The impact of the General Election on Financial Planning
The Prime Minister Rishi Sunak surprised everybody on 22 May by announcing a general election on Thursday 4 July.
One consequence of the election announcement is that we are going to face a month of endless speculation about what a change in government will mean to pension allowances, tax free cash and tax regimes.
Whilst the party manifestos will outline some high-level proposals, the real detail will emerge in the first budget of the new government.
Based on previous elections, we would expect the incoming government’s Budget in early September.
Although Rachel Reeves, the Shadow Chancellor, has effectively signed up to the spending plans that Jeremy Hunt set out in the spring Budget, the International Monetary Fund’s recent report pointed to the Chancellor’s Budget plans has a £30 billion black hole that needs filling with tax rises and/or spending cuts, regardless of which party wins the election.
In addition, the Autumn will also bring several costly calls on government resources – compensation for the Post Office and blood contamination scandals – to which can be potentially added funds to bail out failing water companies and local councils.
The above may explain why the Prime minister decided to call the election now rather than wait to November as previously expected.
The Financial World Outside of the Election
Whilst the election will dominate the news feed for the next month it is important to ignore the noise and focus on the dominant themes currently driving investment markets: –
Interest rates. Still high, with expected cuts being pushed back.
Inflation. Significantly cooled off but reaching a stubborn point.
Conflict in the Middle East and Ukraine. Devastating from a humanitarian perspective and rightfully concerning.
Climate Change. Extreme weather events impact food systems fuelling inflation and increasing the competition for resources.
Demographic changes. Population ageing is posing formidable challenges for monetary policy and public finances.
Technology. AI has the potential to significantly increase productivity across the economy.
What Does All This Mean for Your Investments?
Our priority is to tailor your finances to match your current circumstances, risk tolerance and long-term goals.
Periods of volatility can rightfully cause some nerves among investors, but this is all part and parcel of the investing journey.
Our general position is to use any periods of volatility to your advantage, where sensible. Research shows that the average investor loses out financially by making short term decisions rather than focusing on the longer term.
An example of this this has been the movement of some investors out of the market last year to take advantage of higher cash deposit rates. Whilst on the surface, such a move looked sensible by investing in 1-year fixed term accounts offering 5% per annum.
However, such a move has resulted in the loss of the increase in equity markets since November with the FTSE 100 index up 10% in the past six months.
Whilst cash has rightful place in all financial plans as a source of short-term funds and a reserve for unexpected expenditure, long term growth in excess of inflation is achieved by investing a diversified portfolio.
By keeping a healthy mix of diversified assets in a multi-asset portfolio, coupled with a cash reserve for short- and medium-term expenditure, will enable you to ride out any uncertainty and should see meaningful growth over time.
By staying well-informed, upholding a diversified portfolio, and adhering to sound financial planning principles, we can steadily advance towards your objectives.
Next steps
At present we are not recommending any actions due to the election and a potential change in government. Your financial plan is designed for long-term wealth and should continue to serve its purpose.
That said, we are always open to discuss your finances, so please contact us if you have concerns.
Meanwhile, we remain vigilant of unfolding events and will promptly notify you if any matters demand your attention.
Regards
Jonathan Paul Alan & Liam
Directors
MBS Independent Financial Planning
