Spring is here and it's a golden opportunity to sort out your finances before the end of the tax year on 5 April.
And this year savers have an additional reason to get out in front: inflation. Consumer price index inflation has been steadily rising and has been given extra impetus by the drop in sterling. Doing nothing could see the real value of your assets decline without you even noticing. “Cash investors are facing a perfect storm: value-eroding inflation is rising, but cash interest rates are next to nothing,” says Lisa Caplan, head of financial advice at Nutmeg.
So here are 10 simple things you should do now to spring-clean your finances.
1. Maximise Isa contributions
Investments held within the Isa are not liable for tax, which can make a big difference when battling inflation and is useful protection when the government is reducing the generosity of the treatment of investments held outside wrappers.
The Isa does, however, operate under the “use it or lose it” rule. If you don’t use your full £15,240 allowance before the end of the tax year, you will not be able to carry over unused portions into the next. “The thought of missing out on any tax perks always helps to focus the mind,” says Gordon Andrews, financial planning expert at Old Mutual Wealth.
If you’re contributing to a Stocks and Shares Isa, you don’t need to invest the money immediately. That cash can be parked until you’re ready to decide what to do with it, and drip-feeding money into the markets means you’ll be less exposed to volatile price moves.
Note, too, that the Isa allowance is rising to £20,000 in the next tax year. Tom Selby of AJ Bell suggests updating any Isa direct debits to take advantage of the higher amount.
2. Be clever with your pension
You can “carry forward” unused portions of your pension annual allowance from the previous three tax years. This means a window is closing on 5 April. “The 2013-14 tax year was the last to have a pension annual allowance of £50,000,” says Selby. It has now come down to £40,000 for most people, and those on higher incomes affected by the taper (which cuts the allowance by £1 for every £2 you earn above £150,000, to just £10,000 for those on £210,000 or more) can contribute even less. Once you’ve made use of this year’s allowance, check to see if you can put in more from previous tax years.
You should also ensure you’re maximising employer contributions to your workplace pension. Although many firms will only match up to a relatively low percentage, others are more generous if you’re willing to put in more of your own money. “Simply put,” says Richard Parkin of Fidelity, “the availability of the employer contribution under auto-enrolment means that joining an employer sponsored pension scheme remains the best option for all those who are saving for retirement.”
3. Spread the wealth
Your spouse and children have their own pension and Isa allowances. The Junior Isa allowance is £4,080 this tax-year, and most experts think that because children have much longer investment horizons they can afford to take on more risk.
“Many people set their kids or grandkids up with premium bonds or a cash savings account,” says Caplan. “In an inflationary yet low rate environment, this well-intentioned gift will quickly begin losing value. As a rule of thumb, the longer your investment horizon, the higher your risk profile can be.” You can even put up to £3,600 into a child’s pension this tax year.
4. Regulate your cash balances
Basic and higher tax taxpayers (though not 45p payers) enjoy another tax advantage: the personal savings allowance, under which the former can earn £1,000 in savings interest tax-free per tax year, and the latter £500. With some ordinary bank accounts paying better rates of interest than Cash Isas, it may make sense to hold your cash outside the wrapper.
Nevertheless, cash is a poor investment for more inflationary times because the rate of return tends to be so low. Henderson Global Investors found that between 2010 and 2015 – when inflation briefly topped 5 per cent – cash deposits earned savers £36bn in interest but inflation consumed £116bn of value, a net loss of £80bn.
5. Pay down debt
With interest rates so low, it may seem like a perfect time to load up on debt. Interest-only mortgages have made a comeback and there are some excellent deals on ordinary mortgages too. But if rising inflation prompts the Bank of England to hike interest rates, you could be caught out. “Many of today’s consumers have never experienced interest rates of 10-15 per cent,” says Caplan. “Enjoy the low-rate respite from high borrowing costs, but don’t be caught off guard by rising rates in the coming years.”
Those on newer student loan plans might also consider making extra repayments, she says. “Modern plans will spike sharply when rates rise, so make sure you understand your plan and are prepared to manage it.”
6. Monitor “invisible” spending
Research by Aviva in 2015 found that the average UK adult forks out £948 a year on “invisible spending”. This could be morning coffees, treats for children, or barely used subscriptions that don’t cost much individually, but quickly eat into your income without you putting much thought into it.
Fidelity International has even come up with an Isa “cappuccino plan” to give an indication of how much you could save if you put the money to better use. Ditching a daily £2.50 coffee would enable you save an extra £50 a month, which could become £17,353.60 after 20 years assuming 5 per cent growth and after charges.
7. Keep track of rule changes
The rules around investments are constantly changing and, while the chancellor did little in the most recent Budget, many measures are announced several years before they are introduced. Take the “residence nil rate band” (RNRB) coming in on 6 April. It’s a £100,000 top-up to the existing inheritance tax allowance linked to your home which “will enable homeowners to pass more of their wealth on to their beneficiaries, provided the property was used as a main residence and lived in by that individual,” says Andrews.
“The new allowance is complex, and could have an impact on your existing financial affairs,” he adds. “For example, if property is left in a discretionary will trust the RNRB cannot be utilised. It may also be necessary to consider how homes are owned, i.e. as joint tenants or tenants in common, to ensure the use and benefit of the RNRB is maximised.”
8. Do some easy inheritance tax planning
Even if you’re not intending to do any complex inheritance planning, you still have tools that will enable you to minimise your estate’s liability. “An allowance which often gets overlooked is the gifting allowance,” says Andrews. “This enables people to pass on assets to children or grandchildren free of any potential inheritance tax liability.”
The allowance this tax year is £3,000, but you can carry forward any unused portions of your previous year’s allowance into the current one. “If you haven’t used all the £3,000 allowance from the last tax year, it can be utilised this tax year, meaning £6,000 can be gifted without any liability to inheritance tax,” says Andrews.
9. Review your funds
Because different parts of your portfolio will perform differently over time, a suite of investments that were set up last year to achieve your goals may now struggle to do so. Some types of assets are also more likely to underperform in more inflationary times. It’s not as simple as piling into index-linked bonds or gold, but be prepared to sell down some of your stakes even if they have performed well lately.
10. Speak with an adviser
With the government focused on Brexit, it appears to have rowed back from making massive new reforms to pensions or investments. Much has changed over the past few years, however, and it makes sense to speak with a financial adviser to check that you’re optimising your financial arrangements, especially if you have a more unusual situation.
Andrews gives the example of people who are living and working in the UK from overseas who do not consider themselves UK domiciled who will be impacted by two big changes from 6 April.
First, he says, if you’ve been in the UK for 15 out of the past 20 years, you may now be deemed UK domiciled. “This timescale was previously 17 out of 20 years. Once you are deemed UK domiciled, you will need to start paying UK tax on your world-wide assets rather than just your UK assets.” Second, property in the UK held through an overseas corporate structure will no longer be exempt from British inheritance tax. “This presents an urgent need for inheritance tax planning,” he says.