The political conference season is over and the starting pistol has been fired on the general election campaign with a myriad of policies affecting financial planning.
All parties are promising major changes to tax, pensions, welfare and property over the next parliament as advisers begin to see how the market could evolve over the next five years.
The Conservatives are focusing on middle earners and pensioners while Labour has set out a series of tax rises on “predator” industries and wealthy individuals.
The Liberal Democrats are targeting ways to boost savings after automatic-enrolment and how to raise more money from the richest.
There is also the Ukip factor pushing all major parties, especially the Conservatives, to focus on the older demographic – the crucial “grey” vote.
Lansons director Ralph Jackson says: “We didn’t learn lots more at conferences on savings policies but we got an indication of what the future looks like in terms of nudging people to save more if they earn more. We got a clearer indication of tax policy from the Tories in terms of people keeping more of what they earn and taking them out of tax brackets. The opposition is waiting to see and fill out the details in due course.”
As well as new policies, the next parliament will focus on bedding down huge changes to pension saving and retirement income.
Auto-enrolment will be fully rolled out by 2018 while radical new retirement income products are expected to come to market from next April.
There remain significant implementation challenges for all parties and the consensus over these reforms could fragment if problems develop.
The Conservatives are focusing their election campaign on key voter groups and traditional supporters: homeowners, pensioners and middle earners.
The flagship conference move was to cut £7bn-worth of income tax by raising the personal allowance and the 40p tax band.
Under a Tory Government, the income tax personal allowance would rise from £10,500 in 2015 to £12,500 by 2020.
The Tories would also raise the level at which the 40p tax band kicks in from £41,900 today to £50,000 by the end of the parliament.
As we report elsewhere in this issue, the proposals immediately came under fire from Labour and tax experts for failing to provide funding details.
Chancellor George Osborne has relentlessly focused on helping pensioner incomes and we can expect more of the same nearer election time.
He has protected pensioner benefits, such as winter fuel allowance for the wealthiest, and scrapped the 55 per cent inheritance charge on pension pots.
Most notably, Osborne dropped the Budget bombshell on pensions to allow all over-55s to access their pots in full from next April.
Treasury financial secretary David Gauke says it has been a “revolutionary period” and a Tory Government would aim for a spell of calm in pensions policy as the Budget reforms take effect. He says: “The main aim of a majority Conservative Government would be to ensure our reforms become properly part of the system for a generation or more.
“We have made really important reforms and we need to ensure the next government beds them down and I would question the commitment of Labour. If we make it work and they [the Budget reforms] are there in 2020, then it will be very difficult for a government to rip it up.”
Gauke has poured cold water on a major overhaul of pension tax relief from the Tories, claiming cuts to the lifetime allowance are sufficient.
In one enlightening exchange during a fringe meeting, Mail on Sunday personal finance editor Jeff Prestridge said: “I imagine that if you took away higher rate pensions tax relief then the Daily Mail would go into overdrive.”
In a clear indication that the Tories fear more votes being shipped to Ukip, Gauke replied: “That may well be part of our thinking.”
The Tories have already honed in on helping homeowners with the two parts of the Help to Buy scheme to boost 95 per cent loan-to-value mortgages. The first part of the scheme, which uses shared equity loans to sell new build homes, has already been extended to 2020.
At the conference last week, David Cameron said he would launch a new scheme to slash taxes and regulations for homebuilders who could then pass the savings on to first-time buyers. Under the plans, it is estimated first-time buyers under 40 could receive a discount of up to 20 per cent on homes built on brown-field sites.
While the Conservatives have pledged to reduce the deficit entirely from spending cuts in the next parliament, Labour is plotting a dizzying array of tax rises on numerous sectors. Labour leader Ed Miliband may have forgotten to mention the deficit in his keynote speech to the party faithful but he remembered his promise to spend an extra £2.5bn on the NHS with money raised through tax rises. He reiterated Labour backing for a mansion tax – a 1 per cent charge on homes worth over £2m.
Labour would also reinstate Schedule 19 stamp duty on UK funds to raise £150m and introduce a new £150m levy on tobacco companies.
As well as property, fund management and tobacco, Labour is also committed to raising new taxes from payday lenders, cutting higher-rate pensions tax relief to 20 per cent and raising the top rate of income tax back to 50p.
It has also promised to tax bankers’ bonuses and consider breaking up the biggest banks and introducing a regional banking system.
Labour would also replace the FCA’s treating customers fairly principles with a stronger fiduciary duty on all financial services staff, including advisers, so they have a legal a duty of care to do their best for clients.
