The election effect on your pocket

We outline what politicians’ pledges may mean for the future of pensions, tax and spending

Although Brexit and the health service are likely to dominate the general election headlines, it is received wisdom that most of us vote with our wallets and favour the party that will benefit us the most.

The pound rallied against the euro when the vote was announced — making May bank holidays look more affordable. However, in the run-up to June 8 uncertainty will reign as markets try to anticipate the financial impact of a new government. Political parties will be questioned over their plans for issues such as the state pension triple lock, tax reforms, and national insurance (NI) for the self-employed. We consider how the election could affect you.

Investments
Sterling enjoying strong gains is good news for holidaymakers, who can take advantage of favourable exchange rates. The downside is that it saps the overseas revenues for many FTSE 100 companies. Within two hours of Theresa May’s announcement, the UK’s main index fell 2 per cent.

Anxiety among investors could result in more demand for gold and other traditional safe havens. However, analysts say that hasty decisions based on short-term market sentiment are ill-advised. “Investors must consider whether the election changes the long-term cash-flow generating powers of the FTSE 100’s members before they decide whether to take evasive action — or use any sustained market weakness as a chance to buy what may be good assets going cheap,” says Russ Mould, the investment director at AJ Bell, the wealth manager.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, the wealth manager, says that although markets can be jittery in the run-up to elections, “this may be different as the polls suggest that the incumbent government is likely to remain in power”.

According to Jason Hollands, a managing director at Tilney Bestinvest, a recovery in sterling is “one of the biggest risks facing investors who have shunned UK markets in favour of international funds over the past year — especially those who have piled into the US on the back of the Trump victory”. If the pound continues to rally then investors might turn to sectors that have been neglected since the Brexit vote, such as food retailers.

Tax
Taxpayers will be looking closely at party agendas. Will the Conservatives scrap the “five-year tax lock” they introduced in 2015? The pledge not to raise the rates of income tax, NI and VAT has been restrictive for the Treasury, and was why Philip Hammond had to backtrack on his NI reforms for the self-employed in the budget.

One Conservative plan put on hold this week was the raising of probate fees paid by bereaved families, which critics had described as a stealth death tax. Under the proposals, estates worth £300,000 to £500,000 would have paid a £1,000 fee, while those worth £2 million, or more would have paid £20,000. At present, estates in England and Wales pay £215, or £155 through a solicitor. The Ministry of Justice said there was not enough time before the election for the legislation to go through parliament. If the Tories are re-elected the proposals could still go ahead.

John McDonnell, the shadow chancellor, said that if Labour returned to government, “rich” people would be classed as those earning £70,000 to £80,000 a year and face higher taxes. According to UHY Hacker Young, the accountancy group, this affects more than 1.6 million people. The party would also make public the tax returns of those who earn more than £1 million a year and impose VAT on private school fees.

Pensions
An area under threat is the state pension triple lock — the guarantee to uprate the state pension annually in line with inflation, earnings or 2.5 per cent, whichever is highest. In his autumn statement, Mr Hammond pledged to retain the triple lock “for this parliament”, which was interpreted as being until 2020, but now all bets are off.

Labour has promised to maintain the triple lock until at least 2025 while the Liberal Democrats have yet to reveal their hand. Tom McPhail, the head of retirement policy at Hargreaves Lansdown, the wealth manager, says: “The over-65s are such a powerful voter group that, politically, it would be a very bold move for the Tories to resile from the triple lock this side of the election.”

The raising of the state pension age could be another election battleground. The government was due to respond in May to the Cridland review, which proposed that the state pension age should rise faster than under the current timetable of 66 by 2020, 67 by 2028 and 68 by 2046. Tom Selby of AJ Bell, says: “Given the political sensitivities, it would be no surprise to see the Conservatives quietly shelve any decision until after the election. The other political parties, particularly Labour, could use the election as a platform to promise not to enact the state pension age rises proposed by Cridland.”

Housing
General elections typically slow down the housing market, as people hold off buying and wait to see the outcome. Often there is a boost in sales and prices immediately afterwards.

However, the Council of Mortgage Lenders said this week that the market was “in neutral gear” and that the election would do little to change that.

Howard Archer, a chief UK economist at IHS Markit, says that house prices and lending were unlikely to experience much growth or falls. “We expect house price gains over 2017 will be limited to no more than 2.5 per cent and it could very well be lower than that.”

However, Mark Harris, the chief executive of SPF Private Clients, the mortgage broker, says Mrs May’s announcement could be good news for borrowers because lenders will be even more determined to win business. “If the election means people put decisions to buy on hold then we could see even more competitive deals in an effort to attract borrowers.”

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