A New Tax Year, A New Start For Your Finances

Creating a roadmap for your future financial success.

It’s always a good time to consider financial planning, but at the start of a new tax year, when you have a fresh set of annual allowances to take advantage of, you have the perfect opportunity to get your financial affairs in order and align them with your goals.

The UK tax year runs from 6 April to 5 April each year. These dates don’t change but tax rules and regulations do change and it is important to stay up-to-date.

Mitigating the COVID-19 economic impact

The UK government has accumulated massive deficits while trying to mitigate the economic impact of the coronavirus (COVID-19) pandemic on individuals and businesses.

Essentially, they have three options to try and reduce their debt burdens: implement austerity, including higher taxes, so that the borrowing can be repaid; deliver economic growth so that the debt burden to GDP falls; or allow inflation to erode the real value of the debt.

Meet your goals in a tax-efficient way

The good news is that if you start considering the recent and potential tax changes now, you should be able to mitigate some of the adverse effects. Taxes on savings, investments and earnings all come with bands, reliefs, allowances and exemptions.

Financial planning ensures that you take advantage of these by organising your finances to make the most of your money and avoid situations you may not have anticipated. Taxation can affect net investment returns, and maximising your net return will help you meet your financial objectives. There are a number of potential financial planning solutions to help you meet your goals in a tax-efficient way.

March Budget 2021 changes announced

These involve making use of tax allowances each year, assessing investments that suit your tax profile and considering long-term plans for you and your family. This might necessitate some financial restructuring. Business owners will also need to prepare and plan for the changes announced in the March budget.

The Chancellor of the Exchequer, Rishi Sunak, delivered Budget 2021 to Parliament on 3 March. Here are some of the key announcements around tax and financial planning.

Pensions

Despite predictions that the many tax advantages of pensions could be cut back, they were left untouched. The most significant change was the decision to freeze the lifetime allowance (the amount you can hold in pensions without paying a tax charge) at its current level of £1,073,100 until April 2026.

Pensions still remain one of the most tax-efficient ways to invest, particularly for higher and additional rate taxpayers. In addition to tax relief on what you pay in, any growth is free of UK Income Tax and Capital Gains Tax. And any remaining funds in your pension on death are usually free of Inheritance Tax after your death.

Individual Savings Accounts (ISAs)

The Chancellor left ISA allowances unchanged. Any proceeds from an ISA remain free of UK Income Tax and Capital Gains Tax and, therefore, this is a key consideration in financial planning. As soon as the new tax year started on 6 April, your annual ISA allowance limit was reset.

For the current tax year, savers can contribute up to £20,000 each across the four main types of ISA, which include Cash, Stocks & Shares, Innovative Finance and Lifetime accounts.

Capital Gains Tax (CGT)

Despite proposals to increase CGT, there were no new announcements, other than the decision to freeze the annual tax-free allowance at its previous level of £12,300 until April 2026.

As part of financial planning, it still makes sense to make as much use as possible of the valuable ISA and pension allowances, to ensure your funds are held in the most tax-efficient manner.

Inheritance Tax (IHT)

Again, no changes were made to the standard nil-rate band of £325,000 and the residence nil-rate band of £175,000, both of which have been proposed to remain frozen until April 2026.

If you’re thinking about how you can reduce the Inheritance Tax your beneficiaries have to pay when you die, there are various options you should consider.

Achieve your goals and future wellbeing

The purpose of creating a financial plan is to help you understand where you stand now and where you could be in the future if you take the right steps. It’s about creating a roadmap for your money to help you achieve your goals and future wellbeing.
Putting in place a comprehensive financial plan and keeping it updated will be amongst the most important decisions you ever make. It should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life and wellbeing.

Even if you’re in a good position financially, there are various ways that financial planning could help improve your current situation, for example by:

improving the growth rate your investments are achieving
introducing new streams of income
minimising the tax you pay
recommending solutions and products you might not be aware of

Avoid costly financial missteps

Designed to help secure your financial future, a financial plan seeks to identify your financial goals, prioritise them and then outline the exact steps that you need to take to achieve these goals.

It can also help you avoid costly financial missteps, such as making a risky investment, being subject to an unexpected tax charge or underestimating the liquidity you need, resulting in the forced sale of your assets. But the value of financial planning isn’t just limited to the returns you get from it.