On pensions, Labour has welcomed the Coalition’s Budget overhaul but senior party figures have questioned the rationale and the party seems instinctively uncomfortable supporting them.
Shadow pensions minister Gregg McClymont favours collective defined contribution schemes, where risks are shared between members.
Lansons’ Jackson says: “Labour quite likes pooled investment and risk. There is an ideological belief that pooled risk is better than individual. The opportunity for financial services is for fund managers to be creative and help people with long-term financial planning and advisers are a key component too.”
This belief jars with the Budget reforms and the biggest political risk for insurers hanging over the next parliament is if, how and when Labour could tweak the freedoms.
The LibDems are positioning themselves as a restraining influence on both parties: to be nicer than the Tories and more prudent than Labour.
They have promised to cut the deficit by using 20 per cent tax rises and 80 per cent spending cuts.
At the conference this week, the party said it would create new higher rate council tax bands to take more money from those in expensive homes.
The LibDems have also long favoured wealth taxes on high value property – even considering levies on jewellery or expensive art in the past.
They have proposed new taxes on dividends and shares for higher earners but with few details.
The LibDems were also the first party to propose increases to the income tax personal allowance and back raising it to £12,500 by 2020.
The LibDems have confirmed they want to cut the lifetime allowance even further from £1.25m to £1m, having already lowered it from £1.8m in 2010.
Pensions minister Steve Webb has also set his sights on wholesale reform of pensions tax relief in the next parliament, favouring an equal system. However, he rules out scrapping the 25 per cent tax-free lump sum.
“[Ex-Chancellor] Nigel Lawson called it the ‘much-loved but anolomous’ tax-free lump sum and I guess that’s where I am,” Webb says. “As an economist it’s a nonsense but as someone who wants to encourage the take-up of UK pensions, it would be a complete no-go to touch the lump sum.
“To be honest, out of £37bn we spend on pensions tax relief, a tiny percentage goes on the lump sum. It’s all very well saying that some people put the money in a long time ago and they have had shedloads of tax relief so they can give some back. But it’s a classic case that someone has played the game and as soon as they are going to score the goal we move the goalposts.”
He also says the LibDems would focus on auto-escalation of pension contributions, which would see employees putting a higher percentage of their salaries into pensions each time they get a pay rise.
Webb says cross-party consensus is crucial to pensions policy and hopes policies introduced during this parliament, such as reform of the state pension and Budget freedoms, will endure.
He says: “I have tried not to be tribal in doing what I’ve done because, from my point of view, if I’m not the next pensions minister and the next government comes in and reverses the whole lot, then that’s not much of a legacy.
“Having something that will stand the test of time and building consensus is worthwhile. Labour not voting against state pension reform was a big step forward.
“The basic principle of auto-enrolment has consensus too but if we had implemented it as Labour wanted then it would have failed so we fixed it.
“The one area where I just don’t think we will get political consensus is tax relief as it’s just too political. If you come up with a rational structure then there is more chance of stability.”
Webb says he will watch the pensions industry “like a hawk” as they develop new retirement income products after next April.
There’s the potential for another coalition. It makes planning difficult. The most concerning thing for me is around the death tax changes. We have to advise people – do we assume it’s going to come in?
Stefan Fura, director, Furnley House
My biggest concern is if all the freedom and choice in pensions reforms get reversed – if we get a Labour government that sounds like it could be a possibility. The reforms have largely been viewed as a popular move and I wouldn’t like to see it removed now.
Matthew Walne, managing director, Santorini Financial Planning
2020 vision: What the parties are promising in the next parliament
- Wholesale reforms of pensions tax relief
- Auto-escalation of pension contributions
- New higher rate council tax bands
- Higher taxes on investments
- Raise the personal allowance to £12,500
- No EU referendum unless there is major treaty change
- New schemes to boost home ownership and first-time buyers
- Raise the personal allowance to £12,500
- Raise the 40p tax band to £50,000
- Hold an in/out EU referendum by 2017
- Raise new taxes from bankers’ bonuses, tobacco firms, payday lenders
- Cut higher rate pensions tax relief to 20p
- Introduce a fiduciary duty on all financial services staff
- Reintroduce Schedule 19 stamp duty on UK funds
- Reintroduce 50p income tax band on salaries over £150,000
- No EU referendum unless there is major treaty change
- Raise personal allowance to £13,500
- Create new 35p tax band between £44,000 and £55,000
- Scrap 50p income tax band
- Leave the EU