With all the worries that surrounded the election seemingly behind us, investors have enjoyed a steady upward trend. Indeed, the FTSE 100 seems quite comfortable around the 7000-point mark, despite the possibility of Greece defaulting on its debt, unrest in the Middle East and the price of oil trading at prices not seen since the last recession.
But it always pays to be cautious and keep a lookout for unexpected news that could impact one’s portfolio in the future. Whilst I was conscious of the potential for the Queen’s speech to throw a bit of a curveball, I didn’t expect that it would be in the form of the proposed childcare bill.
Speaking yesterday, the Queen outlined the new government’s programme for this Parliament: she announced that “measures will be brought forward to help working people by greatly increasing the provision of childcare”.
This follows the government’s manifesto setting out plans to double the amount of free childcare given to three- and four-year olds in England to 30 hours a week, helping around 600,000 children a year from 2017.
What It Means For Savers…
Currently, for savers and investors who pay into a self-invested personal pension (SIPP) or a defined contribution scheme, the annual allowance is the maximum you or someone else (e.g. your employer) can contribute to all your pensions in one year, without incurring a tax charge. In 2015/16 the annual allowance is £40,000, and could rise to £180,000 under certain circumstances. This includes benefits being built up in a final salary pension – if you are lucky enough to have one. Higher earners can currently claim additional tax relief in line with their tax rate, too – not a bad incentive to save.
In order to pay for the plans under the childcare bill, tax relief provided by the government to those who make pension contributions will be scaled back to pay for increased free childcare.
The pledge is expected to cost around £350 million a year, though it is not yet clear where the axe will fall to pay for this policy. It is fair to assume that investors can predict when it will be announced, with a second Budget set for 8 July. Indeed, we already know from the 2015 Conservative manifesto that they plan to reduce the £40,000 annual allowance by £1 for every £2 an investor earns over £150,000. Therefore, anyone earning over £210,000 will have a £10,000 annual allowance.
What About Wealth Managers?
It is clear that further tinkering to the pensions regime is unwelcome, especially if it disincentives pensions savings. Pensions must remain attractive for all sections of society if we are to see the full benefit of the reforms. This could mean a period of uncertainty for Hargreaves Lansdown (LSE: HL) and, with the shares currently exchanging hands on a forward P/E of over 32 times forecast earnings, we could well see a further period of uncertainty, as depicted by the chart below.
That said, this is a quality company boasting net cash, 93% client retention rates and 94% client satisfaction – it has weathered many reforms in the past, including the retail distribution review. I see no reason to believe that I should change my stance now.
What Does The Future Hold?
Whilst I will be interested to see the results of a second Budget this year, I would be astounded if they really went to town on pension relief. Savers in this country need to be encouraged to save more than they currently do. Personally, I would like to see a lower annual allowance and 30% tax relief on pension contributions – this, I believe, would encourage more people on lower incomes to save more.
Savers could then start to take control of their finances and learn to start investing in good, quality shares like Hargreaves Lansdown, paying a well-covered and growing dividend to investors.
