What might be in store for your finances post-election

With election fever hotting up, Annie Shaw examines what the result may mean for your savings and pensions
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The Independent Online

What can we expect from each of the main parties if they win the election? Labour has already put many of its plans in place, both in last month's Budget and with measures announced in previous years. But the Conservatives have pledged to overturn many of these plans – and if there is a hung parliament, the Liberal Democrats could turn out to have the whip hand.

Income tax and NI

Labour has already caused controversy by introducing a new 50 per cent income tax band for people earning more than £150,000. It is also set to raise National Insurance by 1 per cent for employees and the self employed earning over £20,000 from April 2011, and employers' NI contributions will similarly be raised for everyone earning over £5,700. Gordon Brown has meanwhile pledged not to raise the basic rate of income tax from 20p if re-elected.

The Conservatives say that they do not regard the 50 per cent tax band as "permanent", but say that they also plan to freeze public sector pay for a year, and rule out removing the 50 per cent tax band while this freeze is in force. The Tories have pledged to mitigate Labour's NI increase by saying that anyone earning less than £45,400 will end up no worse off than now. George Osborne says the Tories would be able to cut the deficit without raising VAT.

The Lib Dems plan to raise the income tax threshold to £10,000, meaning that 3.6 million workers and low income pensioners would no longer pay any income tax at all. The measure would be paid for by closing tax loopholes exploited by business and the wealthy.

Capital gains tax

Labour says it will cut capital gains tax for entrepreneurs. The Conservatives have no particular policy at present. The Lib Dems plan to cut the annual allowance to £2,000 and tax capital gains in line with income tax.

Council tax

Labour is considering council tax rises for second homes, but no policy on this has been officially announced. The Conservatives have pledged to freeze council tax for two years. The Lib Dems believe council tax is unfair and want to replace it with a local income tax.

Inheritance tax

Labour has frozen the IHT nil rate band at £325,000 until 2013. The Conservatives have pledged to take all family homes worth less than £1m out of the IHT net. The Liberal Democrats have no particular policy on IHT, but would oppose plans to raise allowances significantly.

Stamp duty

Labour doubled the stamp duty threshold in the Budget to £250,000, paid for by an increase to 5 per cent for homes worth over £1m. The Conservatives would retain this measure if re-elected. The Lib Dems would impose a 1 per cent annual "mansion tax" on a property's value above £2m.

Savings

Labour has pledged to increase the annual allowance that can be saved tax-free inside individual savings accounts (ISAs), which currently stands at £10,200, by the rate of inflation each year. It has pledged to maintain child trust funds and will contribute £100 a year to CTFs opened for disabled children, with £200 going to the severely disabled.

The Conservatives are mooting "green ISAs", which would give special tax breaks to savers who invest in green or low carbon enterprises. They would cut child trust funds for all but the poorest families and those for disabled children. The Lib Dems have no specific ISA policy. They would stop contributing government money to child trust funds and spend the money saved on education.

The state pension

Labour has raised the retirement age for women to gradually align it with that of men, and both men's and women's retirement ages will rise incrementally between 2024 and 2046 to 68. Labour aims to reinstate the state pension link to average earnings rather than to inflation by 2012 or by the end of the next Parliament, subject to affordability.

The Conservatives say they will also restore the link between state pension and average earnings within the next Parliament, and will review whether the first stage in the rise in the state pension age – to 66 – should be brought forward, but to no earlier than 2016 for men and 2020 for women.

The Lib Dems will restore the earnings link to pensions as soon as they take office and will also introduce a Citizen's Pension, based on residency rather than NI contributions. They support current government policy on the rise in the state pension age.

Public sector pensions

No party has put forward a fully coherent plan to get a grip on public sector pensions, which could become a flashpoint as the trillion pound burden of final salary retirement funding weighs ever more heavily on the taxpayer. Labour has recently introduced reforms to public sector pensions: increasing normal pension age for new joiners and modifying employee contribution and accrual rates.

The Tories would impose a cap on pensions above £50,000. They would also conduct an audit of public sector pensions. They would close MPs' generous final salary scheme and move MPs to a money purchase scheme. The Lib Dems would set up a commission on public sector pensions, raise the public sector retirement age and look at capping top pension pay-outs.

