Many of us are wondering how this may affect us, particularly given the new administration has such a significant majority. While we are, as you would expect us to be, politically agnostic on a change of government, a strong majority can potentially be a positive, as it could allow ministers to create policies from the centre left or centre right, rather than policies designed to appease those on the wider ends of the political spectrum. Only time will tell though, and we of course do not have all of the answers right now; over the coming days, weeks, and months we will get a better idea of how potential changes may impact you as our clients.
What this could mean for me and my financial plan
As you would expect, we have been working behind the scenes analysing what potential changes could be made and understanding what opportunities are available to our clients to keep them on track, primarily focusing on addressing the following questions.
- How do we feel this might affect investment markets?
- How might a ‘change in legislation’ affect my long-term financial plan?
We do not have a crystal ball, and the below is only generic thoughts from a very high level, therefore we would encourage you to reach out to your consultant if you do have any questions or concerns so we can discuss these with you.
Investment markets
Generally speaking, malaise was already baked into the UK market around the election. A labour government was forecast, and Rachel Reeves has made it clear that she intends to be economically responsible, with focus on stimulating growth, rather than immediate boosts to consumer spending – seeking to avoid sparking another bond market turmoil such as the Kwasi Kwarteng mini-budget.
Our own discretionary portfolios have broad exposure to global equities and are not UK dominated. We do maintain a measured exposure to the home market via a well-diversified blend of large cap FTSE 100 companies and more domestically orientated small and mid-cap companies. It is key to note that a majority of FTSE 100 companies generate most of their earnings from overseas and as such are little affected by political events in the UK.
Labour’s pledge to build 1.5 million new homes is a slight positive to builders and tertiary services around building, although stubbornly high interest rates will also need to be supportive here moving forward.
Change in legislation
Both main parties, and particularly Labour, were ultra-cautious about not saying anything that could lose votes. It is therefore more about what is not being said than what is. Not wishing to fall into the trap of conjecture, as is usually the case, much may be decided by the economy. Against the backdrop of a weak economy, interest rate cuts would do much to stimulate growth. In turn, that would provide an ‘excuse’ for the left-leaning tendencies of a Labour administration to push for tax rises. Conversely, if interest rates need to be kept higher for longer than the market anticipates, then not only would that damage the investment market, but it would also leave Labour with less scope to tax a weaker economy. At this juncture, this is impossible to double-guess.
Ironically, therefore, the better the economy does, the greater the risk of tax rises, which of course will inevitably be focused on those deemed to be wealthy.
In pensions, will Labour reverse the abolition of the lifetime allowance or make other significant changes?
Pensions may be the exception to the rule where adverse changes may be seen irrespective of what happens in the economy – whether the economy is doing well or not, restrictions on tax-free cash, a reimposition of the lifetime allowance in some shape or form, further contribution restrictions, and the possibility of a reimposition of tax on death on pension funds could be implemented without having a material impact on the economy.
Higher rate tax relief, by definition, only benefits higher rate taxpayers, so could a flat rate of tax relief on contributions be introduced?
Large pension funds are again typically the domain of those perceived more wealthy, so could the lifetime allowance be reintroduced? Tax-free cash is most beneficial to those with larger pension pots, so could the allowance be limited?
In December 2022, the Institute for Fiscal Studies (IFS) published a paper[1] strongly exhorting a future government to reimpose tax on death on pension funds. The immense tax reliefs and tax exemptions that pension funds benefit from were designed to encourage people to save for their retirement. Is the inheritance tax advantage an unintended consequence that could be abolished?
Investing in the UK – CGT and ISAs?
Labour has said it wants to make investing in the UK more attractive. If the aim is to make investing in UK equites more attractive, other measures could be used to better support smaller markets and growth-based companies within the UK. For example, retail investors are often cut out of initial public offerings (IPOs) and secondary capital raising rounds. The Financial Conduct Authority’s (FCA’s) review of the listing regime needs to improve investor rights and put them at the heart.
Following the Conservatives’ plans for a UK Individual Savings Account (ISA), there has been little else said here by Labour, so we have to consider whether ISA allowances will/will not increase, or will they decrease; what seems clear is that Capital Gains Tax (CGT) is almost certainly a tax that will be considered and likely expanded.
Michael Wright, Deputy CEO commented, “Clients often ask me, “what should I do if there is a change in government?”. While there are exceptions, I typically remind people that a well thought out holistic financial plan is designed to last for the very long-term and therefore, highly likely to span a number of administrations. As such, an immediate and significant deviation from a considered strategy is something I caution against. However, we must be cognisant that personal taxes, particularly CGT, may increase and some tax-efficient investment structures may move into the spotlight of reform. Therefore, if annual pension contributions are part of the plan, let’s consider the timing of these, and if ISA investments are, or could be part of the plan, let’s consider the timing of these as well. Similarly, I have for many years now encouraged very in-depth discussion around the activation of pension schemes. We cannot plan for the unknown, but we should always be reviewing our well thought out plans as and when circumstances change.”.
Next steps or what is next?
With so many potential changes, advice will be key. We would strongly recommend contacting your consultant, to discuss any concerns you may have or want to discuss around your holistic financial planning, which may include any or all of the following:
- There will be good reasons to closely review pension planning to ensure the current and any potential change in legislation are optimised.
- Tax efficient investing will continue to be important. Taking advantage of ISAs to benefit from tax-free growth and income remains wholly sensible.
- Where suitable and only with financial advice, consider the use of Venture Capital Trusts (VCTs). Although high risk and not suitable for all investors, VCTs offer 30% tax-relief into UK growth assets upon investment and a long-term tax-free income opportunity in a potentially more taxing environment.
Over the coming months, we will be sharing with you many planning opportunities which can complement your pensions and other assets you may own. As always, your consultant will be on hand to advise you accordingly to ensure any planning is appropriate in meeting your needs and objectives.
These are the views of Mattioli Woods at the time of writing and may change. Investing through ISAs, pensions or in VCTs carries risk and rules may change. Tax treatment depends on individual circumstances and may change. Always seek financial advice. Content is correct at the time of writing (July 2024).
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
