Michelle McGagh takes her courage in both hands and does a little canvassing among the adviser community
It’s been the closest and most vicious election campaign that we’ve seen in the last forty years – see editor Michael Wilson’s rant on page 14. And, predictably, the furious state of electioneering in the run up to polling day has been giving rise to more political promises and yet more opportunities to tinker with the financial system. But what do advisers make of the electoral show so far? We set out to find out.
An initial trawl through the expansive party manifestos shows that, despite huge upheaval in the rules affecting financial planning in the past year, there are still further changes to come. And top of the pile – at least, as we went to press – was that most beloved British asset, property.
While Labour and the Liberal Democrats have planned to introduce a mansion tax on homes worth over £2 million – to be collected via new council tax bands (Lib Dem) and through central government (Labour) – the Conservatives have swung the other way and are vowing to let people pay less tax on their property. Well, when they die, anyway.
The headline story is that the Tories are pledging to make good on their 2009 promise to increase the inheritance tax (IHT) nil rate band threshold to £500,000 per person, or £1 million for a couple. But only for home owners. While the nil rate band will not be increased to £500,000, an extra tax-free band will be created worth £175,000, or £350,000 for a couple, that would apply to main residences.
Pete Matthews, managing director of Cornwall-based Jacksons Wealth Management, said both policies were short-sighted. “Labour’s mansion tax is a cheap shot and an easy shot,” he told us. “The Tories are planning IHT residence relief, and I like the idea, but it is short sighted – it is all electioneering and not long term thinking. I think all the policies that are being proposed now show that in sharp relief.”
Michael Brooke, financial planner at Clarion Wealth Planning in Cheshire, had a bigger concern about the mansion tax than just short-sightedness – that it would become a gateway to more punitive taxes on homes. His concern is that politicians would strip the capital gains tax exemption for main homes for properties worth over a certain amount.
Playing Politics with Pensions
The last parliamentary term has seen a large overhaul of the pension system, with the introduction of auto-enrolment, plans for a single-tier pension being put in place, and most notably the April pension freedoms which have indisputably revolutionised retirement.
However, the changes aren’t finished yet. All of the three main parties have used their manifestos to flag up a need to review or cut higher rates of pension tax relief. The Conservatives have said they will cut the 45% rate of relief for the highest earners in order to pay for their IHT residence relief band, while Labour has said it will restrict relief for the ‘highest earners’ to pay for a cut in university tuition fees.
This doesn’t go down well with Andrew Pennie of Glasgow-based Intelligent Pensions, who accused the parties of raiding pensions to pay for other policies. “This is another example of pensions being seen as an easy piggy bank raid to fund other initiative and election promises,” he told us. “But it’s the wrong approach.” Considering the vast number of changes resulting from pension freedom, he said, “we now need a period of consistency instead of constantly chopping at the tax advantages.”
But he conceded that, whichever party – or combination of parties – win the general election, pension tax relief would be “reduced severely” for the wealthiest.
A Clawback in the Offing?
All major parties have used their manifestos to confirm that they will pick up the current coalition’s pension freedom policy, and all of them have backed the right for pensioners to use their savings as they wish. But that has not stopped rumours about a potential roll back on certain elements on pension freedoms under a Labour government.
Within political circles there have been whispers that Labour leader Ed Miliband is unhappy with the changes around death benefits, and about the ability for wealthy individuals to use pensions as a tax-planning vehicle to pass money onto the next generation, potentially tax free. There are worries circulating that Labour might amend the pension freedoms slightly to reduce the benefit given in death.
Matthews at Jackson said he didn’t think that Labour would roll back on pension freedom completely, as that would be “very unpopular” – and besides, a Labour government wouldn’t not want to lose the boost to the coffers that the freedoms will bring. “Any politician with any nous knows that there is a tax benefit from income tax [paid from taking pension cash] and also from VAT when people spend the money they have taken from their pension.”
Time to Stop Meddling
Brooke at Clarion agreed that clients and financial planners needed to be given time to live with the new rules, particularly around pensions. “What we could do with is a period of consolidation in terms setting out the rules and saying lets live with them for a while,” he told us. “Do not adjust the lifetime allowance any more, or the annual allowance, or threaten to adjust the rates of tax relief – we just need to live with a new normal.”
Andy James, head of retirement planning at Towry, agreed that repeated attempts to “simplify” the pensions landscape have meant that any future changes need to be carefully considered “if confidence in pensions as a credible method of retirement planning is to be maintained”.
Stock Market Shake-Up? Probably Not
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, told us he believes that the Conservatives are offering a more market-friendly option than Labour, because the former say they’re planning to finish the job with spending cuts while the latter prefer fewer cuts and more redistributions of wealth. But in practice Wyn-Evans believes that the outcomes for markets are not as wide as you might suppose, given the many different shades of coalition tie-up that could result, and even the possibility of a second election.
“Long-term investors will find little excuse to make big portfolio shifts,” he told us. “Although traders might be able to game the outcome……Political developments overseas, including, but not confined to, Europe, Russia, the Middle East and China will have more impact.”
He added that one reason why equity markets were likely to remain dependent on global developments, rather than on the outcome of the UK general election, was that three-quarters of the FTSE 100 revenues and earnings are generated abroad.
In terms of the Labour-Conservative fight, Wyn-Evans said it was an “asymmetric picture”, with a Labour-led regime expected to be more punitive than a Tory-led government. On the other hand, he told us, “the Conservatives also acknowledge that they must not be seen to be feathering capitalists’ nests.”
Scotland and Europe
Wyn-Evans added that investors also needed to be mindful of the potential for both EU and Scottish referendums, depending on which parties come to power. He said a vote for the Tories was “effectively a vote” for a referendum on the UK’s membership of the EU – and conversely, if Labour joined up with the SNP to gain power, then another Scottish referendum might be on the cards.
Pricing In the Risk?
Nick French, head of UK wealth management at Russell Investments, is a little less sanguine than Wyn-Evans. He told us that he was currently keeping client portfolios invested in a way that “does not expose them to unnecessary and unrewarded risk”.
“The one thing we can be reasonably sure of is that the volatility in domestic markets and sterling will increase as a result of the election uncertainty,” he said. But that he felt the market was not pricing in “the full extent of the uncertainty” of the election, and that volatility in sterling “could be more pronounced and could last for a longer period of time after the election”. He added that he would be “watching the volatility markets” to see how different asset classes “are pricing the election certainty”.
Plenty of Opportunities
While constant shifting of the goalposts within financial planning can be frustrating for both clients and advisers, it does provide the latter with increased opportunity to help the former.
James at Towry told us that pensions are the area where advice would be most needed – partly because of the changes already made, and party due to the decrease in the lifetime allowance to £1 million and the subsequent index-linking of the allowance from 2018.
“With the tax charge on any excess over the limit running at up to 55%, there is certainly need to take action to prevent the tax consequences if at all possible,” he said. But “thoughtful and reasoned financial planning” could optimise a pension drawdown strategy.
Robin Melley, chartered financial planner at Matrix Capital in Shropshire, says he would like to see politicians take a break from tinkering and allow current policies to bed-down. But since that’s looking unlikely he’s taking the changes as a challenge and as a positive for his business.
“I have been in the business 25 years and when policies change and the rules around financial products change then it creates opportunities,” he said. “Political changes create an endless supply of opportunities and…secure the need for advice…and allow us to add value.”