Does the General Election matter for your finances?

We’re just a week away from going to the polls here in the UK to choose our next government. As I write, it seems that Labour are heading for a win, the only question is by how wide a margin. But most of us have been invested for decades, and in that time have seen governments of different colours come and go. So, are things different this time? Will the outcome of this election have a significant impact on our finances?

Short answer: no-one knows. Everyone has an opinion, but no-one knows for sure. Manifesto promises are made and broken, legislation is proposed and then changes beyond recognition as it goes through parliament.

It’s easy to get buried in the imminent threats or promises of the parties’ proposals, but with investments, it usually pays to take a much longer-term view.

At the highest possible level, this chart from our friends at Timeline shows the performance of UK equities, with dividends reinvested, since 1925, with the colours representing the governments throughout.

Without fail, every time the government has changed in the last 100 years, investors in UK equities would have been better off than they were at the previous change. Through it all, UK equities have returned an average of 12% a year.

By the way, you can download a PDF of the chart here. 

A recent article from AJ Bell looks at the performance of the FTSE All-Share Index since it was created 42 years ago.

The average one-year return in the index after a change of government is 12.8%, compared with just 0.9% where the incumbent government wins again. 

In a similar vein, when the government changes, the return of the index over the term of that government averaged 47.9% compared with ‘just’ 31.1% where the incumbent prevails.

So if Labour do get in, based on history we might expect markets to do well in the coming months.

Of course, as every single piece of investing information states, past performance is no guide to future performance, so no-one knows for sure what the future holds.

One thing that we were expecting is that Labour had promised to reintroduce the pension Lifetime Allowance, but it seems that is no longer the case. As a financial planner, I’m very glad about this because there’s nothing more difficult to plan for than uncertainty.

But I think it is likely that pensions will be taxed in other ways. I did a video on the subject here:

I reckon that the Annual Allowance is up for change, and I’ve been saying for years that the incredible death benefits of pensions are ripe for the picking. There is a small chance that pension tax relief will be shifted to a flat rate, but legislation on that will be tricky, so I don’t think that is likely in the short term.

Many clients are concerned about VAT being levied on private school fees. I hear of schools making big noises about pay-in-advance schemes with nominal discounts for people paying two years of fees in advance.

It has been mooted that anti-forestalling legislation will be passed quickly and may even be applied retrospectively to fees paid in advance, so there is risk in paying early before the election happens.

One of the mantras of financial planning is that we can only plan a path through the system that we know.

If I had a pound for every time it has been rumoured that tax-free cash on pensions will be withdrawn, I’d have about £20 by now. Maybe £25. When it was given the new name of Pension Commencement Lump Sum, I think back in 2015, many thought that signalled the end of it being tax-free. But here we are, nine years on and you can still take a big chunk of your pension without paying income tax.

I see no merit in making big lifetime decisions based on rumours and conjecture. We build so much ‘fat’ into our clients’ financial plans anyway that changes in tax legislation generally won’t make or break a plan. So our view is to wait things out and see what is actually being legislated, rather than making plans based on guesswork.

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A week and a bit from now, the election will be done and dusted. Probably Number 10 will have a new resident and the House of Commons will look very different.

Whatever your politics, we’ll have to live under whatever the new government sets out. But I think that the perspective of a long-term view of investments and financial planning will help us avoid the near-term conjecture and hand-wringing about what might happen. Which reminds me of a quote attributed to Mark Twain:

“I’ve had a lot of worries in my life, most of which never happened”

Call it naivete if you like, but I believe that generally things settle down into the same old, same old routine. And we’ll be here, helping our clients navigate through the personal finance system, just as we have done for the last 50 years…

by Pete Matthew