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Hung parliament: what does this mean for your finances?

Our Q&A explains how your pension and investments are being affected by the surprise election result

UPDATE – 13:00 9 June: The Conservatives have formed a majority government by entering into an informal partnership with the Democratic Unionist Party (DUP).

Read our analysis of how their manifestos compare, and where the two parties agree and disagree on financial matters. 

The surprise result of 8 June’s election, leaving the Conservatives as the largest party in the UK but short of an overall majority, has been felt across the financial markets. But what impact will it have on your finances now – and in the future?

Yesterday’s vote has resulted in a ‘hung parliament’, where no party holds an absolute majority.

Here, we explain how the stock and currency markets have been affected by the outcome of the election, what it means for your money in the short term – and what policies you might expect to see affecting your pensions, taxes and property.

What’s happened in the markets?

As at 6am, the value of sterling had fallen against the dollar by around 2%. If you’re about to go on holiday and you haven’t bought your holiday money, you’re bound to be a bit poorer at the poolside.

The FTSE 100 has opened slightly higher than yesterday, boosted by the weaker pound.

But one financial commentator predicted that the uncertainty of a hung parliament could ‘unleash mayhem’ across global financial markets. Nigel Green, from wealth manager DeVere, said: ‘We can expect the pound to fall considerably, gilt prices to rise and UK-orientated stocks to come under further pressure as the UK tries to get a handle on what is happening before it officially starts the Brexit negotiations.’

You’ll could see an impact on your investments. And that’s not just people holding stocks and shares Isas; your pension and retirement savings are invested in shares and could be affected, too.

Why could the markets be reacting this way?

What markets don’t like is uncertainty. This is because share prices are determined by what buyers are willing to pay for a slice of ownership in a company.

If future returns – that is, the growth in share price or dividend income – look less certain than they were before, investors are less likely to pay as much money for shares for what they see as riskier bets.

After the 2010 election, in which no party won a majority, the UK stock markets took a minor dive and the pound wobbled. But once the Conservative/Liberal Democrat coalition was announced, they both bounced back.

You can reasonably expect a similar pattern this time around. Your investment portfolio or pension might take a dip, and your holiday money might get a tad more expensive. But once a government is declared, markets will sense somewhat of a return to business as usual and move upwards.

Do markets favour political parties?

Markets do not favour one government over another. Historically, stock markets have not reacted any more positively to a Conservative government as they have to a Labour government.

The primary driver of share prices is the fundamental strengths or weaknesses of a company rather than shifting political winds.

Of course, politics can affect supply and demand – if one government decides to stop buying something or nationalise something else, that could affect the company’s business prospects and by removal its share price.

But in a time of such high uncertainty, guessing which policies are most likely to be implemented or scrapped is a very difficult if not impossible task.

Should I sell my investments?

Remember, investment is inseparable from risk. Although you may be feeling jittery as you watch the markets wobble to and fro, sit tight.

History shows that stock markets and foreign exchange markets both bounce back quickly as the level of uncertainty falls after a government is formed.

In general, your portfolio should be diverse enough to weather dips in one market or another – but if you’ve got all your eggs in the UK basket, now is probably not the time to sell. Remember, if you sell low all you’re doing is crystallising your losses.

You might be tempted to try to take advantage of what might be a very temporary dip, but beware: buying and selling comes with its own set of costs, and you might not make those costs back as a result of the trade.

What is a hung parliament?

A hung parliament emerges when no party has won enough parliamentary seats to have a majority (326 seats) and form a government.

The Conservative party has the most seats, but looks likely to fall eight short of a majority. It remains in office, and can try and form a government as a coalition or as part of an agreement with another party. Or the Conservatives could opt to rule as a minority and rely on others to vote through the laws the party wants to pass.

If the Conservatives can’t form a government and Labour can, it could become the ruling party.

This process and negotiations could go on until at least 13 June, when the new Parliament is due to meet, although there is no official time limit. The last coalition in 2010 took five days to negotiate.

If the Conservatives can form a government, what does it mean for my finances?

The Conservative manifesto promises include major reforms to funding social care and changes to the state pension age.

If the Conservatives do form a government, it remains to be seen how many of their manifesto commitments will be put into place.

But these are the party’s main policies on tax, pensions and care, and what they could mean for you.

How do the Conservatives plan to reform social care?

The cost of care is currently subject to a means-test. If you have more than £23,250 in savings and income, you will need to meet the cost of care in your own home. If you have more than £23,250 in savings, income and the value of your property, you have to fund care home costs yourself. If you have less, your local authority might meet some or all of the costs.

The Conservatives plan to change the system in two ways.

  1. The value of your home will be taken into consideration for means testing for care in your own home, as well as for a care home.
  2. But the amount of savings and property you can have before you need to pay for care will increase from the current level of £23,250 to £100,000.

If the value of your savings and property is more than £100,000, you will have to fund care yourself. You’ll only stop paying for care once the value of your assets has reduced to £100,000.

Unless you have hundreds of thousands of pounds in savings or income, the funding for care may have to come from the value of your home.

Why has this been controversial?

Mainly because most people who own a home will be affected by the changes. In March 2017, the average UK property value stood at £215,847.

Under the Conservative plans, people would be liable for more than £115,000 of care costs before the new £100,000 ‘floor’ kicked in.

People who want to pass on their property to their family when they die are concerned that an inheritance they planned to give away may be wiped out to pay for their care.

