With the UK heading towards a general election on 12 December, Laura Suter, personal finance analyst at AJ Bell and Tom Selby, senior analyst at AJ Bell, look at how the outcome could affect people’s personal finances in some key areas.
Boris Johnson pledged a number of changes to personal finances in his campaign to be elected prime minister. The biggest move would be hiking the point at which the 40% income tax rate kicks in, from £50,000 to £80,000 – a 60% hike. The move would affect around 4 million people, and the highest earners in that group would get an extra £2,500 in their back pocket each year.
Labour also announced plans in its 2017 manifesto to change the income tax system, but in the other direction. John McDonnell wants to bring more people into the 45% tax bracket, reducing the threshold at which you start paying it from £150,000 down to £80,000. He would then introduce a 50% tax rate for those earning over £123,000, in a move that could raise billions for the public purse, but cost the highest earners the most.
The property market and stamp duty has also come into the focus of both parties. Boris Johnson has talked about cutting stamp duty on all homes worth £500,000 or less, in a bid to stimulate the property market. First-time buyers already get a stamp duty break – as they pay nothing on the first £300,000 if they buy a property worth £500,000 or less. But Boris’s plan is to extend this to all buyers and increase the tax-free limit to £500,000. The move would save first-time buyers up to £5,000 and all other homeowners up to £15,000.
Labour’s plans were more radical – a report backed by leader Jeremy Corbyn pledged to scrap stamp duty for homes people will live in themselves. Included in the plans were for council tax to be scrapped and replaced with a new ‘progressive property tax’, based on property values. This would also be payable by landlords rather than tenants, which would put money in the back pocket of anyone renting, and hiked for second homes, empty homes or those owned by non-doms. As part of this crackdown on landlords the capital gains tax rate for second homes or investment properties would increase too.
The most-hated tax in Britain has not escaped either party’s notice, with Labour pledging to scrap the current inheritance tax system and instead cap the amount everyone can receive in inheritance across their lifetime at £125,000. Any gifts received above this would be taxed at income tax rates, in a revenue-raising move.
New Chancellor Sajid Javid has already said he is a fan of simplified taxes, and as the Government has already commissioned the Office for Tax Simplification to carry out a review of IHT simplification, it seems a likely area of focus. Among the OTS’ suggestions are scrapping the seven-year taper, simplifying the annual gifting allowances into one, and scrapping certain other allowances.
The path of interest rates is particularly unclear at the moment, making it very tricky for savers, homeowners or those with other debt to know what to do. If you expected interest rates to rise it would be a great time to lock in a lower mortgage rate, but a time to avoid locking up savings for a longer period – the converse is true if rates were widely expected to fall.
However, so much of the direction of the Bank of England is dependent on how Brexit pans out and how the current political situation concludes. Broadly speaking a messy Brexit or a Labour majority are likely to lead to more uncertainty in markets and the economy, which could mean the Bank has to cut rates. Likewise, a better-than-expected Brexit conclusion could see the economy and markets rally, meaning a rate rise is more likely.
Investors are likely to face a bevy of hits from a Labour government, as the party has laid out plans to hand over some company shares to staff, introduce new taxes on investing and nationalising certain companies.
A new financial transaction tax would make the cost of buying shares and bonds more expensive, while plans to nationalise the Royal Mail, water and energy companies and RBS could mean existing investors in these businesses lose out if the shares aren’t purchased at market rate. A proposal for companies with more than 250 employees to hand staff 10% of the firm’s shares could be popular with employees, but would cost investors.
With each of the main parties vying for support both from the ‘grey’ vote and the 10 million or so savers introduced to pension saving through automatic enrolment, pensions are likely to take a central role in the forthcoming general election campaign.
While Brexit has clearly dominated political discourse over the past three years – and will inevitably continue to do so during what is likely to be a fractious battle for the keys to Number 10 - there has never been a larger section of the electorate with a vested interest in the pension policies of our prospective political leaders.
Stalling life expectancy and increasing the state pension age
Source: Office for National Statistics
Perhaps the most politically toxic area of pension policy centres around plans to increase the state pension age. Under accelerated plans announced by the Conservatives in 2017, the state pension age will rise to 67 by 2028 and 68 by 2039 – a full 7 years earlier than had previously been proposed.
This was deemed necessary to address the rising cost of state pension provision, with improvements in life expectancy expected to increase state pension spending by 1% of GDP, from 5.2% to 6.2%, over the next two decades or so. The Government estimates the accelerated increase in the state pension age will save £74 billion to 2045/46 compared to existing plans.
However, recent data points to a significant slowdown in life expectancy improvements since 2010, which unfortunately for the Tories coincides with the introduction of austerity policies across the country.
The combination of a rising state pension age at the same time as life expectancy improvements have ground to a halt is political dynamite which even a seemingly dysfunctional Labour Party is likely to seize. Indeed, we have already seen this through various left-wing politicians’ ebullient – if slightly unspecific – support for the ‘WASPI’ campaign.
Labour has laid the groundwork in its 2017 manifesto, pledging to halt proposed increases beyond 66 and commission a review of the state pension age. The party wants the state pension age to reflect ‘the contributions made by people, the wide variations in life expectancy, and the arduous conditions of some work’.
It remains unclear how this will work in practice, and in particular what would be deemed “arduous” in the context of state pension policy. Given Boris Johnson has already shown his willingness to depart from the policies his party was elected on, it would be no surprise to see him attempt to neutralise this threat in the Conservative manifesto.
