What financial uncertainties does the new government bring?

I don’t know about you, but the 2024 General Election and transition to the new Labour government has felt quite stressful at times – while the election result was always a near certainty, the constant cacophony of noise around Labour’s tax policy - whether published policy, possible policy or pure speculation - has been unsettling and is likely to continue for months to come. There’s a strong sense that your personal finances are about to come under attack and that you should be doing something to defend yourself against a range of potential tax missiles aimed at different areas of your finances. The trouble is, over a 6-week election campaign and the period up to the new government’s first budget, the targets seem to be constantly defined, adjusted and discarded - one moment you feel you’re in the crosshairs, the next you realise the real target is slightly different and doesn’t apply to you at all. It can be quite exhausting trying to keep on top of what might happen, when it might happen, how it might affect you and what options you have available to protect yourself.

Pension tax changes now seem less likely...

Take pension tax policy as one example: when the election was called in late May it was widely expected Labour would reintroduce the pension Lifetime Allowance in some form, so that tax charges would be applied to pension savings deemed to be excessive. This commitment was reaffirmed early in the campaign. Then, just a week later, it was dropped from Labour’s draft manifesto on grounds it would be destabilising for pension savers, but perhaps also to avoid inevitable questions about the impact on senior doctors and other high-earning public sector workers. A few days later, the published manifesto simply included a general commitment to a “review of the pensions landscape”. The latest post-election update comes in the recent King's Speech - the summary of the planned legislation for this Parliament - this doesn't mention a review but does include a Pension Schemes Bill which appears to focus on improving pension industry processes rather than on personal tax.

So, for those with a significant pension pot and who follow policy announcements closely, you would have spent 2 weeks working out your response to what seemed like an imminent threat, then downed tools for 3 days, then moved to a watching brief - the threat of a review now seems to have receded and there's nothing else looming on the horizon. Perhaps in that initial flurry of activity you’ve identified some helpful no-regrets moves, like re-organising your pensions so you can take tax-free cash more quickly in the future, or bringing forward any planned pension contributions for this tax year just in case there’s a nasty surprise in the next few weeks. Or maybe your conclusion continues to be that there is nothing worth doing now, just sit tight and wait.

...but there are several other tax changes to consider

But pensions are just one of a range of potential tax impacts – what about all the other potential tax-related damage to your finances? Are you paying for private education, or planning to do so in the future? If so, how might the imposition of VAT on private school fees affect your finances in the coming years? What about tax policy where the Labour manifesto is silent – particularly capital-related taxes such as capital gains tax, inheritance tax and council tax - how are you feeling about those? Are these genuine threats that require some action from you now, or are these just examples of general background risks that you can just accept for now and trust that you’ll find an answer if and when the risk becomes a real-life issue for you in the future?

How can a financial plan help?

A key thing to remember is that most of the election-related noise about tax policy is speculation, amplified by the media to attract attention. It’s difficult to find a way to focus on reacting to specific events that have happened, or that are very likely to happen, and to resolutely ignore everything else. It’s the same with all the unknowns that may hit your finances from time to time. Political and economic uncertainty is like an unexpected storm on a summer’s day — it can hit you out of nowhere, leaving you scrambling for cover. Whether it’s a global financial crisis, a pandemic or a cost-of-living crisis, these storms can upend your financial stability. Having a solid financial plan in place can be the umbrella you need to weather these unpredictable times. Let’s dive into why having a financial plan is so helpful, especially when the economic seas get rough or when the political environment is at its most turbulent.

A plan provides a financial baseline

A financial plan gives you a trusted reference point – if you’ve built your own plan, whether for yourself or as a couple, you’ll know three things about your finances:

• your current financial resources - your net worth (assets less debts), your income (earnings, other income, investment returns) and expenses (current lifestyle expenses, debt interest and tax)
• your lifetime objectives and how much money is required to achieve them – this covers your target future lifestyle plus any plans for one-off discretionary expenses or gifts.
• the key financial decisions that you’ll have to take during your lifetime financial journey. For example, you’ll know when you’re likely to buy, move or downsize your home and you’ll know how and when you’re going to use your pensions.

Collectively these three things give you a financial baseline that enables you to measure the impact of any change that hits your plan and to measure the impact of your response to that change. So, in the current example of uncertainty about the financial impacts of the new Labour government, you can apply those specific impacts to your plan, understand where your finances change (both in the short term and the projected impacts into the future) and then see if you can reduce the impact by taking some corrective action.

