Dealing with political uncertainty in your financial plan
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Politics can have a big impact on your financial plan. Perhaps the government changes a key tax rule which affects your income and investment returns. Or, maybe a policy announcement leads to a sharp drop in the market. Whilst we cannot control the decisions of those in power, individuals can put measures in place which reduce many political risks to their financial plan. Below, our Grantham financial planners at Castlegate explain how this can be achieved. We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Diversifying investments
In late September 2022, the new UK government led by Prime Minister Liz Truss announce its new “Mini Budget” (delivered by Chancellor Kwasi Kwarteng). Tax cuts were a key feature, such as plans to scrap the 45% additional rate of income tax. However, panic quickly spread to investors who worried about how the cuts would be funded. The British pound fell sharply in value and the cost of government borrowing soared as investors demanded higher returns for holding UK government bonds. Some pension funds almost collapsed due to their heavy investment in these bonds and the pressure to sell them. The Bank of England, in quick response, announced it would halt the start of its gilt selling programme and, instead, buy billions of pounds worth to try and stabilise the markets. Calm quickly returned.
This case study helps to show why it is wise to diversify both within and across asset classes. For instance, suppose an investor holds most of his portfolio in UK government bonds. In this case, he would have incurred more short-term losses in September 2022 compared to, say, an investor with a portfolio comprising equities and bonds in a range of global markets. By building a globally-diversified set of investments, you can reduce the potential impact of political events from any single country.
Diversifying a tax plan
Nobody knows if, or how, the government of today or tomorrow will change different tax rules. Margaret Thatcher (a Conservative), for instance, set the rates of capital gains tax (CGT) the same as income tax in the 1980s. It was only in October 2007 that then (Labour) Chancellor Alistair Darling announced a big reform to CGT, lowering the rates below income tax. In the 1980s, the tax-free capital gains tax allowance was raised from £3,000 to £5,000. Today, in 2022-23, it stands at £12,300 – although it will go down to £6,000 per year in April 2023 and later, in 2024, down to £3,000.
Governing politicians do not, it seems, always follow tax policies which you may expect to flow from their party ideologies. Therefore, it can help to build a tax plan which takes advantage of many tax-efficient strategies in the system. If a single tax rule is changed, therefore, it helps to protect your wealth from disproportionate erosion. For example, in 2022-23 a long-term investor with a strong risk tolerance could consider using the ISA, a pension and tax-efficient investment “vehicles” such as EIS (the Enterprise Investment Scheme) and VCTs (venture capital trusts). A company director could take both a salary and a regular dividend and adjust the ratio, if needed, should tax rates change for either source of income. Those looking to eventually pass wealth to loved ones as an inheritance may consider building wealth in both their pension and in a home. In 2022-23, the former can be inherited by beneficiaries without inheritance tax (IHT). Moreover, an individual can pass down up to £500,000 to “direct descendants” without IHT if they pass on the family home (using the Residence Nil Rate Band).
The importance of staying updated
For those with at least a passing interest in politics, it helps to stay updated about current events to find out how they might affect the economy and markets. For instance, in November 2022 the new Chancellor, Jeremy Hunt, announced a series of tax changes that would come into effect in April 2023. In particular, the tax-free allowances for capital gains and dividends would go down. Also, the threshold for the 45% additional rate will go down to £125,140. Staying informed about events like these could re-structure their finances to help mitigate needless tax erosion.
In the background, moreover, interest rates have been rising since 2022 as central banks fight higher inflation. In the UK, this has led to higher rates on savings accounts and mortgages. The impact on household finances has not always been noticed, however. For instance, higher rates on savings accounts are certainly welcome. Yet there is a danger that some savers could breach their tax-free Personal Savings Allowance inadvertently. Working with a financial adviser can not only help you keep abreast of these events (e.g. by joining their monthly newsletter), but it also helps you to plan effectively whilst keeping a long-term perspective.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
