Five planning pledges

Current Prime Minister Rishi Sunak has announced a snap general election - with the country set to go to the polls on Thursday, 4 July 2024.

The initial polls and bookmaker’s odds indicate a strong likelihood that the Labour party will form the next government but who knows how things will play out over the next six weeks.

Of course, ‘we don’t know what we don’t know’ but there is a likelihood that current rates of allowances, taxes and accompanying legislation will change, whether that be immediately post-election or as would seem more likely, following an ‘Autumn Statement’ later in the year.

Whatever your political views, it undoubtedly makes sense to take stock of where your finances are now, what your current options are, and what might happen further down the line. If appropriate, our guidance is that you seek to take some action prior to election day.

As a firm of Independent Financial Advisors this places us in a somewhat invidious position when it comes to offering advice on an unknown and trying to separate what might be pure speculation and what might actually come to pass.

At the time of writing, the Labour and Liberal Democrat party manifestos have yet to be written and we are short of precise detail. However, Labour has signalled their intent to reintroduce the Lifetime Allowance (LTA) for pension funds and we believe there are certain planning aspects that clients should pledge to revisit in advance of the election, where we feel your ‘Top five’ commitments should be:

1. Pension Contributions and 25% tax-free cash

Depending on your income, UK residents can currently contribute up to £60,000 into their pension fund, upon which they could be eligible for income tax relief at 45%. In addition, there remains the ability to carry forward any unused allowances from the previous three tax years and qualify for income tax relief in the tax year in which the payment is made.

There remains the option to access up to 25% of a personal pension pot as a tax-free cash lump sum and this is an area reported to be under review.

As far as the 25% tax-free cash is concerned, this has been rumoured to change in every Budget since the turn of the century and yet remains untouched. While we think it is unlikely to be removed altogether, we could potentially see a cap on tax-free cash (i.e. 25% on the first £500,000 only), although the reintroduction of the LTA would partially achieve this in restricting the limit of the LTA (£1,073,000).

Care needs to be taken when accessing tax-free cash from pension schemes as the rules are complex and professional advice should be sought prior to taking any action.

2. Capital Gains Tax (CGT)

There is a current disparity between the highest rate of Income Tax (45%) and those for capital gains (24% property/20% other assets). Labour has indicated they have no plans to redress this balance but spending commitments may render CGT an area for attack if other funding strategies don’t come through as planned.

3. Individual Savings Accounts (ISAs)

Individuals resident in the UK are permitted to invest up to £20,000 each tax year (plus a forthcoming British ISA allowing a further £5,000 each tax year) into ISAs. ISA funds are currently free from CGT and Income Tax which makes them a first port-of-call after pension contributions have been utilised.

4. Inheritance Tax (IHT)

Possibly one of the most contentious areas that it is undoubtedly in need of a revisit. The various gifting allowances and basic ‘nil rate band’ (the first £325,000 of an estate is exempt from IHT and therefore has a tax rate of 0%) have remained frozen for many years and have lost value in real terms. Consequently, the number of estates suffering this tax continues to increase year-on-year.

There is currently no IHT payable on inherited pension funds if death occurs pre age 75. There is undoubtedly a sense that this could be ‘too good to be true’ and would be a low hanging fruit for a Labour government to either abolish or restrict to a certain level.

5. Savings rates vs interest rate reductions

Perhaps coincidentally (or perhaps not) the election is taking place at a pivotal time for the Bank of England. The International Monetary Fund (IMF) has suggested UK interest rates should be cut to 3.5% by the end of next year. Such a move could see the Bank of England cut its key rate by up to seven times from its current level of 5.25%.

With UK inflation currently measured at 2.3% (May 2024) and deposit takers still offering interest rates of up to 4% - 5%, there is a real opportunity to lock in a savings rate that will reward low-risk savers with capital growth above the cost of rising prices.

Conclusion

Whatever your political views, things will undoubtedly change, and it would be remiss not to take stock of where your finances sit today and whether you should be making any tweaks prior to the election.

Our professional team of qualified financial planners are on hand to offer independent advice which helps our clients to make the best use of their hard-earned wealth and to support them in making smart decisions delivering lasting value.

If you would like to explore you options then please contact our team to arrange an introductory no fee, no obligation meeting.