It’s the result that very few thought was possible: an outright majority for the Conservative Government. Nobody expected any of the parties to gain more than the 326 seats needed to form a single-party government. According to pollsters it was the most unpredictable election since the end of the Second World War. Even on election night there was a lot of “I’ll eat my words” and “I’ll eat my hat”, following jockeying over some form of coalition-combo. But now that the Conservatives are in power and can act on their pledges, what will this mean for investors?
Throughout the lead-up to the election the hottest topics of the debate were focussed around finance and the economy. As a result, the outcomes for investors are wide-ranging and will have a significant effect on many of us.
David Cameron made promises to raise the personal allowance to £12,500 as well as increasing the 40% tax threshold to £50,000. That is a pretty sizable increase from the current level of £42,386, and reflects a significant benefit for many middle income earners. The Conservatives have also pledged not to raise VAT or National Insurance.
Their position on inheritance tax is even more significant: their proposal is to increase the amount you can leave tax-free from £325,000 per person to £500,000 on property. For married couples or those in civil partnerships this represents an inheritance tax threshold of £1Million.
At the Quadrant Group, we help clients to understand inheritance tax planning. Because our focus is always on long-term investment, we have the right perspective and are able to help clients plan effectively. While it is impossible to avoid inheritance tax, it can be assuaged through many legally available measures such as ‘potentially exempt transfers’ (PETs), tax-free gifts, making use of trusts and having a ‘whole life assurance’ policy. Through good planning, you can make provision for paying inheritance tax when it is due.
With the new changes to retirement rules introduced last year, people aged 55 and over have far greater freedom to access their pension pots. Tax relief on contributions, tax-efficient growth, the prospect of tax-free cash at retirement and the ability to pass on funds to the next generation tax-efficiently has improved the benefits of putting money into a pension. (See our recent series on keeping your wealth within the family). The Tories have pledged more of the same and will keep with the recently introduced pension freedoms.
Like all of the main parties proposed, the Conservatives will keep a triple lock on the state pension, meaning that it will rise each year by either average earnings, inflation or 2.5% whichever of those is highest.
However, there are limits to any government’s generosity and for those earning over £150,000 the Conservatives did pledge to restrict pension tax relief. We expect these restrictions to become clearer following the anticipated interim Budget on 8th July. At Quadrant Group we will keep up with any legislative changes which may impact present and future planning.
It has been a year since Bank of England Governor Mark Carney called surging home prices “the biggest risk to financial stability.” This is an area of policy that is double-edged depending on where you are on the property ladder. Would-be-first-time buyers will be pleased that the Help to Buy ISAs will go ahead and that Help to Buy equity loans will be extended to 2020. In addition, the mortgage guarantee scheme will be extended to 2017 to help both new and second steppers. However, some are suggesting that all the assistance offered will just drive up house prices further.
Labour’s failure to win means that fears of a mansion tax on homes valued at more than £2 million have receded and the high-end property market is predicted to boom, especially with foreign interest in London.
Our AstutePortfolios include property as part of the return-generating mix, combined with lower risk and inflation-protecting assets. The housing market along with fixed interest bonds are asset classes that support the diversification of our portfolios. Spreading your exposure to risk in the market is at the core of our investment strategy.
According to data compiled by Hargreaves Lansdown, the stock market has performed twice as well under a Conservative government as it has under Labour. Over the last 45 years there have been five Conservative governments, five Labour governments, and the recent coalition. During that time the UK stock market has returned, on average, 16% a year under Conservative rule, compared with 9% under Labour and in the past five years.
Initial market reactions have delivered a boost and many analysts are elated by the outcome. But we can’t ignore that the UK stock market is only a small part of a truly global trading community. What happens abroad has a big impact on the results we see here and is not under the control of our politicians. Even if you consider UK shares only, the majority of most large company’s earnings are generated elsewhere. Over 70% of the FTSE 100’s profits can be attributed to foreign trade.
Sufficiently diversified portfolios are likely to have just a small proportion of their assets in the UK. For example, our AstutePortfolio™ 60 is made up of only 13% UK equity with tilts to value and smaller companies, therefore a fall in the FTSE would have only a minor affect on portfolios. Diversification is certainly the best chance you have of a positive long term financial return.
The stand-out event of this Tory government is likely to be a referendum on whether the UK should pull out of the European Union. David Cameron has little choice but to hold the vote following his repeated pledges to renegotiate the UK’s relationship with the EU and ask the people their verdict.
In the event of a ‘yes’ turnout, there are still a number of possible conditions. Including whether the move will be a ‘soft’ exit whereby the UK joins the likes of Norway in the European Economic Area (EEA) or the least likely scenario of cutting all ties.
The prospect of a ‘Brexit’ could have an impact on the FTSE, influenced by investor confidence, with the prospect of sterling becoming more volatile.
While this may result in colourful headlines, you really can rest assured that, again, by diversifying you will protect your wealth and deliver results over the long-term. No matter what happens in today’s climate of unpredictability, a passive approach to managing your wealth is the best bet.
Predicting future currency is notoriously difficult and many factors outside UK policy have an influence. The pound has been very strong against the euro at â‚¬1.40 in past months due to the single currency quantitative easing and anxiety over Greece defaulting. While Sterling has recently fallen to a five-year low against the US Dollar, this has not been attributed to our elections but deflation and the likelihood that an interest rate rise will be delayed behind the US. Arguably it is the Bank of England not Downing Street that holds sway on our economic outlook. We have a long way to get back to 2% inflation.
However, if the pound falls further this would boost foreign earnings which would increase the appeal of owning UK shares that profit overseas because exports become cheaper and more attractive. So, it is swings and roundabouts.
Maintain a Long-Term Perspective
Now that we have the assurance of a stable government for the next five years investors can get on with business as usual. There is a good deal of feel good factor in the city, however this may be short-lived with so many other factors at play. It is important for investors to remain astute and keep focused on the long-term.
It may sound simple but investors should always rely on diversification. Individual assets will continue to go up as well as down but you really can rest assured that spreading your exposure to risk will deliver results in line with the market and protect your wealth. Diversify your portfolio. “Keep Calm and Carry On Investing”.
What are your views on the outcome of the General Election in relation to finance, investment and wealth? Join the discussion by leaving a comment below. And, of course, if you have any questions about how the election results will affect your investments, or if you want to find out more about how Quadrant Group can help you prepare your financial affairs for the future, just get in touch or request a callback.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.