Labour's proposals – pensions and personal tax

The Labour party manifesto doesn’t pull any punches, setting out a vision for a radical transformation of the UK’s society and economy. The overall themes are of change, fairness, the climate, rebuilding public services and better living standards for all.

We’ve focused in this piece on their policies which would impact directly on savings and investments.

Any manifesto should be considered as a whole package, but there are some parts of the manifesto that will be of particular interest to savers and investors. Whether a policy is good or bad is something voters have to weigh up for themselves.

This article should not be viewed as personal advice, if you’re not sure what to do please seek advice.

Pensions

On pensions and pensioners, Labour are planning a raft of giveaways, including the winter fuel payment, free TV licences and free bus passes. They also propose to maintain the ‘triple lock’ increases to the state pension, meaning it will rise every year by the highest of inflation, earnings growth and 2.5%. This means the state pension is likely to increase in value relative to both the incomes of people in work and to the cost of weekly shopping.

In addition they have promised to uprate the state pension for UK pensioners abroad who currently miss out because of where they live – in the EU and in Australia, for example. They’ve also committed to freeze increases to the state pension age at 66, as well as compensating women born in the 1950s, who’ve had to deal with fairly abrupt increases to their state pension age.

There’s little here that most people would object to - they’re likely to be popular policies. But there are concerns, particularly about the state pension age being frozen at 66. This is likely to cost tens of billions of pounds in the long run and it doesn’t appear in Labour’s manifesto costings.

Personal taxes

Labour have confirmed plans to increase income tax for higher earners, to 45% for those earning over £80,000 and 50% above £125,000, as well as to bring dividend and capital gains taxes in line with income tax. This is potentially a very significant change for investors. We’ve set out below examples of how it will impact on someone receiving dividends or selling an investment with a capital gain.

On inheritances, Labour propose to do away with the main residence nil rate band, meaning the IHT exempt allowance would effectively fall for homeowners, to £325,000.

While some might not consider it a personal tax, another measure which will have a direct impact on your investments is the proposed introduction of a financial transaction tax.

This will involve applying stamp duty to a range of financial transactions undertaken by pension schemes and investment companies. Labour project this will raise nearly £9 billion a year, which means a drain on investment portfolios of that amount.

What savers and investors can do

Nathan Long, Senior Analyst

There are a few things you can consider if you think these policy changes might affect you.

In terms of your pension planning, there could be the potential for short-term shocks to the stock market and sterling. It’ll be no surprise to see volatile markets as we approach the election, whoever ends up on top, so it’s important to make sure you’re properly diversified across geographies and asset classes. Remember a dip in sterling would see overseas investments rise in sterling value.

Find out more about diversification

Similarly, the proposed increase to wealth taxes, coupled with the application of income tax rates to dividend income could mean it might be more tax efficient to structure your investments differently. If the tax cost of capital gains may rise, you may wish to think about pre-empting this.

If the taxes are introduced, there is a risk investors will be reluctant to trade investments because of the tax cost of doing so.

One of the most effective things individuals can do may be to pay money into a pension and shelter it from the worst effects of any potential tax increases.

This is especially true if eligible for 45% or 50% tax relief. Once in the pension though, it cannot be accessed until age 55 (57 from 2028).

Looking at the broader impact of Labour’s economic and business taxes and policies, we anticipate a possible increase in the cost of government borrowing: the market may well demand a higher rate of interest for lending money to a government which is engaged in a radical restructuring of the economy and society, and which needs a lot of extra cash to do it.

This in turn could lead to higher mortgage interest rates. The silver lining could be higher annuity rates.

Labour make no secret of favouring earned income over accumulated capital. It is a mantra which hasn’t diminished in relevance over time, but we encourage all investors to take advantage of whatever tax shelters and allowances are currently available to them whichever party is in power. This means using your ISA and pension allowances, as well as the annual capital gains allowance where applicable.

We’re not sure what changes might lie on the horizon for pensions, or tax relief. As always, taxation can change at any time and benefits depend on your personal circumstances.

Bear in mind that how you access your pension can also be subject to change. Regardless of the election outcome, if you’re a higher-rate taxpayer thinking about adding money to pensions, we think you should consider bringing this forward. If you weren’t planning on adding money to your pension, an ISA could be a simpler option.

Find out more about ISAs

Find out more about SIPPs

HL is not expressing a view on the merits or otherwise of any of the policies or any of the political parties, and nothing in this note should be taken to be an endorsement or recommendation of any particular party, candidate or policy.

Article image credit: REUTERS / PETER NICHOLLS - stock.adobe.com