By FT Money Writers
Last week’s election result was not what financial markets — or politicians — expected. When it comes to our personal finances, where do we go from here?
The combination of a weak government and a loudly ticking clock on the UK’s Brexit negotiations will undoubtedly rattle investors. Plus questions are being raised over the future direction of tax and pensions policy, which are unlikely to end well for the wealthy.
But rather than wasting time fretting, FT Money writers show you how to “take back control” with some prudent financial planning as you prepare to navigate potentially volatile times ahead.
1 Diversify your investment portfolio
In the wake of yet another surprising political result, investors should spread their risk by diversifying their portfolios across a greater range of assets, writes Aime Williams.
British investors tend to focus too much on British companies, investment experts say — and now might be a good time to kick the habit.
“UK investors have long had a focus on UK assets,” says Tom Becket, chief investment officer at Psigma Investment Management. “It’s unnecessary,” he says, as it is easy to add overseas exposure, adding that the shock election result had been “mostly helpful” in switching the focus to other parts of the world.
David Jane, multi-asset fund manager at Miton, agrees. “You’re sitting here in a relatively unclear and uncertain environment when you could look elsewhere and see there’s stability.”
Mr Jane says he was interested in emerging markets, along with global oil and gas companies. “We’re not especially bearish on the UK,” he adds, “but there are better things to be bullish about.”
Patrick Thomas, investment manager at Canaccord Genuity Wealth Management, suggests global equity funds, including investment trusts, were a good way for investors to diversify. “The global space is comfortably the most interesting,” he says.
UK-listed investment trusts, such as Scottish Mortgage, which focuses on technology, and Murray International, which holds a large portion of emerging markets stocks, are among Mr Thomas’s portfolio picks.
Richard Buxton, chief executive and head of UK equities at Old Mutual Global Investors, also recommends a more global exposure. “You must have global funds as well, [especially] for sectors like technology — you must have global exposure,” says Mr Buxton. “My only plea would be that.”
Mr Thomas at Canaccord says that, along with a wide geographical exposure, investors should make sure they had a range of investment styles in their portfolio. He says he sought funds that did not simply focus on growth, or value, but were happy to blend their approaches.
“We’ve been trying to have managers who are much more flexible about the kind of companies they’re buying,” he adds.
2 Max out your pension
Pension savers hoping for a break from constant changes to tax relief are unlikely to win a reprieve from the new government, writes Josephine Cumbo.
Since 2006 there have been more than a dozen changes to lifetime and annual allowances, which govern how much can be saved into a pension and benefit from tax relief. These allowances currently stand at £1m and £40,000 respectively.
“With so much political uncertainty, it is very unlikely we will see any radical changes to pension rules or tax reliefs,” says Patrick Connolly of Chase de Vere, financial advisers. “But tweaking of the system is always on the cards. While we don’t have this on the political agenda now, it always makes sense to maximise your pension savings allowances if you can.”
Advisers report much uncertainty over the money purchase annual allowance (MPAA), a savings allowance for over-55s taking more than a tax-free lump sum from a “defined contribution” pension.
Before the election, the government announced plans to lower the MPAA from £10,000 to £4,000 — a move which could potentially catch out over-55s dipping into their pensions but still working and benefiting from an employer pension contribution.
But the measure was among several removed from the slimmed-down finance billpushed through parliament before the election. “There is now the question of whether the reductions in the MPAA will make it into law this year,” says Rachel Vahey, product technical manager at Nucleus Financial, a platform provider.
“This places advisers and their clients in limbo, trying to work out how much the MPAA is for 2017/18 tax year — £10,000 or £4,000. But the longer this hiatus lasts, the less likely it seems that the government can backdate this piece of legislation to the start of the tax year when, or if, it is eventually passed.”
Without a clear majority, pensions experts said it was very unlikely Theresa May would try to push through with plans to scrap the triple lock on the state pension in 2020 or to means test winter fuel payments. The triple lock pledge sees the state pension rise by the higher of 2.5 per cent, prices or inflation.
“The plan to replace the state pension triple lock with a double lock from 2020 is not supported by the DUP or by other parties so is unlikely to feature,” says Stephen Cameron, pensions director with Aegon, the pension provider.
3 Plan for future tax rises
Wealthy investors should be braced for higher taxes, writes Vanessa Houlder. Tax analysts think capital gains tax, income tax and tax planning using trusts might end up in the cross-hairs if the new government responds to the surge in support for Labour by shifting more of the tax burden to the rich.
Chris Groves of Withers, a law firm, says the 2016 cuts to capital gains tax might be vulnerable as they were widely viewed as an “unnecessary giveaway”. But he warns against rushing a decision to sell, saying tax should rarely determine investment decisions.
Mr Groves believes that increasing the top rate of tax to 50p is unlikely because the Treasury believes it would raise little money. Even so, talk of higher taxes for top earners is likely to make some consider moving out of Britain, especially as some other countries are rolling out welcome mats in response to Brexit.
Tax avoidance — a traditional response to higher taxes — is no longer an option, he says. The Conservatives have signalled their determination to continue an avoidance crackdown, with a pledge to “legislate for tougher regulation of tax advisory firms”.
Philip Hammond, chancellor, has already made it clear that tax savings from being self-employed or working through a company structure are under threat. But the government’s fragile majority might make him cautious of trying, once again, to make controversial changes. Already, campaigners representing the self-employed are lobbying against higher national insurance bills, which they dub the “strivers’ tax”.
In the meantime, companies will continue to be a popular vehicle for tax planning. Entrepreneurs are likely to pre-empt any rise in tax rates by accelerating dividend payments. Family-owned companies can also arrange payments of dividends and salaries to shift income to a spouse who is taxed at a lower rate. Tax advisers say that even without a family company, couples might benefit from sharing their assets to maximise their tax-free allowances for savings income, dividend income and capital gains as well as the basic income tax allowance.