Will I have to sell my home to pay for care?

The Conservatives said that everyone will be granted with a ‘deferral of care bills’. This means their care bill won’t have to be paid until they – or their surviving partner – have died and their home has been sold.

Would the total cost of care be capped?

Yes – but we don’t know how much. The Conservative government under David Cameron had planned to introduce a cap of £72,000 in April 2016, but that was delayed until 2020.

Following the publication of the Conservative manifesto, Theresa May subsequently said that the government would consult on introducing a cap to the total cost of care. She has stated that it will not be the same level as the £72,000 cap, but it is not known whether it would be higher or lower.

What is happening to the state pension?

The Conservatives plan to put an end to the state pension ‘triple lock’, with the introduction of a ‘double lock’ from 2020.

Since 2010, the triple lock guarantee has ensured that the basic state pension has risen each year by the higher of inflation (as measured by the Consumer Price Index), the increase in earnings, or 2.5%.

The potentially less generous double lock would use just earnings and inflation, applying to both the basic state pension and the new state pension introduced in April 2016 – but only starting from 2020.

Will the state pension age go up?

The Conservative party was due to make a decision on the schedule for the increase in the state pension age at the start of May, but this was shelved once the election was called.

It said in its manifesto that it would increase the state pension age so that it ‘reflects increases in life expectancy, while protecting each generation fairly’, but added no specific details.

A report into the state pension by John Cridland proposed that state pension age should increase to 68 by 2039, rather than by 2046.

Will I lose my winter fuel payment?

Another manifesto commitment was the introduction of means-testing for the winter fuel payment.

This payment, introduced in 1997, gives between £100 and £300 tax-free to help pay your heating bills if you were born on or before 5 May 1953.

The means-testing method wasn’t announced by the Conservatives, but the party had indicated that it could save billions of pounds if it restricts the payments only to those who are classed as living in ‘fuel poverty’.

How much will I be able to save into my pension?

You can save £40,000 into a pension every year, on which you earn tax relief. But when you start to withdraw money from your pension – specifically defined contribution or ‘money purchase’ pensions – the amount you can contribute falls.

The money purchase annual allowance (MPAA), as it’s known, was set at £4,000 for the 2017-18 tax year, down from £10,000 for the previous year.

The government then amended the Finance Bill in the wake of the election announcement, removing the provisions intended to reduce the MPAA, but this could make its way back.

Will my income taxes go up?

The Conservative manifesto ditched its commitment towards a ‘tax triple-lock’, which froze National Insurance, income tax and VAT, but published little more detail.

The party kept its commitment to increase the personal allowance – the amount anyone can earn before they pay income tax – to £12,500 by 2020. The higher-rate threshold will also rise to £50,000, meaning anyone earning less will only pay the basic rate of 20%.

What about my National Insurance bill?

Self-employed workers are likely to pay more National Insurance. The Chancellor said in March he wanted to increase self-employed rates from 9% to 11%, which would still be slightly less than the 12% paid by employees.

The policy was announced in the budget, but was promptly dropped as it went against the previous Conservative manifesto. When ditching the plans, Philip Hammond said there would be no increases ‘in this [the previous] parliament’ – and then parliament was promptly dissolved.

If implemented, the new rate will apply to profits between £8,164 and £45,000. Self-employed workers will pay 2% national insurance on profits over £45,000.

I earn dividends from my investments. Are they affected?

Currently, investors can receive dividends up to £5,000 before they start paying income tax.

In the last budget before the election, Philip Hammond said this would be cut to £2,000 in April 2018. This cut could remain in place.

Are there any changes to inheritance tax?

No changes have been announced – but it’s likely that a bigger chunk of people’s estates would be taken if the new system for funding social care was introduced.

What else could change with my taxes?

Two new personal allowances were due to arrive in April 2017, meaning people who traded goods and services online, or rented out assets like their homes or drives could earn £1,000 from each before they’d have to start paying income tax.

They were postponed for the election, but could be reintroduced.

What could happen if Labour can form a government?

The Labour party manifesto proposes an upheaval of the income tax system and commitments on pensions.

How could income tax change?

Labour says it would increase income tax for the highest earning 5% of workers. This would come in the form of a 45p tax rate on earnings over £80,000 a year, and a 50p tax rate on earnings over £123,000. This means that anyone earning less than £80,000 would pay income tax at 20%.

Elsewhere, the 5.7 million people earning less than the living wage would see their salaries boosted to £10 per hour by 2020. Labour also promises not to increase National Insurance contributions or raise VAT, but would extend the Stamp Duty Reserve Tax (levied when buying shares) to cover other financial assets.

What are Labour’s plans for the state pension?

Labour says it will guarantee the pension triple-lock protection, while the pensions of UK citizens living overseas would also be protected.

Support would also be offered to the 2.5 million women born in the 1950s who have had their state pension age changed.

Labour has also stated that it will commission a new review of the pension age, to develop a flexible approach to pension age based on people’s contributions made by people, life expectancy across the country and what people have done for a living.

What about housing?

Labour proposes building over a million new homes, with at least half of these available for social rent. For those trying to get on to the ladder, funding would be guaranteed for the Help to Buy equity loan scheme until 2027 and the use of leasehold houses in new developments would be stopped.

For renters, Labour says it would enforce three-year tenancies as the norm and cap rent increases at inflation.

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