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Time to set some ‘new year’ financial resolutions

Pension & retirement

13 April 2023

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Ruth Heath

Two overlapped hands hold a jar of money

While many people mark January 1 by taking stock of their lives and making resolutions to accomplish new goals or change behaviours, the new tax year in April kickstarts a good time to take stock and put in place a few financial resolutions.

Fairstone independent financial adviser Ruth Heath shares five top tips to kickstart your new tax year to help keep your finances on track over the next 12 months.

 

Get to grips with your allowances

It is important to utilise all the tax reliefs and allowances available to you in a tax year to minimise any potential liabilities.

These include your personal reliefs; married couples should consider utilising each other’s personal reliefs and if they could make gifts of income-producing assets, which must be outright and unconditional, to distribute income more evenly between the two.

Trust funds can also help protect your assets and guarantee that your loved ones have financial stability for the future. Crucially, a trust can help avoid IHT and ensure that the majority of your money, shares, and equity, are passed on in the most efficient way.

 

Tax efficient wrappers

One of the easiest ways to reduce your tax bill is to make the most of your annual allowances and to then shelter any returns above your allowances in tax efficient wrappers.

ISAs are easy to understand, flexible and most importantly, you don’t have to pay income or capital gains tax on your savings or investments.

You get one ISA allowance per tax year, which this tax year is £20,000, and any unused allowance will not be rolled over…. so it really is a case of use it or lose it.

Each tax year you can save up to this amount in either a Cash ISA or Stocks and Shares ISA or a mix of the two. A Cash ISA is similar to a normal deposit account, except you don’t have to pay tax on the interest you earn and withdrawals are tax free too. Stock and Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.

If you’re aged between 18 and 39, a Lifetime ISA (LISA), can be useful if you’re saving to buy a first home or for later life. The Government will add a 25% bonus to your contributions up to a maximum of £1,000 each tax year.

And don’t forget your children or grandchildren – parents and guardians can invest up to £9,000 in a Junior ISA. Interestingly, children aged 16 and 17 have both the £9,000 Junior ISA allowance and in addition, a £20,000 personal ISA allowance providing this is used for a cash ISA. This means they have the potential to save £29,000 per year in tax-efficient wrappers.

 

Check your pension is on track

If you want to boost your retirement savings, the simplest solution is to increase your contributions. You may think you can’t afford to, but even a slight increase can make a big difference and for those lucky enough to receive a pay rise in line with inflation every year, increasing your pension contributions by just 1% could add thousands to your eventual pot.

Pensions are a tax-efficient way to save for retirement. You can get tax relief on personal pension contributions up to 100% of your UK earnings, or £3,600 if this is greater (if you’re a low or non-earner).

It is possible to ‘carry forward’ unused allowances from the previous three tax years so long as the amount does not exceed 100% of the taxpayer’s earnings.

If your employer offers a workplace pension which you qualify for, that should typically be your first port of call for your retirement savings, particularly if they offer salary sacrifice.

Once your employer is making contributions into your pension at the maximum level, then a Lifetime ISA could be a more tax-efficient choice for any other retirement savings. It’s worth noting that if you save into a Lifetime ISA (LISA) instead of a pension, your entitlement to certain means-tested state benefits could be affected.

Also, the first 25% taken out from a pension from age 55 (rising to 57 in 2028), is usually tax free.

It’s also worth checking out how much your pension is worth and what it is expected to pay out at your retirement, which you will be able to get from your pension provider.

 

Review/ make a will

A will is a very important factor of an estate plan, and it is always sensible to have a will in place to ensure that your estate is divided among the people (or charities) you want to receive it.

This will ensure that your financial assets are distributed how you want them to be after you have passed away and the people you wish to benefit from your estate will do so, as quickly as possible and with minimal Inheritance Tax.

If there is no will, the deceased’s estate will be distributed under the terms of law, which may not align with their loved one’s wishes. Receiving the right professional advice and setting up a financial plan can ensure you are best able to look after your family when the time comes.

 

Revisit your investment goals

The start of a tax year is a good time to review and rebalance your investment portfolio to make sure that it still aligns with your goals.

Things to consider are your level of risk – are you still happy with that and also have your personal circumstances changed. If so, you might need to make some slight changes.

If you’ve just topped up ready for the start of the tax year, you could think about rebalancing your portfolio which will make sure you’re matching the level of diversity and risk you planned on when you started out.

Keeping your plan on track also means evaluating the progress on a regular, ongoing basis.

Whatever your personal investment goals may be, it is important to consider your time horizon at the outset, as this will impact the type of investments you should consider to help achieve your goals.

 

Taking steps now to review your finances will help to keep your goals on track.

Remember there is little point in setting goals and never returning to them. Any new year’s resolutions can be impacted by life changes so it’s worth setting a formal annual review at the very least to check you are on track to meeting your goals or if you need to make any adjustments.

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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FAIRSTONE ARE NOT TAX ADVISERS. FOR GUIDANCE ABOUT HOW TAX BENEFITS EFFECT INDIVIDUAL CIRCUMSTANCES, SEEK SPECIALIST TAX ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP.

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