Here are some tips from Unbiased.co.uk’s media independent financial advisers on how to prepare for the New Year and get your personal finances in order.
1. Spring clean early
Put your plans on the front foot for 2011, says Danny Cox at Hargreaves Lansdown. “Between Christmas and New Year is an ideal time to dust off your old investments and pensions and review how they are doing. Are they up to date and still right for you? How they are performing? Could you consolidate your plans and make them cheaper and easier using a fund supermarket. Is it time to cash in your premium bonds? Are you making the most of your cash savings? Have you made the most of all your tax efficient allowances? Reviewing your financial affairs does not need to be an onerous task.”
2. Create a cash buffer
Peter McGahan at Worldwide Financial Planning says alot of consumers are concerned about interest rates and the potential that inflation might drive these northwards. “If this is the case the normal reaction is sometimes to pay off all debt as quickly as possible,” he says. “Your first port of call should actually be to create a buffer by having three to four months expenditure available to rely on for cash flow. A bank loan reduced by £2000 may only save you £80 per month but £2000 will give you enough space to pay that loan for 25 months. Cash flow is important. If you have any loans that are on a variable rate be careful to pay off the highest interest rate loans first.”
3. Save regularly
“Put aside a regular amount each month to invest for the long term,” suggests Gordon Bowden at Quainton Hills Financial Planning. “Do not spend your monthly income and then see what is left over. There will never be enough left over. Instead decide how much you want to save and work out your spending budget from what is left. One day you will be glad you did this.”
4. Income from investments
Income is the want of many clients yet income paying investments in a low interest rate environment are at a premium. Ian Lowes at Lowes Financial Management says whilst the likes of equity income and fixed interest funds are likely to be the default option for many, there may be a better way such as ‘income from gains’.
“Whilst many people want an income from their investments, what they actually need is a regular payment and that’s not necessarily the same thing,” says Lowes. “A growth orientated portfolio can still produce the ‘income’ needed by way of automated regular or, ad-hoc withdrawals. Such a strategy means that a more diversified range of investments can be utilised, thereby providing greater opportunity, and potentially lowering the risk. What’s more, growth investments should be subject to capital gains tax rather than income or dividend tax and as everyone has an annual capital gains tax allowance, in a lot of circumstances, an investor drawing income from a growth portfolio will have little, or no, tax to pay on an annual basis.
“Obviously, the less tax you have to pay the greater the returns you receive from your portfolio. Larger portfolios may give rise to some tax on final encashment but this should still be less than income tax and for the older investors some solace can be gained from the consequence that CGT also ‘dies’ on death.”
5. Review your pension
If you are still working one long term aim is likely to be a financially secure retirement and a pension should be a key part of that.
To get the most out of your pension between now and then you need to be clever about contribution levels and review this decision each year, says Jason Witcombe, at Evolve Financial Planning. “If your income is in the 20 per cent tax band, it will cost you £8,000 to get £10,000 into your pension after basic rate tax relief. Higher rate tax currently starts at £43,875. So, if you wait until your income is £53,875, getting £10,000 into your pension only costs you £6,000 as you get 40 per cent relief. Therefore, if you are a 20 per cent taxpayer now but anticipate a promotion in the next few years, maybe you should delay pension contributions? Perhaps your focus could be paying down your mortgage or saving into ISAs in the meantime?”
If your income is in the bracket £100,000 to £112,950 you actually get 60 per cent income tax relief because you lose your income tax Personal Allowance at a rate of £1 for every £2 of income over £100,000. Therefore, a £10,000 pension contribution only costs you £4,000.
“Things get more complicated for very high earners,” says Witcombe, “but it is still possible to secure 50 per cent tax relief on a certain level of pension contribution. If you could receive 40 per cent, 50 per cent or even 60 per cent tax relief on money that goes into your pension and only pay basic rate tax on the income that you eventually draw from your pension, that gives you a neat tax planning opportunity.”
6. Teach your children that money matters
The announcement that Junior ISAs would be launched, probably, in autumn 2011 should go some way to educating children particularly when it comes to saving.
