8th May 2015
A shock election result has put the Conservatives into power in their own right; but what does it mean for investors and savers?
The fact that David Cameron will continue to run the country will bring some comfort to markets and investors, both of which like continuity, although there will be a period of uncertainty while a new Parliament is put in place.
Thoughts will now turn to the first Budget and the new legislative programme that will be implemented under a majority Tory government.
Hargreaves Lansdown sets out what the surprise election result means for investments, pensions, and tax planning.
Mark Dampier, head of investment research at the fund supermarket, expected to markets to act strongly, as they did after the surprise 1992 election when Conservative John Major took power.
‘Business as usual might be the order of the day from this election result. In 1992, when we had a similar surprise success, markets reacted strongly and I would expect to see the same again.
‘However we shouldn’t overestimate the significance for the investment markets in the short term; investors might do well to keep a closer eye on the bond markets than on the comings and goings in Downing Street.’
Over the longer term, Dampier said uncertainty may come from a ‘new legislative programme, the strength of SNP in Westminster, and the question of a referendum on Europe’.
All party election manifestos pledged to look at the reliefs given to higher rate taxpayers as an incentive to save and it has to be assumed that 40% tax relief on pension contributions will now be targeted.
Tom McPhail, head of pensions research, said: ‘After the seismic changes in the 2014 Budget, further changes to pension taxation seem inevitable, particularly for higher earners.’
He said that higher rate taxpayers with plans to make pension contributions should ‘consider acting sooner rather than later’.
Annuity rates could also benefit from the Tory election win but McPhail was cautious about calling it too soon.
‘We’ve seen bond yields edging upwards in recent weeks – 15 years gilts up from 1.7% on 30 January to 2.3% on 7 May – which could mean annuity rates getting pulled upwards in the days and weeks to come but we have had so many false dawns in the annuity market over the past five years that investors should be wary of pinning their hopes on a significant improvement in the rates.’
The Conservatives have already pledged to take family homes out of inheritance tax (IHT) by increasing the threshold for married couples and civil partners to £1 million.
It will work by giving individuals an additional, family home IHT-free threshold, of £175,000 on top of the standard nil rate band of £325,000.
‘With all the changes to the taxation of the death benefits from pensions, inheritable ISAs and the prospect of the end of deeds of variation and now the potential for a higher nil rate band, investors should be looking at their wills and estate plans to check they are still fit for purpose,’ said Danny Cox, chartered financial planner at Hargreaves Lansdown.
The Tories have also said they will not increase VAT, national insurance or income tax but will increase the threshold for paying 40% income tax to £50,000 over the course of the parliament.
Cox said regardless of the election, the principles of good tax planning remain and ‘the sooner investors take advantage of their tax free allowances, the greater the tax benefits they are likely to enjoy’.
When it comes to ISAs, which are the nation’s favourite way to save, investors can look forward to increased allowance of £15,240 and more flexibility in withdrawals and reinvestments, as well as the introduction of the Help to Buy ISA.