Case study 1: VAT on private school fees

Let’s take the VAT-on-private school fees issue as a quick case study – a significant potential impact for the families of more than half-a-million school children in the UK. With a financial plan the impact assessment is quick and easy - you can simply open your plan, increase the expense item for private school fees and rerun a projection of your plan to see the impact on your future finances. Depending on the impact, you could then investigate many different responses:

• modify your children’s education plans (maybe secondary or 6th form only),
• boost current income (start a side-hustle, postpone a career downshift),
• reduce current expenditure (give up holidays or home improvements),
• reduce future expenditure (accept a lower standard of retirement lifestyle), or
• just accept the “do nothing” option.

You can pick any or all of these options and work through them quickly to understand what works best for you from a holistic, lifetime perspective. Without an existing financial plan, this is difficult – you would be guessing at the best responses and unable to assess the long-term impact on your finances. With a plan, you are more likely to make a better, well-informed decision than you are without one. There is also likely to be an embedded boost to your financial wellbeing – you’ll feel more comfortable about your decision and restore confidence in your financial situation more quickly. In summary, you’ll have taken a hit but repaired the damage in the best way possible and put yourself back in control, ready to re-focus on living your life as best as you can.

A plan contains financial shock absorbers

There’s a second aspect to a financial plan that’s equally important in dealing with uncertainty – if you’ve successfully built your own plan, you’ll have considered your approach to two types of risk:

• bumps in the road - how much money to put aside to absorb the impact of unexpected events during your lifetime financial journey. These are specific, well-defined risks – sometimes called the known unknowns - where the financial impact can be reasonably estimated. One common approach to managing these is to set up an emergency cash savings pot to cover unexpected large expenses (home repairs, car replacements) or temporary interruptions to your income (redundancy, injury). Where there is a larger impact, paying for insurance cover is another approach – for example, buildings insurance to cover the cost of rebuilding your home after a fire.
• changes in the journey - how much money you have to deal with an unexpected event that forces you to take a different road from the one you currently expect to travel. These are more general risks that are difficult to define and quantify - sometimes called the unknown unknowns. Examples of these could be personal misfortunes (separation, chronic illness) or external risks (the economic effects of wars, pandemics, changes in government). To manage these risks, you can turn to the general pot of money that you have at the end of your plan - the legacy value that you expect to leave behind for your beneficiaries if everything turns out as expected. But you can also think of this money as representing a contingency fund that can be used as a financial buffer to help protect your finances and buy you time to recover and replan your journey when you’re hit by some life-changing event.

Incorporating these shock absorbers into your financial plan means that you have already prepared yourself for dealing with uncertainty – you’re therefore a step ahead of people who don’t have a financial plan, particularly with respect to the unknown unknowns. A resulting benefit is that this can give you more confidence to shut out the speculative noise associated with this type of risk and just carry on living. If some unknown risk turns into a genuine financial issue at some point in the future, and forces you to materially alter your plan, you’ve got the comfort of knowing you have some spare financial resources to help you through that change.

Case study 2: Silence on capital taxes

Let’s take the silence on capital-related taxes in the Labour manifesto as our case study. Will the Labour government materially change the rules for capital gains tax, inheritance tax or council tax? Should you be worried about this or not? A financial plan can help you recognise this risk for what it is – however much media noise surrounds this, it’s just another unknown unknown that you have already planned for. For now, you can just keep calm and carry on.

Financial plans can reduce financial worries and improve confidence

Political and economic uncertainty is a part of life, but it doesn’t have to throw you off course. A well-structured financial plan provides both a baseline and a shock absorber, helping you navigate the ups and downs of the financial landscape. It provides a clear reference point for assessing the impact of, and your response to, specific financial threats such as tax increases. A good financial plan also contains some surplus money which can be used to help you through times when completely unexpected events knock you off your anticipated path. Knowing you have these shock absorbers in place can give you the courage to remain calmer at times when the winds of uncertainty blow a little harder than normal.

If you’re the type of person who worries about your finances a little too often, you may find that a financial plan is a key step towards becoming more confident about your money and providing peace of mind. Why not give it a try? It’s never too late to start planning for a secure and prosperous future.

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