Overhauling inheritance tax is likely to be too controversial and complex a task for this government, but Tim Stovold, head of tax at Kingston Smith, an accountancy firm, says the £325,000 exemption for trusts might be an early casualty. Given the Conservative manifesto pledge to tackle the “misuse” of trusts, he says anyone thinking of putting assets into trusts should consider accelerating their plans.
4 Consider what will happen to interest rates
If borrowers believe that mortgage interest rates are about to rise, mortgage lending tends to take off as people seek to lock in low rates, writes James Pickford.
The Bank of England left interest rates unchanged this week, in spite of rising inflation — though the rate-setting committee came close to making a move. Ray Boulger of broker John Charcol says that political upheaval will counteract future inflationary pressure; and if the BoE did decide to move rates, this was unlikely to exceed a quarter or half-point.
“What happened in the general election just increases the likelihood of the Bank not doing much. The extra uncertainty just creates another reason for it not to put rates up,” he says.
Andrew Montlake, director at broker Coreco, says uncertainty breeds caution among potential buyers as well as central bankers. “There’s a lot more waiting and seeing, which means transactions levels will stay low.”
But low levels of market activity are typically good news for mortgage borrowers, he adds: “The banks and building societies need to lend. This means they will continue to do more to try and attract customers to them. You might see lenders even tweaking things down a little further to entice people in,” Mr Montlake says.
Tesco Bank, for instance, this month announced a five-year fixed rate mortgage at 1.68 per cent for borrowers with a 40 per cent deposit, carrying a fee of £995.
Mr Boulger says the market outlook gave reassurance to those worried that they might face making early repayment charges on a mortgage to lock in a better deal now. “It will make very little difference from a rates perspective whether you remortgage now or in three months’ time,” he says.
Nonetheless, those considering a longer term fixed rate period, say of 10 years, should beware some common pitfalls. Many lenders levy early repayment charges for the whole of the 10-year term, yet few borrowers will be able to predict their circumstances in five years’ time, let alone 10 — and statistics show that a proportion of borrowers default on payments or may split from a partner within that period. “Too many people don’t take adequate notice of early repayment charges,” Mr Boulger says.
5 Think about holding some gold
Demand for gold as a “safe haven” investment rose following the uncertain outcome of the UK election, writes Lucy Warwick-Ching.
Investors are worried by the election result because they believe a hung parliament will make it more difficult for the UK to negotiate effective trade deals with the rest of the world. For some, gold provides a physical store of value as opposed to a company, which could see its earnings fall or even go bankrupt.
Josh Saul, chief executive of The Pure Gold Company, says: “People are motivated to purchase gold not merely to grow their portfolio but to protect and preserve their wealth against further unforeseen and unprecedented market forces.”
He says that the election results added another layer of concern to an increasingly long list of worries that his clients cite when buying physical gold. “The downgrading of China’s credit rating and the ongoing fragility of some of Europe’s banks have prompted a 41 per cent increase in financial professionals purchasing physical gold in June, including investment bankers, accountants, lawyers and those in the hedge fund space.”
Not everyone is bullish on gold. Kathleen Brooks, research director at City Index Direct, says the gold price has been remarkably calm since the UK election result.
“The gold market seems cautious and investors aren’t yet willing to give up hope of another spike in the stock market rally, which is one reason why the gold price hasn’t popped higher,” says Ms Brooks. “When or if investors become concerned that stocks will fall sharply is when we expect gold to rise.”
She points to the fact that the UK’s credit default swap rate has not dramatically changed since the hung parliament, which she takes as “a clear sign that the market is not particularly concerned about a political crisis in the UK, which is why demand for gold since last week has been limited”.
Financial experts warn that since it provides neither a dividend nor an income, there is an opportunity cost in holding gold. However, many investors believe that is worth paying in times of uncertainty.
6 Assess what the weak pound means for UK equities
Stock markets were divided in the immediate aftermath of the recent UK election, writes Aime Williams. The fall in sterling caused shares in companies with overseas earnings to rise, while domestically focused stocks lost value.
Among the winners were high international earners and sectors like mining, while UK-focused housebuilders and banks were among the largest fallers.
But Richard Buxton, head of UK equities at Old Mutual Global Investors, cautioned against making sector bets based on political moves.
As long as there is “a government of some sort”, he says, then financial markets will quickly move back to watching the minutiae of bond yields and market data.
This is not to say that all is well in the financial world, however. Mr Buxton says the behaviour of bond markets is contradicting that of equity markets, potentially sending confusing signals to investors.
While bond yields rose with the election of Donald Trump — meaning the price of bonds fell as investors moved into riskier investments — they have since fallen back, says Mr Buxton, “signalling that things will slow down”. Equities, however, are “at all-time highs, signalling that life is fine”.
Mr Buxton expects sterling to stay low — and that while it benefits companies with international earnings, valuations are looking good on some domestic some stocks too. “There’s a lot of bad news priced in,” he says.
Richard Campion, deputy chief investment officer at wealth manager Canaccord Genuity, disagrees. “UK small-cap is going to be a difficult place for the next few quarters,” he says.
General UK equity managers will mostly be overweight in FTSE 250 stocks. “They’ve had a good six months but they could struggle,” says Mr Campion.
He also adds that a more “populist” style of politics could increase the likelihood of further rises to the minimum wage, which will put pressure on profits in sectors such as hospitality and hotels.
Mr Campion says Cannacord recently sold its holdings in Greene King, the UK pub chain, as a result, adding: “We don’t want too much exposure.”
Source: The Financial Times