The state pension ‘triple-lock’
If the state pension age is potentially political dynamite, then how the major parties approach the ‘triple-lock’ could well light the fuse.
The triple-lock guarantees the state pension rises each year in line with the highest of average earnings, inflation or 2.5%. The policy was introduced by the Coalition Government as a way of boosting the value of the state pension after decades of decline following Margaret Thatcher’s decision to scrap the earnings link.
Labour’s 2017 manifesto committed to retaining the triple-lock for the next Parliament and the party is widely expected to retain this position as part of a big offer to older generations.
The Liberal Democrats have gone further, suggesting the triple-lock should become a permanent feature of the state retirement system.
For its part, the Conservative’s 2017 manifesto suggested the UK should move to a state pension ‘double-lock’ linked to the highest of average earnings or inflation.
While this predictably attracted significant criticism from opposing parties, retaining the triple-lock is illogical because it increases the real value of the benefit at random intervals. This seems particularly difficult to justify given the disposable incomes of retired households have grown at a faster rate than those of working households in the last 20 years or so.
The triple-lock has become a totem for ‘doing right by older generations’, and it therefore seems likely all major parties will vow to protect it as voters go to the polls. If politicians believe the state pension is too low – as the triple-lock implies – they should instead detail a structured plan to move the benefit to the ‘right’ level.
Pension tax relief
As sure as night follows day, the onset of a new Government with a new fiscal agenda will inevitably fuel rumours around the future of pension tax relief.
A quick look at the costs of retirement savings incentives explains the Treasury’s active interest in this area.
The overall cost of pension tax relief was over £38 billion in 2017/18 (£20 billion when the income tax paid on pension withdrawals is taken into account), with rising pension participation via auto-enrolment expected to push this figure higher.
Although Labour hasn’t explicitly set out its views on pension tax incentives, Shadow Chancellor John McDonnell has pledged to overhaul income tax by bringing the 45% tax threshold down to £80,000 and introducing a new 50% rate for the country’s top earners.
While the aim of this policy is to increase the tax burden on the wealthiest in society, it will also boost pension tax incentives for this group of people at the same time. It seems extremely unlikely the intention of this policy is to hand more pension tax incentives to the rich, and so savers might need to repare for reform in this area under a Labour administration.
One idea that has previously been suggested by the Liberal Democrats is a flat-rate of tax relief for all. In theory this might address perceived issues of fairness with the current system, although nobody has yet articulated clearly how it could work on a practical level for defined benefit schemes.
There would also be intergenerational fairness issues to address as younger savers who are more likely to be basic-rate taxpayers would miss out on the opportunity to benefit from higher-rate tax relief as their careers progress.
The pension tax taper and the NHS
The pension tax taper, which gradually reduces the amount higher earners can save in a pension from £40,000 to £10,000, could be a specific area of focus in party manifestoes, particularly given the negative headlines it has generated around the NHS scheme.
The taper is horrifically complicated which not only discourages saving but is now placing a very real strain on the UK’s healthcare system. With senior consultants refusing shifts and patient care potentially put at risk as a result, an election provides an opportunity for politicians to rethink this wrongheaded policy.
Scrapping the taper altogether would be the easiest way to ease the burden on the NHS and at a cost of around £1billion a year it is reasonably affordable in Government spending terms.
More broadly, the uncertainty that constantly surrounds pension tax relief is unhelpful and understandably puts people off saving for retirement. Given the long-term nature of pensions, the next Government needs to take a similarly long-term approach to engender greater confidence in the system.
Rather than constantly tinkering with pension tax relief, policymakers should commission a review aimed at simplifying the rules and encouraging more people to save for retirement. Once complete this should be coupled with a cross-party commitment not to alter the rules for at least 10 years.
Automatic enrolment – raising minimum contributions
Source: Office for National Statistics
Automatic enrolment has vastly increased the number of people saving in a pension, with over 10 million people successfully auto-enrolled since the reforms were introduced in 2012.
The next Government, whoever it may be, will need to address the question of whether and how to increase contributions beyond the minimum of 8% of earnings between £6,136 and £50,000.
The current administration has pledged to ditch the earnings bands, meaning the first pound of earnings would qualify for a matched contribution, and reduce the qualifying age from 22 to 18 by the mid-2020s.
Given auto-enrolment enjoys support from across the political spectrum and has generally been viewed as a successful initiative, it is likely all political parties will continue to support the policy.
Any move to increase minimum contributions will need to consider the potential impact on the wider economy, as it would lower the spending power of both businesses (which would be required to pay more into pensions) and individuals.
While auto-enrolment has boosted pension participation among a large chunk of the workforce, the self-employed remain excluded.
Most self-employed workers are making little, if any, provision for retirement, and given nearly 5 million people now fall into this category, addressing this issue will be a priority for any incoming Government.
One option would be to boost the Lifetime ISA, a product apparently designed with the self-employed in mind but whose design remains unnecessarily complicated.
Reducing the exit charge so it just returns the 25% Government bonus rather than penalising people would be a good place to start, while expanding the age criteria beyond 18-39 and increasing the maximum bonus, which is currently capped at £1,000 a year, could also make the product much more attractive.
These articles are for information purposes only and are not a personal recommendation or advice.
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