There are also practical and emotional benefits to receiving professional financial advice, for example by:

freeing up time spent managing your finances
reducing the administrative burden on you
removing financial stress, which could impact on your health
giving you peace of mind that you’re moving in the right direction

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION & TRUST ADVICE.

Will Your Pension Run Out Early?

Impact on people opting for early retirement as a result of the pandemic.

An increasing number of people have been forced into early retirement due to the economic impact of the coronavirus (COVID-19), with many worried about how they’ll make ends meet in the future. Because of the pandemic, we are currently in a challenging economic period. The global economy has taken over ten years to recover from the shock of the last financial crisis.

In a recent survey, the findings showed that 3% of people in the 55-64[1] age group have taken early retirement due to the coronavirus pandemic. And 4% of people in this age group have had to access some of their pension savings to cover living costs because their income has dropped due to redundancy or reduced pay. These percentages may seem small, but they represent hundreds of thousands of people.

Risks of early retirement

While early retirement may sound like a dream come true, for those with insufficient pension savings it can be a ticking time bomb. Every year of early retirement will have an impact on your pension, in that it represents both a year lost for saving and a year added for spending. Simply put, you’ll need to make less money last longer.

Unless you’ve budgeted carefully and are sure you have enough savings, you could run the risk of your pension running out in your later years. This is an expensive time for many people, due to the cost of financing care, and that can result in unexpected hardship.

Planning for early retirement

If you’re planning early retirement, you should consider the following steps:
1. Calculate all your savings in different pension pots to find out what your total is.
2. Track down any lost pensions from previous employers and add these to your total.
3. Check how much of the State Pension you can expect to receive, and from what age.
4. Create a budget for your retirement spending, making sure to include any additional future costs you’re aware of and a little extra for future costs you’re unaware of. Be honest about how much you’ll need.
5. Make sure that the total you have in pension savings, when combined with the State Pension you’ll receive, is sufficient to cover all your future costs.

Alternatives to early retirement

If your financial situation is forcing you to withdraw from your pension but you’re not ready yet to stop saving, there are ways to access your pension that do not affect your annual allowance and therefore allow you to continue contributing at the same rate in the future.

These include:

Taking up to 25% of your savings as a tax-free lump sum (from a defined contribution pension)
Accessing a defined benefit pension (if you have one)
Withdrawing a pension pot worth under £10,000 in its entirety under ‘small pots’ rules
Buying certain types of annuity

Can you afford to retire early?

We know that you work hard for your money, so you should be able to enjoy it as much as possible. When planning for retirement, there are now more choices available than ever before. By understanding precisely what you’ll need to get to where you want to be, you can ensure you’re prepared for the future.

So when working out if you can afford to retire early, your starting point should be to think about whether your savings and investments will be enough to cover all your outgoings, as well as all your essential living costs and any regular debt repayments you may have to make.

Source data:
[1] https://www.lv.com/about-us/press/covid-pandemic-pushes-more-than-154000-into-early-retirement

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

Boost Your Pension Savings

Planning to achieve your retirement goals sooner.

Are you ‘mid or late career’ or planning to retire within ten years? If the answer’s ‘yes’, then you probably want to know the answers to these questions: Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?

But, for many different reasons, planning for retirement is a commonly overlooked aspect of personal financial planning and this can often lead to anxiety as your age of retirement approaches. We’ve provided four ways to boost your pension savings and help you achieve your retirement goals sooner.

Review your contributions

Sometimes the simplest solutions are the most effective. 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.

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 pension pot. The reason why a relatively small increase in pension contributions can result in such a large increase in the value of your pension pot is because of the power of compounding.

The earlier you invest your money, the more you benefit from the effects of compounding. Adding more money to your pension pot by increasing your contributions just makes the compounding effect even better.

Review your strategy

A missed opportunity for many pension holders is failing to choose how their pension is invested. Some people leave this decision in the hands of their workplace or pension provider.

Firstly, you should know that you don’t have to hold a pension with the provider your employer has chosen. You can ask them to pay into a different pension, allowing you to choose the provider while considering the type of funds they offer and the fees they charge.

Secondly, many pension providers will give you several options for investment strategies. If you’re in the default option, you could achieve higher returns with a different strategy (though this will usually mean taking on more investment risk). Note that this may not be appropriate in all circumstances, particularly if you are close to retirement.

Know your allowances

When you save in a pension for your retirement, the government adds tax relief on top of the money you contribute, helping you to grow your savings faster. However, there’s a limit to the amount of contributions you can claim tax relief on each year, which is called your ‘annual allowance’. It’s currently £40,000 (tax year 2021/22), and in some cases may be lower.

