How to plan your finances in an election year

The Rest is Elections

The British electoral system does not lend itself to coalition governments. Ask anyone from the Liberal Democrats how they feel about the Conservative/Lib Dem coalition of 2010 and they probably won’t refer to it in glowing terms. Historically, this means that the UK is subject, every now and then, to a lurch from right to left, or vice versa. With this lurch we tend to see fairly fundamental changes in policy. At least, we used to.

I don’t think I am being controversial by suggesting there is a strong possibility that Kier Starmer will be the next Prime Minister at some point this year. The last time we had a change from Conservative to Labour was Tony Blair’s victory, 27 years ago, in 1997, with a majority of 179. According to a recent poll, Labour is heading for a majority of 298! We’ll see. But already, many of our clients are thinking about what a Labour Government will mean for them and what, if anything, should they be doing to protect their finances.

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For Financial Advisers, we are always in a difficult position when it comes to offering advice on an unknown. At the time of writing, the Labour manifesto has yet to be written and we are short of precise detail. Without a crystal ball it would be unwise for us, or any other adviser, to recommend a course of action based on speculation. 

To a certain extent, we experience the same thing every year with the budget. I have been advising clients for over 35 years and every year I hear the same fears. Are we going to see the end of tax-free cash in pensions? Will higher rate tax relief on contributions be removed? Will any changes be retrospective? They are, in essence, the same fears as those before an election.

Will Labour tax the rich and give to the poor? 

Labour, in blunt terms, has always been associated with taxing the rich and redistributing to the poor. The Labour administration of the 70s imposed an eye-watering top rate of income tax at 83% for those with incomes above £20,000 (£221,741 in today’s terms). With the investment income surcharge of 15% added, this resulted in the now famously high-water mark of 98%, the highest rate since the war.

I think it is worth pointing out that politics from the 70s was far more polarised than it is today.  Tony Benn was openly attempting to nationalise virtually every British industry in sight, and the unions were hell bent on removing anyone from government who was more right wing than Che Guevara. If you haven’t done so already, I thoroughly recommend listening to the excellent ‘The Rest is History’ podcast ‘Britain in 1974’. Apart from highlighting this polarity, it is also a stark reminder of just how bad things had become.

Since the 90s the major parties have become (in historical terms at least) more centrist, and both Labour and Conservatives exhibit the same general desires when it comes to taxation and government debt. The current tax take (under the Tories) is the highest it has been since the war. The highest rate of income tax now is 45%, higher than it was under Labour in 2010. Admittedly, both parties have, in recent years, examined their political extremities (Corbyn for Labour and the Reform breakaway for the Conservatives) but the truth seems to be that monetarism has won the day and the days of ultra-high taxation and reckless borrowing seem to be history. At least for now.

How can you protect yourself? 

So, returning to the steps our clients can take to protect their positions, in advance of the general election, I think it will probably focus on the peripheral subjects such as the Lifetime Allowance, or good savings fundamentals, which apply regardless of elections.

The Lifetime Allowance (LTA) has just been abolished, but as soon as its demise was announced, Labour publicly stated that they would reinstate it. But without knowing what shape this will take, it is impossible for us to advise. They could simply reinstate the previous level (£1,073,100). If this is the case, it may be in our clients’ interests to ‘crystallise’ their pensions above this figure beforehand. But what if they don’t? What if the LTA is increased to £1.8 million and tax-free cash is increased to 25% of this figure as a conciliatory gesture? In this case, you would be penalised by crystallising pensions now, up to this number. This is because there is now a new ‘Lump Sum Allowance’ (LSA) which is £268,275, and this represents the aggregate maximum amount of tax-free cash that can be taken from all schemes. There is also no guarantee that any change, whatever it might be, wouldn’t be retrospective.

So, what else might change? As I mentioned earlier, this is a question which also crops up every budget and the best protection anyone can take is probably to make the most of any tax breaks which are currently available. 

First on the list is pensions. Obtaining tax relief on contributions is, and always has been, an extremely tax efficient move, especially for higher rate and, particularly, additional rate taxpayers. Not only do you receive tax relief on contributions (subject to annual allowance limits) but all pension funds grow free of capital gains tax and personal income tax. The pension fund is also outside of the estate for inheritance tax purposes.

ISAs are probably the next port of call with individuals permitted to invest up to £20,000 each tax year (plus a forthcoming British ISA allowing a further £5,000 each tax year). ISA funds are also free from capital gains tax and income tax which makes them superb retirement planning vehicles.

If a new government chooses not to change them then, well, they were a good idea anyway, and if they do change them (for the worse) then you have maximised tax efficiency beforehand (subject to there being no retrospective changes).

I think one thing is fairly certain. The UK is not in fine financial health and handouts will not be the order of the day. But like him or loathe him, Kier Starmer is no Tony Benn and, to quote Benjamin the donkey in Animal Farm, I suspect things will continue much the same as they did before. That is to say, badly! 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office. 

Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.