Colin Jackson at Baronworth Investments Limited says, “Mums, dads, grandparents, aunts and uncles often give monetary presents to children at Christmas. Perhaps it would be a good idea to put these presents into a Junior ISA and for those children old enough to understand, explain the reason for doing this - to save for their future. The good news is that the children will not be able to get their hands on the money until they turn 18 so, dependent upon the child’s age, consideration should be given to a Stocks and Shares ISA that has the facility to accept further investments from time to time.”
7. Identify gaps in cover
“As budgets continue to be stretched by the increased costs of living, a review of existing borrowing and protection arrangements might help by showing how savings could be achieved in these areas, while also identifying gaps in the level of cover you have,” says Dan Clayden at Clayden Associates.
8. Buy before 4 January 2011
The VAT increase comes in on 4th January but any payments made against it before then will be liable to VAT at the old rate. So, if you’ve ordered an expensive item for delivery in January it would be worth paying in full before then, suggests Steve Laird at Carrington Wealth Management.
He says that in practice this means paying before the end of December. “This is particularly useful if you’re buying a new car. If you pay for it in December you can get the old VAT rate but the car can still be registered in 2011 which means it’s likely to be worth more when you come to sell it – the best of both worlds!”
9. Keep track of spending
Create a detailed household income and expenditure analysis. Most people only have a vague idea of what they spend. Keith Thomson at Blackadders LLP says keeping track of all expenditure, especially incidental cash expenditure (newspapers, lunches, drink, snacks etc) will give you a clearer picture of what you spend your money on. It may well surprise you how money can be so easily spent and it should help identify where money can be saved to meet unexpected bills and still enjoy those little luxuries from time to time.”
10. Karen Barrett, chief executive of unbiased.co.uk
“2011 is going to bring with it a lot of uncertainty and changes to the financial landscape, including an increase in VAT and an impending rise in interest rates. Consumers should make their financial resolutions now and start planning ahead to get their money matters in order, ready for the New Year; making an appointment to see an IFA is a great way to start this off.
“An independent financial adviser can help develop a plan for managing your money and investments. Only an IFA can advise you on the best products for you from across the whole of the market. To find a qualified, local adviser near you search on unbiased.co.uk’s free and confidential ‘find an IFA’ service. You can also find useful tools to help plan your monthly finances including the unbiased.co.uk financial calendar which can be downloaded from the website
From: ft.com
1. Spring clean early
Put your plans on the front foot for 2011, says Danny Cox at Hargreaves Lansdown. “Between Christmas and New Year is an ideal time to dust off your old investments and pensions and review how they are doing. Are they up to date and still right for you? How they are performing? Could you consolidate your plans and make them cheaper and easier using a fund supermarket. Is it time to cash in your premium bonds? Are you making the most of your cash savings? Have you made the most of all your tax efficient allowances? Reviewing your financial affairs does not need to be an onerous task.”
2. Create a cash buffer
Peter McGahan at Worldwide Financial Planning says alot of consumers are concerned about interest rates and the potential that inflation might drive these northwards. “If this is the case the normal reaction is sometimes to pay off all debt as quickly as possible,” he says. “Your first port of call should actually be to create a buffer by having three to four months expenditure available to rely on for cash flow. A bank loan reduced by £2000 may only save you £80 per month but £2000 will give you enough space to pay that loan for 25 months. Cash flow is important. If you have any loans that are on a variable rate be careful to pay off the highest interest rate loans first.”
3. Save regularly
“Put aside a regular amount each month to invest for the long term,” suggests Gordon Bowden at Quainton Hills Financial Planning. “Do not spend your monthly income and then see what is left over. There will never be enough left over. Instead decide how much you want to save and work out your spending budget from what is left. One day you will be glad you did this.”
4. Income from investments
Income is the want of many clients yet income paying investments in a low interest rate environment are at a premium. Ian Lowes at Lowes Financial Management says whilst the likes of equity income and fixed interest funds are likely to be the default option for many, there may be a better way such as ‘income from gains’.
“Whilst many people want an income from their investments, what they actually need is a regular payment and that’s not necessarily the same thing,” says Lowes. “A growth orientated portfolio can still produce the ‘income’ needed by way of automated regular or, ad-hoc withdrawals. Such a strategy means that a more diversified range of investments can be utilised, thereby providing greater opportunity, and potentially lowering the risk. What’s more, growth investments should be subject to capital gains tax rather than income or dividend tax and as everyone has an annual capital gains tax allowance, in a lot of circumstances, an investor drawing income from a growth portfolio will have little, or no, tax to pay on an annual basis.
