Batten down the hatches: a Corbyn government could be on the way
Theresa May’s government is so inept that our next PM is quite likely to be Jeremy Corbyn. Not to prepare for that would be very foolish, says Merryn Somerset Webb.
Corbyn has been war-gaming for a run on the pound.
(Image credit: 2017 Getty Images)
It is, I'm afraid, time to prepare your personal finances for a Corbyn government. The collapse of May's well-meaning but inept government and replacement by a neo-socialist Labour government is now a high enough risk that not to prepare for it would be pretty foolish. Remember how neither David Cameron nor Jean-Claude Juncker bothered to prepare for Brexit? Quite.
So what should you be doing?
The first thing to note is that whatever you do you will want to do it quite quickly: John McDonnell has said that Labour wants to "hit the ground running" with tax rises and sweeping changes to employment legislation introduced immediately, and nationalisation proposals "all on the shelf".
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So think first about your income and your savings. It is more or less certain that ncome tax will rise for "the rich" at least. There may be new bands at £70,000 or £80,000, and rates on current additional-rate payers are bound to rise. So review your spending. Cut where you can and prepare to live on less and if you are very highly paid, substantially less. There has already been talk of a national maximum wage and it seems unlikely that many multi-million-pound pay packets will last long in a new era of social justice.
Next, think about getting rid of your buy-to-let investments. The current government hasn't exactly been kind to landlords (buyers now have to pay a 3 percentage point surcharge on purchases and their ability to write off mortgage interest against rents has been slashed). But socialism has a long history of loathing landlords, and Corbyn has already proposed rent controls something that I suspect will be the last straw for the finances of many small landlords. It also wouldn't be much of a surprise to see a new annual wealth tax of some kind imposed on holiday and rental properties. Now is as good a time as any to sell up.
You might also fix the mortgage on your primary residence if you haven't already done so. Back in October it came out that Labour had been war-gaming for a proper run on the pound. That's far from a certainty today's markets are remarkably forgiving and a new Labour government could start more carefully than Momentum might hope. But if it happens it could mean rising imported inflation at exactly the same time as huge (and unfunded) public spending promises will be freaking out international bond investors about the UK's creditworthiness. Interest rates will rise particularly if a Corbyn government removes the Bank of England's independence and suggests it prints yet another new pile of money. Mortgage rates will rise with them.
Next look to your savings both in terms of the structures you keep them in and the asset classes you hold. I'm not much worried about Individual Savings Accounts (Isas). These haven't quite gained the religious status of the NHS in the British psyche, but they aren't far off; it would be a particularly stupid politician who meddled with them. Your pension is a different matter.
The current annual contribution allowance for those of us with defined contribution schemes is £40,000 and the lifetime allowance is £1m. £1m isn't enough to generate a rich person's income (by a long stretch). But it sounds like a lot of money: the kind of money only "the rich" would have. If you have cash left over after your Isas are filled contribute to your pension sooner rather than later.
Then look at how you invest. The last time the pound fell sharply (immediately after the EU referendum) the FTSE 100 rose nicely in response (a low pound makes it easier for our big exporters to sell abroad). That may not happen this time. Rising sales are likely to be quickly offset by rising regulation, nationalisation and taxation.
According to broker AJ Bell, 42 of the constituents of the FTSE 100 paid less than the UK's 20% standard rate of income tax last year (for entirely legal reasons); and 11 paid less than 10%. See that lasting? Me neither. Corbyn has already said that the "richest corporations" will be paying a lot more so that his government has the cash to "invest" in infrastructure and public services.
All this suggests you need to be invested even more internationally than usual, despite the fact that UK is one of the few markets offering value anywhere at the moment.
Finally, make sure that the portfolio you end up with is one you fancy for the long term: McDonnell has promised us new taxes on financial transactions, so you could find it more expensive to get out of your holdings than it was to get in.
Next, think about the consequences of a run on the pound. Labour's war-gaming will have involved talking about capital controls putting in place systems to prevent money leaving the country and stop complete currency collapse (socialists always blame financiers for pushing down their currencies rather than their own policies). Not many people appear to remember these from their last go round in the 1970s. Those that do will remember that only being able to take £50 out of the country was very restrictive indeed.
Those who are worried that Brexit will crimp freedom of movement might have a bit of a shock in store if the UK goes back to the 1970s. Say goodbye to gap years, cocktails in Dubrovnik and Christmas shopping in New York. It will be over.
You can hedge against the first stage of a weak pound by keeping a stash of foreign currency on a currency card (try Caxton) or on account with a foreign exchange broker (again try Caxton). Otherwise you can open a foreign exchange account with most of the main banks: dollar and euro accounts are relatively easy to get although most providers will either have high minimum balance rules or high charges or both. Or to make absolutely certain that you will still be able to go on holiday even if things do go horribly wrong at home, open an account actually in a foreign country and deposit your cash there.
Finally one last piece of advice. If you were thinking of avoiding some tax via any kind of avoidance scheme or tax haven, maybe don't. Corbyn's reaction to the Paradise Papers doesn't suggest he'll be looking kindly on your attempts to optimise your tax affairs. Better to pay up than to be seen as an enemy of the state.
A version of this article was first published in The Spectator
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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