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Brexit, state pensions and tax relief: Three predictions for 2017

At the start of 2016, I predicted that the UK would remain in the EU with a double digit blowout victory and Hillary Clinton would trounce Donald Trump.

It was the year that made a fool of over-confident pundits and amateur guess-men such as myself. Oh well.

Like an addict who doesn’t know when to stop, I’m putting on my predictions hat once more for the year ahead.

Here are the three big areas of savings policy that except to change in 2017, how they affect advisers and why.

  1. The state pension triple lock will end

Sir Steve Webb, the former pensions minister, collected his gong for political services after a jam-packed five years in office.

He had many achievements and a few steps but his biggest contribution to Britain was undoubtedly the triple lock. This ensures the state pensions to grow at 2.5%, inflation or earnings, whichever is highest.

The FT estimates it costs around £6bn a year extra and it was introduced at a time of stringent cuts to other areas of the public purse.

The average pensioner now has a better standard of living than the average young person, according to the Resolution Foundation. Pensioner poverty has plummeted, which is an immense achievement compared to the 1990s.

The triple lock is designed to guard against the state pension being eroded by inflation (and stop politically problematic small rise such as Gordon Brown’s 75p annual rise in 2000) but it has done its job too well.

Even former deputy prime minister Nick Clegg – in his new book, Politics– says it is time to scrap the triple lock. And he pushed for it in government in the Lib Dem 2010 manifesto.

Former work and pensions secretary Iain Duncan Smith has spoken regularly about the inter-generational unfairness building up within housing and pensions.

Most importantly, Chancellor Philip Hammond has hinted he may drop the triple lock and with the weak pound likely to create much higher inflation, it could be perfect timing.

If Hammond drops the triple lock when inflation is above 2.5% then he can link pensions to inflation. That means the immediate impact will be nothing while the long-term risks to the public finances will be eased.

This will also numb any political difficulties. Shadow chancellor John McDonnell, sensing a government shift, has come out strongly in favour of the triple lock in a bid to win older voter for Labour.

The triple clock was deliberately not written into pension legislation in the last parliament. Something the Labour party acknowledged but did not press to be included. It can be scrapped with the ease.

Hammond can lance the expensive boil in 2017 and I predict he will drop the minimum increase of 2.5% and link the state pension to inflation or earnings once more.

  1. Pensions Tax Relief remains untouched

It was the EU that spiked George Osborne’s first major attempt to overhaul pensions tax relief in the March budget.

Osborne wanted to slash pensions tax relief into a flat rate or even create a pensions Isa to complete his savings revolution.

But Tory backbenchers were in uproar and promised “blood on the carpet” if he pushed ahead with any reforms. He probably didn’t have the numbers to pass it and he certainly didn’t have the appetite with the June referendum on EU membership so close.

In his first autumn statement, Hammond strongly signalled he wanted changes on tax relief by effectively claiming it is unaffordable.

“As more people become pension savers for the first time and as automatic enrolment contribution rates increase, the cost of income tax and National Insurance contributions relief will increase,” the Treasury said in a consultation document. “The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”

But this is not the same as ending the state pension triple lock, which would cut the rate of growth in state pensions. Overhauling pensions tax relief is a tough political choice that removes large privileges from a key voter group of those who are wealthy and approaching retirement. Potential Ukippers.

More importantly, the triple lock can simply be ended by the Treasury. Reforming tax relief needs legislation. Hammond would have a similar problem to Osborne. The same MPs who would be angered by tax relief reform want a hard Brexit.

And the Brexit negotiations will trump all else in 2017. I would be shocked if there is the political will to fight on two fronts this year against the same rebellious Brexiteers. Perhaps the angry MPs could even bring down a budget if the Treasury pushed ahead.

Reforms is hard with a tiny majority. Brexit spiked reform in 2016 and it will be the same in 2017.

  1. Brexit rollercoaster

If pundits were spectacularly wrong in 2016 then so were markets. The post-Brexit equities plunge in June is now seen as a ludicrous over-reaction as stocks in London and New York hit record highs.

The rally in US stocks following the election of Donald Trump shows the irrationality of market actors. Stocks had plunged pre-election every time a Trump victory looked more likely.

It shows how scatty stock markets are today and often they completely misjudge which way the political winds are blowing.

This will only get worse in 2017. The Brexit negotiations will begin in March when the UK triggers Article 50.

The UK and the EU will engage in two years of intense, complex and lengthy negotiations over almost every aspect of public life.

Brussels is the world’s leakiest city and proposals will find their way into the press and the market will overreact. I’m a financial journalist so I know that the EU capital is a goldmine for sensitive information finding its way into the wrong hands.

There are 28 countries involved in the negotiations and the French may see a benefit in leaking their tough starting proposals for UK passporting rights for banks, for example.

Traders will be spooked and the markets will wobble. Bank stocks could plunge and then bounce back within days when the reality kicks in.

More than any other period, political gossip will drive markets and publicly listed companies in certain sectors will be affected by closed-door negotiations. It will be a testing year to sort out the rumour from reality and how to manage risk and portfolios.

That is the fund manager’s job, of course. For advisers, it may be about holding clients hand through the Brexit rollercoaster and guiding a long-term path. We may sail through it as we did last June. We may not.

Then there are other global risks such as the eurozone’s future, China’s shift to consumer economy and Trump’s impact on emerging markets. But Brexit will be the most novel threat due to its basis on political unknowns.

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