Occupational pensions

Labour has already introduced new rules than mean high earners with incomes over £130,000 will have pension tax relief restricted from 2011. People with incomes of £180,000 and above will receive only basic rate tax relief. From 2012, employees must be automatically enrolled into an existing company pension scheme or a new one run by the National Employment Savings Trust, with both employer and employee making a minimum specified level of contributions. Employees will, however, be permitted to opt out.

The Conservatives will review Labour's NEST pensions scheme. They will abolish the rules that compel pension savers to buy an annuity with their savings, as long as they have enough income to avoid means-testing.

The Lib Dems have pledged to abolish the default retirement age and introduce a "decade of retirement" scheme backed by anti age discrimination laws to encourage people to work longer.

Long-term care

Labour has backed down from its plan to impose a "death tax" to fund free long-term care for those who need it. It still wants a National Care Service paid for by some sort of compulsory levy. The Conservatives have pledged to "help people protect their home" rather than have to sell it to pay for care. They have said they will not impose a "death tax" or cut attendance allowance and disability allowance for the over 65s. They currently favour an insurance-based scheme for care, with a premium set at about £8,000. The Lib Dems favour some sort of "partnership" proposal, with costs shared between individuals and the state.

Winter fuel allowance

Labour has increased the annual winter fuel payment for the over-60s to £250 for another year. The over 80s will get £400. The Conservatives have pledged to "protect" the winter fuel payment, free bus passes and free television licences for the over-75s. The Lib Dems would cut the winter fuel allowance to under 65s.

Financial regulation

Labour intends to keep the "tripartite" system of regulation of banks and financial institutions, which includes the Financial Services Authority, the Treasury and the Bank of England. Labour wants, however, to create a new council to oversee financial stability.

The Tories have pledged to break up the tripartite system, giving the Bank of England responsibility for maintaining financial stability, with powers to regulate pay structures and require banks to hold large amounts of capital. A new Financial Policy Committee would supervise financial institutions and be able to rein in bank lending. The FSA would be replaced with a Consumer Protection Agency to concentrate on protecting the public rather than supervising City activity.

The Lib Dems would retain the FSA as the financial regulator but want a cross-party "council of financial stability" to agree the scale of the deficit cuts required and a timetable for action. They would require bankers paid more than £200,000 to publish details of their pay and bonuses. The Lib Dems favour breaking up Lloyds Banking Group and RBS and want to see the risky side of investment banking separated from retail banking.

Consumer finance

Labour wants to use the Post Office as a distribution network for credit unions and to provide banking for the financially excluded. The Post Office will also be the pivot of the "Savings Gateway" scheme to encourage saving by the low paid, adding 50p for every £1 saved. Labour is already rolling out a free financial guidance service under the auspices of the FSA.

The Conservatives have pledged to launch a free national financial advice service. They have also pledged to cap excessive store card interest rates, and ensure that consumers are given clearer information on credit card bills and advertising. They want to continue shared property ownership schemes to help the low paid get on the housing ladder.

The Lib Dems want a Post Office bank to provide banking services for the lower paid. They propose to introduce basic "Safestart" mortgages, offering a fixed rate for five years for borrowers with a 15 per cent deposit, to help buyers who can't borrow because of stricter lending policies by banks and building societies.

Key issue: Cutting the deficit

Whichever party wins the election, Britain's £167bn deficit will be the spectre at any election victory feast. This means that tackling the UK's national debt is going to be the number one priority – and the weapons of choice will be tax rises or spending cuts.

Right-wingers believe that spending cuts need to happen right away. Andrew Lilico, from the Policy Exchange think tank, says: "The last thing we should be doing is raising taxes to lock in high government spending – the consequence would be low growth. Instead, we need an early and credible start to the spending cuts programme, to build confidence in markets and for consumers."

The fear on the Left, however, is that cutting spending too severely could send the country back into recession, and its chosen weapon to cut the deficit is tax rises. Alistair Darling said in his Budget speech: "I believe that to start cutting now risks derailing the recovery, which is already bringing down borrowing more rapidly than was expected."

The Lib Dems back the Labour sentiment and have indicated they would not support plans to cut public spending too early in the next Parliament.

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