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New Year, new start for your finances

20 January 2023

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Sandra Corkhill

New Year is often the time to take stock and make resolutions for the year ahead and if that includes giving your financial plans an overhaul, Fairstone Chartered financial planner Sandra Corkhill shares steps to take to check your finances are on track for 2023.

While some people avoid making New Year’s resolutions for fear that they will only break them, people who do make financial New Year’s resolutions are more likely to end 2023 in better financial shape than when they began.  It’s about going back to the basics, deciding what you want to achieve, managing your money with confidence and asking for help along the way.

Repeated studies have shown that financial wellbeing is intrinsically linked to improved mental health, so facing up to your situation and making small changes to your financial planning can have a big impact on your current wellbeing too.

In a straw poll*, 69% of respondents said that their top financial resolution was to increase their savings, while a further 16% said that their focus is on using their full tax allowance.

Whatever your individual priorities are, to ensure you achieve your financial resolutions, it helps to break down the bigger goals into more manageable bite-sized objectives that you can gradually work through bit by bit to create better financial habits.

While some people avoid making New Year’s resolutions for fear that they will only break them, people who do make financial New Year’s resolutions are more likely to end 2023 in better financial shape than when they began.  It’s about going back to the basics, deciding what you want to achieve, managing your money with confidence and asking for help along the way.

Repeated studies have shown that financial wellbeing is intrinsically linked to improved mental health, so facing up to your situation and making small changes to your financial planning can have a big impact on your current wellbeing too.

In a straw poll*, 69% of respondents said that their top financial resolution was to increase their savings, while a further 16% said that their focus is on using their full tax allowance.

Whatever your individual priorities are, to ensure you achieve your financial resolutions, it helps to break down the bigger goals into more manageable bite-sized objectives that you can gradually work through bit by bit to create better financial habits.

So where do you start and what do you need to do? The key areas to consider are outlined below:

 

Develop an honest and realistic budget

Your basic first steps should be fully getting to grips with what’s coming in and going out each month.

The key to an effective budget is to be honest and realistic – so that’s everything you have coming in and your average monthly outgoings (including essential spending such as mortgage, household bills and groceries as well as non-essential such as going out and entertaining).

Budgeting in times of economic uncertainty is the foundation of effective money management and without a budget, you are likely to be unprepared when you hit an unexpected financial hurdle, which is particularly pertinent during the current cost of living crisis.

It will also give you the foundation for your financial plan, as you identify your individual goals, prioritise them and then outline the steps you need to take to achieve them.

 

Start asking questions about your retirement and pension

Even if retirement seems a long way off, think about what you want your money to do for you when you stop working. Ask yourself: Do I know how much money I may need in retirement? How long will my money need to last for? How much should I be saving today? The earlier you start the process of planning for your retirement, the more manageable it will be, and the less of an impact it will have on your daily finances.

Questions to include: Am I taking full advantage of the tax-efficiency of my personal pension or workplace pension? What am I looking forward to doing the most in retirement? How much retirement savings will I actually need? How much can I afford to spend yearly once I have retired? Is this figure realistic?

 

Check you’re using all of your tax allowances

Tax planning might not sound very exciting, but it can have a dramatic effect on your personal finances. With tax rules subject to constant change, it’s essential that you regularly review your own and your family’s tax affairs and plan accordingly.

And by taking action now, it may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later. Time is running out if you delay as many of the tax and planning opportunities available require action before 5 April 2023.

 

Taking your ISA to the max

One of the easiest ways to reduce your tax bill is to shelter any returns above your allowances in an Individual Savings Account (ISA), which is a tax-efficient wrapper. They’re easy to understand, flexible and most importantly, you don’t have to pay income or capital gains tax on your savings or investments.

For the 2022/23 tax year, you can put up to £20,000 into an ISA. So for a couple with one child, the total ISA allowance available to the family is £49,000, which comprises £20,000 for each adult plus £9,000 of Junior ISA allowance for the child.

You can choose to hold all of that in a Cash ISA, or put it into a combination of ISAs including Stocks & shares ISA, Lifetime ISA and Innovative finance ISA. You have to be aged between 18 and 39 to start a Lifetime ISA and can only put up to £4,000 into this each year, with the Government adding an extra 25%, up to £1,000 a year.

 

Review your borrowing

If you have high-interest debt, make a plan to pay it down. If you don’t have enough money to do this, it is worth looking into transferring your debt to a card with an introductory 0% balance transfer offer to save you some money on interest and look to pay off the balance before the introductory period ends.

 

Keep your inheritance in the family

ISAs and pensions are the two big ways to shelter your money from tax, but there are other tools at your disposal. Your estate is valued when you pass away and chargeable to Inheritance Tax (IHT) at 40%, although the first £325,000 nil-rate band (NRB) is exempt. Anything that goes to your spouse is also exempt. If you give away your home to your children or grandchildren, your threshold can increase to £500,000.

Current tax rules also enable you to give away up to £3,000 free of IHT each tax year without them being added to the value of your estate, which is known as your ‘annual exemption’. You can give away more than this amount if you want to, but you must live for at least seven years from the date of the gift for it to be exempt from IHT.

 

Life cover

Unless you have substantial savings or inherited wealth, most people rely on their salary to pay for everything. But life is full of uncertainties. Making sure you have life cover should the worst happen gives huge peace of mind.

If you do have cover, chances are that your personal circumstances and needs will have almost certainly changed over time so it is also worth reviewing your policies regularly and the level of cover they provide, to ensure they’re still suitable.

 

Your will

One of the most important components of an estate plan is a will. Not only does a will put you in control to choose who will benefit from your estate and what they are entitled to, it also sets out who will administer your affairs after your death.

If you don’t make a will, the intestacy rules will decide who benefits from your estate, which could produce undesirable results.

 

Lasting power of attorney

A lasting power of attorney (LPA) can be made for property and financial affairs, as well as health and welfare, setting out your wishes to allow an appointed person to make financial and welfare decisions on your behalf if you lose the capacity to do this for yourself.

These documents can be put in place at any time and it is important to consider setting them up, no matter what age you are.

 

Let us help make your financial New Year’s resolutions a reality

The beginning of a new year is the perfect time to consider your existing financial goals and decide if they still align with your priorities. It is also a good time to check if you have the right systems and support needed to achieve these goals when you want to.

To find out how Fairstone can help you meet your financial goals in 2023, get in touch.

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*LinkedIn poll, 20/12/22

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