether the Conservatives are prepared to make a commitment to retain or reform the triple lock. It is a sensitive matter with older voters but cannot remain ring-fenced indefinitely. And the longer the triple-lock is maintained the more it places pressure on government to increase state pension age, so it is something of a doubled-edged sword.

Old Mutual Wealth’s head of retirement policy Jon Greer comments on social care:

Labour have committed an extra £8bn over parliament’s lifetime to battle the social care crisis. Their long-term solution to create a new National Care Service, which will require an additional £3bn to set up.

Almost £30 billion is already being spent on social care per year. In the medium term the government could look at how it can encourage people to save and fund their own care.

One option is to allow people to channel their pension funds into care annuities tax-free. Annuities have not been good value for money, but they do provide a piece of mind and, when used appropriately, still have a place in the new world of pension freedoms. Or an alternative to this could be to allow a capped amount of pension saving to be paid to a care provider tax-free. A holistic approach to social care reform is needed and making some use of pensions system is an obvious option.

For more information contact

Michael GlenisterOld Mutual Wealth020 7778 963807469 144535michael.glenister@omwealth.com
Kathleen GallagherOld Mutual Wealth023 8072 629307990 004932kathleen.gallagher@omwealth.com

Notes to editors:

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