“Obviously, the less tax you have to pay the greater the returns you receive from your portfolio. Larger portfolios may give rise to some tax on final encashment but this should still be less than income tax and for the older investors some solace can be gained from the consequence that CGT also ‘dies’ on death.”
5. Review your pension
If you are still working one long term aim is likely to be a financially secure retirement and a pension should be a key part of that.
To get the most out of your pension between now and then you need to be clever about contribution levels and review this decision each year, says Jason Witcombe, at Evolve Financial Planning. “If your income is in the 20 per cent tax band, it will cost you £8,000 to get £10,000 into your pension after basic rate tax relief. Higher rate tax currently starts at £43,875. So, if you wait until your income is £53,875, getting £10,000 into your pension only costs you £6,000 as you get 40 per cent relief. Therefore, if you are a 20 per cent taxpayer now but anticipate a promotion in the next few years, maybe you should delay pension contributions? Perhaps your focus could be paying down your mortgage or saving into ISAs in the meantime?”
If your income is in the bracket £100,000 to £112,950 you actually get 60 per cent income tax relief because you lose your income tax Personal Allowance at a rate of £1 for every £2 of income over £100,000. Therefore, a £10,000 pension contribution only costs you £4,000.
“Things get more complicated for very high earners,” says Witcombe, “but it is still possible to secure 50 per cent tax relief on a certain level of pension contribution. If you could receive 40 per cent, 50 per cent or even 60 per cent tax relief on money that goes into your pension and only pay basic rate tax on the income that you eventually draw from your pension, that gives you a neat tax planning opportunity.”
6. Teach your children that money matters
The announcement that Junior ISAs would be launched, probably, in autumn 2011 should go some way to educating children particularly when it comes to saving.
Colin Jackson at Baronworth Investments Limited says, “Mums, dads, grandparents, aunts and uncles often give monetary presents to children at Christmas. Perhaps it would be a good idea to put these presents into a Junior ISA and for those children old enough to understand, explain the reason for doing this - to save for their future. The good news is that the children will not be able to get their hands on the money until they turn 18 so, dependent upon the child’s age, consideration should be given to a Stocks and Shares ISA that has the facility to accept further investments from time to time.”
7. Identify gaps in cover
“As budgets continue to be stretched by the increased costs of living, a review of existing borrowing and protection arrangements might help by showing how savings could be achieved in these areas, while also identifying gaps in the level of cover you have,” says Dan Clayden at Clayden Associates.
8. Buy before 4 January 2011
The VAT increase comes in on 4th January but any payments made against it before then will be liable to VAT at the old rate. So, if you’ve ordered an expensive item for delivery in January it would be worth paying in full before then, suggests Steve Laird at Carrington Wealth Management.
He says that in practice this means paying before the end of December. “This is particularly useful if you’re buying a new car. If you pay for it in December you can get the old VAT rate but the car can still be registered in 2011 which means it’s likely to be worth more when you come to sell it – the best of both worlds!”
9. Keep track of spending
Create a detailed household income and expenditure analysis. Most people only have a vague idea of what they spend. Keith Thomson at Blackadders LLP says keeping track of all expenditure, especially incidental cash expenditure (newspapers, lunches, drink, snacks etc) will give you a clearer picture of what you spend your money on. It may well surprise you how money can be so easily spent and it should help identify where money can be saved to meet unexpected bills and still enjoy those little luxuries from time to time.”
10. Karen Barrett, chief executive of unbiased.co.uk
“2011 is going to bring with it a lot of uncertainty and changes to the financial landscape, including an increase in VAT and an impending rise in interest rates. Consumers should make their financial resolutions now and start planning ahead to get their money matters in order, ready for the New Year; making an appointment to see an IFA is a great way to start this off.
“An independent financial adviser can help develop a plan for managing your money and investments. Only an IFA can advise you on the best products for you from across the whole of the market. To find a qualified, local adviser near you search on unbiased.co.uk’s free and confidential ‘find an IFA’ service. You can also find useful tools to help plan your monthly finances including the unbiased.co.uk financial calendar which can be downloaded from the website
From: ft.com
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