Bank holiday season is upon us, and the end of the tax year is approaching too. With a few long weekends coming up, now is a good time to do some financial spring cleaning. Below are seven things you should do this springtime.
1. HIGHER EARNINGS: FOCUS ON MAXING OUT YOUR PENSION
People earning over £150,000 a year (including company pension contributions) ought to make sure they have maxed out their pension contributions before the end of the tax year. Currently, the maximum someone can save tax-free is £40,000. But after April, special rules come in which restrict the amount higher earners can put into a pension from their pre-tax earnings. The level will be tapered down to just £10,000 a year for people earning £210,000 or above.
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“In the current tax year, contributing to a pension is highly attractive for high earners,” says Jason Hollands of Tilney Bestinvest. “But scope to make big contributions on this basis is about to be scaled back imminently.”
2. DON'T FORGET YOUR SPOUSE
People who have contributed the maximum amounts to their pension or Isa should look into helping their partner or children reach their savings limits too.
“Even non-earners, including children, can have a pension of up to £3,600 a year and still receive a basic rate tax top up. Every little bit helps,” says Hollands.
3. INVEST MORE, KEEP LESS IN CASH
Savers tend to be more cautious than many professionals say they should be. People tend to keep a high level of their pension in cash when for many it would be better off invested in shares, where it can grow. Cash won’t rise in value, it will only be worth less in future because of inflation.
This spring, consider topping up some investments and keep a little less in cash.
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“Your real risk is not taking sufficient investment risk,” says Pamela Reid at Quilter Cheviot. “When considering how your pension is invested, remember that your fund will need to support you for the rest of your life and provide an income to your spouse if you die first. That could be a long time into the future and being too cautious could increase your risk of running out of money within your lifetime.”
4. DRIP FEED MONEY INTO THE MARKETS
Investment markets have been volatile this year, and that’s disconcerting for any investor. Although it’s wise to buy shares when they’ve fallen, trying to spot the low point is tricky.
It’s also wise to remember that you don’t have to invest all the money in your Sipp or Isa straight away. It’s often sensible to buy shares incrementally over a period of time.
“Lots of people are topping up their pensions at the moment. But just because you’ve put your cash into a pension doesn’t mean it also has to go straight into the markets. When they’re so volatile it is sensible to drip feed,” says James Horniman of James Hambro & Partners. “It’s alright to invest straight away in assets that try to preserve value, such as absolute return funds.”
5. SIT DOWN WITH A PROFESSIONAL
There’s value in seeking advice, either for a single session to work out a financial plan, or by paying a wealth manager to invest on your behalf. At the moment, one in two people earning over £50,000 have sought advice, according to research from Octopus Investments.
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“DIY investing is a lot of fun and if you’re good – or lucky – can be very rewarding. By all means, allocate some money to invest yourself, but unless you’ve got a lot of time to do this properly, seriously consider letting the professionals manage the bulk of it,” says Lee Goggin of FindAWealthManager.com. “Hopefully you’re going to be retired a long time, so you can’t afford to take risks.”
People who already have a wealth manager ought to check up on the performance of their portfolio. There’s a vast marketplace out there of wealth managers and advisers, so if yours isn’t providing decent performance or the right kind of service, find another one.
6. CONSIDER INHERITANCE PLANNING
Recent changes have made it easier to pass your pension onto the next generation, either upon death or during your lifetime, if you have enough saved up elsewhere to support yourself. With that in mind, it’s a good idea to take stock of your situation.
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“Review all existing pension contracts and death benefit nominations to ensure that they remain suitable given the recent changes to legislation,” says Simon Bashorun of Investec Wealth & Investment.
“For people with other sources of income in retirement, there is an opportunity to pass down pension assets through the generations tax-efficiently. However, this is not a substitute for trust-based inheritance tax planning, and the potential pitfalls in this area make professional advice essential.”
7. STAY INFORMED OF PENSION CHANGES
Over the last year there has been a major overhaul of how pensions are taxed and how much people can put into their pension pots before tax. The industry has been calling on the government for a period of calm, so people have time to digest the changes.
At this stage, getting your head around the pension changes is one of the most important things you can do. There could be more to come too. “It is widely anticipated that we will see further changes to pensions,” says Sarah Lord of Killik Chartered Financial Planners.
This article appears in the March edition of City A.M.'s Money magazine, which will be distributed with the paper on Thursday 31st March.