With the election now upon us, we can hope for an unblocking of the parliamentary indigestion of the past three years. The polls and betting odds suggest a Conservative majority is all but guaranteed, but what does this mean for your clients’ finances, and what happens if we get an unexpected result? Here’s a short guide to the parties’ pension and taxation policies and how these might change under coalition rule.
Conservative win (betting odds predict 70 per cent probability)
The Conservative manifesto is very light on policy detail which will impact your clients’ finances. The party promises to raise the National Insurance threshold, saving individuals up to £2 per week, but has had to row back in its promise to reduce corporation tax to 17 per cent. On other taxes, Boris Johnson has left little room for manoeuvre with a pledge that income tax, VAT and national insurance rates will not increase during the parliamentary term.
There will be a review of the annual allowance taper to address the urgent issues impacting NHS doctors. For the current tax year, the government has put in place a temporary measure with promises to make up the shortfall in doctors’ pensions – a complicated fudge that could be challenged in court by other civil servants. The Conservatives will also attempt to gain cross-party support for a solution to long-term care funding and establish a review of the pension net pay anomaly for low earners. We should see the framework for the pension dashboard finally put in place.
Overall, with a Tory majority, it looks like there is very little change for advisers to worry about, barring wholesale change to the allowance taper.
Labour win (3 per cent probability)
It’s no exaggeration to say that a Labour outright win would represent the most radical shift in government policy in two generations. The increases in income tax and CGT paid by higher earners, and of corporation tax by companies, is more or less traditional Labour policy. Meanwhile, borrowing £58bn to pay compensation to the Waspi generation, and keeping state pension age at 66, will push the costs onto the next generation.
The more radical aspects of Labour policy have significant consequences to the finances of individuals. Reform of property tax to a land value tax (favoured by economists) will affect individuals with larger land holdings. The appropriation of 10 per cent of mid- and large-cap shares into workers’ hands would trigger an immediate capital and dividend loss for individual investors and members of pension schemes, and lead to significant increases in DB pension scheme deficits.
Nationalisation of utilities, Post Office and rail franchises could mean an even bigger haircut, with talk of buying these at a 20 per cent discount to market value.
Some advisers may worry that a Labour majority government would see some of their clients take flight overseas. Even without this, we are likely to see at least an initial significant shock to asset values in reaction to a Labour win.
Labour minority government (17 per cent probability)
Should Labour win the largest share of the seats but not be able to enter a formal coalition, this ought to temper some of the more radical ideas from its manifesto. For example, wholesale re-nationalisation of utilities, Post Office, rail and broadband is more likely to meet some opposition, but some aspects of its nationalisation programme may find public support. The proposed 10 per cent worker share ownership scheme may win some cross-party support but once the impact is fully studied, will be hard to legislate and put into practice.
Labour ought to be able to implement the more palatable aspects of its manifesto easily enough, with tax increases, free elderly care, an independent pension commission and some form of help for the Waspi cause all broadly supported by the SNP and Liberal Democrats.
Conservative minority government (7 per cent probability)
It’s hard to see, in this scenario, which parties the Conservatives could feasibly work with. Clearly, with the Brexit Withdrawal Agreement, they have burned their bridges with the DUP, and there have been clear commitments from Labour, the Lib Dems and SNP not to enter a coalition with the Tories. This being the case, they would have to govern on an issue-by-issue basis. They may have to accept a referendum on the Brexit deal as the price of any form of collaboration.
The Conservatives ought to be able to implement their key policies relating to pensions and finances, modest as these are. They may have to concede and agree to fund TV licences for over-75s, cap care costs and at least agree to an independent review into the Waspi claims.
Labour/SNP government (6 per cent probability)
There is considerable overlap in pensions and taxation policy between Labour and the SNP. In the event of a coalition between these two parties, Labour ought to be able to push most of its manifesto through. However, the party is likely to have to concede to a second independence referendum within the parliament, as well as a second Brexit referendum.
Liberal Democrat win (0.3 per cent probability)
Deemed outsiders in a two-horse race, a Liberal Democrat majority government would present a shock result unlike any other. The implications of reversing Article 50 could fill many pages on their own.
Ignoring probabilities, the Lib Dems are promising to cap long-term care costs, look at compensation for the Waspi women and direct pension funds to increase the level of investment in green and environmental projects. Their spending will be funded by modest tax rises for most people.
What’s not in any manifesto?
It’s worth noting that previously, the Lib Dems have spoken in favour of a harmonised, lower rate of pensions tax relief for all pension savers, while Labour of abolishing higher rate relief altogether. As the manifestos are silent on these points, there is certainly room to bring forward these changes without breaking any promises. The Conservatives are most likely to favour the status quo, unless their hand is forced by political or fiscal necessity.
Jon Dean is head of retirement strategy in the life and pensions team at Altus