Reflections on the General Election

Labour, as predicted, won last week’s election with a clear majority. The stock market hasn’t overtly reacted to the result given the polls prediction of a landslide win, which would have been predictively priced into the market.

Keir Starmer has painted no illusions about the current economic situation in the UK which provides little room for him to maneuverer at this time. Labour have however made several large commitments within their manifesto which are likely to result in taxation and policy changes within the UK as they seek to increase revenue streams and stimulate economic growth to fulfil these pledges.

We summarise below the changes we could anticipate over the coming months.

Pensions

We can expect further changes to pensions with Labour committing to a review of current legislation. Pensions have become increasingly complex in recent years due to consistent changes. Arguably, this puts retirement plans at risk as, while pensions are meant to be a long-term asset, they lack transparency and clarity, and investors can easily ‘fall foul’ of the complex rules.

While labour has committed to reforming pensions, hopefully any changes made are steps to simplify the current regime, with the implementation and transitional rules thoroughly thought out in terms of practicality which has not been the case with the abolishment of the Lifetime Allowance.

There is a continued commitment to the state pension triple lock guarantee but with the reduction in National Insurance Tax, which largely funds the state pension, an ageing population combined with an overtaxed working population, realties need to be faced as to whether this remains sustainable.

The State Pension age is forecasted to increase and so continually increasing the age in which this can be accessed, may be an initial solution around this benefit. Due to the uncertainty around this benefit, we may need to be more strategic and less dependent upon this future source of income to underpin our retirement planning.

Labour are going to be exploring how to increase UK investment from pension funds and they are maintaining the strategy of the ‘one pot pension’ mentioned by the Conservatives with a focus on consolidation within workplace pensions. The feasibility around this remains questionable with ongoing barriers to pension transfers and platforms unable to keep pace with fluctuating legislation.

While they have confirmed they are unlikely to reintroduce the Lifetime Allowance, they are unlikely to make tax relief on pensions more attractive than it currently is now. Further information around what this reform and possible changes entail has not yet been made clear, but this is an area in which we do expect changes to happen.

School fees

They have been very transparent regarding their plans to add VAT to school fees moving forward. With this expense already notable, it may cause some affordability issues for many families as to whether this will remain a sustainable expense. Alternatively, will it cause an influx of applications to state funded schools putting a higher strain on those systems?

While this is not expected to come into force until 2025 giving families time to review their options, it is expected to raise circa £15 billion, but is this too optimistic given the change is likely to cause unaffordability for some families?

Capital Gains Tax

No forecasted changes have been announced regarding Capital Gains Tax (CGT) and Starmer has openly ruled out CGT being applied to our main residences. This would have potentially been a very unpopular decision which could have impacted downsizing strategies as a means to release some equity in retirement.

Allowances within CGT remain nominal, having been reduced by the Conservative Party in recent years and will be naturally resulting in more taxation when capital gains are applied.

National Insurance and Income Tax

Again, there were no comments to increase these taxes outlined in Labour’s recent manifesto. This does mean; however, the working population will continue to bear the impact of fiscal drag.

While the Conservatives outlined a plan to continue reducing National Insurance and therefore the impact of ‘double taxation’ on workers, Labour have not committed to this strategy. While they are continuing to sustain the triple lock guarantee applied to the State Pension, this ultimately may not be feasible as it would leave a large revenue hole to fill within the economy.

They do have the option to apply National Insurance taxation to other income streams such as pension income but again, changes such as these, expose retirees to risk which is a demographic with limited flexibility and means to produce further income.

Inheritance Tax

While Labour’s plans around non-domiciled broadly aligns with the Conservatives plan, they have also mentioned introducing legalisation to end offshore trusts to stop inheritance tax (IHT) avoidance. Otherwise, IHT was absent from their manifesto and with more estates being caught by fiscal drag, they may leave current allowances alone, leveraging off the impact of fiscal drag for increasing revenue.

There is a very ‘steadfast’ approach to the fiscal strategy with Labour looking to open growth and revenue opportunities in the first instance. The first major changes are likely to be announced within the Autumn Statement which will hopefully give investors, the economy and product providers time to adjust and plan accordingly.

If you are concerned as to how a new government may impact your financial position, do not hesitate to contact us.