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What a Labour landslide means for mortgages, savings and pensions
Telegraph Money explains how Keir Starmer’s victory could affect your money
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Having secured a significant majority in last week’s election, holding 411 seats in the House of Commons, Sir Keir Starmer and Chancellor Rachel Reeves now hold the keys to your finances.
Immediate changes straight off the bat are unlikely as Labour has ruled out an early Budget. Yet reforms could be on the horizon.
Voters were told throughout the campaign trail that there would be no tax rises for working people.
But with Labour’s cabinet confused as to what defines a “working person”, the path may well be cleared for a raid on savings and pensions.
As for mortgages, rates are due to slowly retreat with or without Labour’s help.
Capital Economics, a consultancy, believes that Labour is to “benefit from a combination of lower inflation, lower interest rates and faster economic growth than most are expecting”.
It forecasts inflation to drop to around 1.5pc by the end of this year, “prompting the Bank of England to cut interest rates from 5.25pc to 3pc next year, rather than to 4pc as investors expect”.
Here Telegraph Money outlines what could be in store for mortgages, savings and pensions with a new government in power.
Mortgages
Following three years of mortgage misery, Labour looks on course to inherit an easy win with mortgage-holders as interest rates begin to fall later this year – potentially as early as next month.
Things however aren’t set to be rosy red.
A return to the ultra-low mortgage rates seen in 2021 is unachievable, with the chief executive of Lloyds Banking Group last week predicting that 3.5pc to 4.5pc will become the “new normal” for mortgage rates.
In the scenario of a 4.5pc average, a mortgage-holder with 25 years left on a £300,000 loan would be £257 better off each month compared with the current average of 5.95pc.
But such a scenario may never come to fruition due to Labour’s proposals to introduce a “genuine living wage”.
HSBC has warned that raising the minimum wage beyond adjusting it with inflation would hurt businesses and in turn keep the Bank Rate “higher for longer”.
However, the general expectation is that mortgage rates are on course to dip regardless of what happened at the polls on Thursday.
Sarah Coles, of stockbroker Hargreaves Lansdown, said: “The swaps market, where fixed mortgage rates are set, is unlikely to be spooked by the Labour win.”
Savings
A predicted reduction in the Bank Rate will herald a cut in savings rates offered by banks and building societies.
Locking in a favourable rate now – before cuts or potential Labour changes – is therefore deemed a shrewd move by wealth advisers.
The leading one-year fixed account from Mizrahi Tefahot Bank, available only via Raisin UK, pays 5.25pc interest.
Savers putting down a £20,000 deposit are rewarded with £1,050 on maturity.
For those with spare cash thinking of squirrelling money away for longer, a £20,000 deposit in the leading five-year fix of 4.6pc will herald returns of more than £5,000 on maturity.
Easy-access savings accounts currently offer average rates of 3.11pc, according to Moneyfacts. The leading account is Ulster Bank’s with an average rate of 5.2pc.
Labour is sticking with the frozen tax thresholds until 2028, so more people will be dragged into a higher bracket and pay more tax on their savings.
As wage growth rises, it means more workers will surpass the £50,270 higher-rate threshold therefore and pay 40pc tax on savings interest. Their personal savings allowance, which Labour hasn’t committed to keeping, also drops from £1,000 to £500.
There is no allowance for additional-rate taxpayers.
The Institute for Fiscal Studies (IFS) has warned the frozen thresholds will bring 4.5 million more people into higher tax thresholds by 2028.
Were the personal savings allowance to be scrapped, a basic-rate taxpayer earning £1,000 a year in interest would lose £200 a year.
Savers piled a record amount into Individual Savings Accounts (Isas) ahead of this week’s Labour victory.
But the tax-free havens, where up to £20,000 can be deposited each year, could be an obvious target for Labour reform.
Pensions
The forecast fall in interest rates will spark annuity incomes, which have been riding high, to drop later this year.
At current rates, a 65-year-old with £100,000 can buy an annuity paying £7,222 a year, around £2,000 more than three years ago, according to Hargreaves Lansdown.
That wave however is poised to fall as annuity rates are closely linked to the yields on UK government bonds, known as gilts, which are in turn affected by the Bank Rate.
Sir Keir has said pensioners have “nothing to fear”, yet Britain’s older generation remain concerned over a raid on their retirement pots.
The party quickly U-turned on its plan to reinstate the lifetime allowance (LTA), which capped the amount people were able to save into their pensions tax free at £1,073,100.
If Labour were to U-turn again, a reintroduction of the LTA could affect around 250,000 people.
As it stands, this isn’t on the horizon but the prospect of reform in another guise is hard to shake-off. And Ms Reeves said in 2016 that she supported calls for a flat rate of relief on pensions contributions.
Helen Morrissey, of Hargreaves Lansdown, said: “There have been rumblings that changes to how pensions are taxed could be in the offing and the potential for tax-free cash to be cut back.
“However the party has been quick to stamp on these rumours.
“That’s not to say these things couldn’t be tweaked in future – but for now the outlook looks calm.”
Labour could also slash the annual allowance – the amount someone can save into their pension each year before having to pay tax. This stands at £60,000.
The 25pc tax-free lump sum, which lets people withdraw from their pot tax-free after the age of 55, could also be in danger of a cut as Labour has failed to calm fears of a raid.
When probed recently, Liz Kendall repeatedly refused to rule out making changes to the tax-free allowance.