If you want to contribute more than your annual allowance into your pension in one tax year (for example, if you’ve received a windfall and want to put it aside for the future), it’s worth knowing that you can use any unused allowance from up to three previous years.

So, if you have £10,000 of unused allowance in each of the past three years, that’s another £30,000 you can claim tax relief on this year. The tax relief on this amount would be at least £7,500, depending on your tax band.

Trace lost pensions

Usually, starting a job with a new employer means starting a new pension. And, when that happens, some people may overlook the pension they had with their last employer. As a result, many people have pensions with previous employers that they’ve lost track of – and rediscovering them can give a huge boost to your retirement savings.

You can trace old pensions by getting in touch with the provider. Look through any documentation you still have from your past employers to see if you can find your pension or policy number. If you can’t, you can contact the provider anyway and they should be able to find your pension by using other details, such as your date of birth and National Insurance number.

If you’re not sure who the provider is, start by asking your previous employer.

Goals based investing

Are you giving yourself the best chance of success?

Before you start, defining any goals you may have will help you plan, budget and choose the right investments. Your goals might be around enhancing your current lifestyle, planning for your family or your own retirement.

The sooner you start investing, the better off you will be. Match your long-term investment goals with your short-term lifestyle aspirations. When you have created your goals and time frames, define your budget. Be realistic about what you can afford to put aside for your investments.

To help you stick to your budget, look at your cash management and put strategies into place.

It’s well worth taking the time to think about what you really want from your investments. Knowing yourself, your needs and goals, and your appetite for risk is a good start.

How to get started checklist:

1. Goals

Be clear about what you’re investing for. Investing is generally most appropriate for medium and long-term goals (at least five years). If you want access to your money before that, you might want to think about saving instead.

2. Payments

Before you start investing, first make sure that you can afford your essential living costs, as well as any debts. It’s also a good idea to make sure you have some savings to cover emergencies.

3. Investment risk

Have a think about how much risk you feel comfortable taking with your money. You should also consider your other financial commitments when deciding how much risk to take. If you don’t want to or can’t take any risk with your money, then investing may not be for you right now.

4. Timescale

The longer your money is invested, the more opportunity it has to grow in value and reach your goal. Each year, not only will the money you invest potentially grow in value, you’ll also potentially get growth on any previous growth. This is commonly known as ‘compounding’, and over longer time periods it can make a significant difference to the value of your investments.

5. What you’ll get back

The final value of your investments will depend on three main factors: how much you pay in, how your investments perform, and how long you’re invested for. Generally speaking, the more you pay in, the better your investments perform. And the longer you can keep your money invested, the more you’re likely to get back at the end.

6. Mix it up

Putting all your money in one type of investment can be a risky strategy. You can help reduce that risk by spreading your money across a mix of investment types and countries. Different investments are affected by different factors: economics, interest rates, politics, conflicts, even weather events. What’s positive for one investment can be negative for another, meaning when one rises, another may fall.

7. Be tax-efficient

You can do this by putting your money into your pension or using up your Individual Savings Account (ISA) allowance.

8. Review, review, review

Make time to regularly review your investments to check they’re on track to meet your goals.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Advice matters

Life events that professional financial advice can help you navigate.

In the current climate, we understand that you may be feeling worried about your work, your finances and what the future holds.

Research carried out by the Office for National Statistics (ONS) found that, since the outbreak of coronavirus (COVID-19), over 25 million people have experienced ‘high’ levels of anxiety[1].

Professional financial advice offers so much more than just practical, financial benefits. It also helps to improve your emotional wellbeing by making you feel better about your money and yourself – especially in times of crisis.

And receiving advice isn’t just for the very wealthy; most people can benefit from an expert overseeing their finances. Let’s explore what it means to take advice and what it might be able to do for you.

Here are five situations you’re likely to encounter in your lifetime when professional financial advice could help you and ensure you avoid making costly mistakes.

Consolidating your pensions

These days it’s common to have multiple pensions from previous jobs, and there are various benefits to consolidating them, such as managing all your money in one place and paying just one set of fees.

However, you could lose out on pension benefits when you transfer funds to a different provider and may also encounter unexpected fees. Your professional financial adviser will advise on the most appropriate options.

Making financial gifts

You might want to help your family members by making a financial contribution towards their education or home, or to celebrate a special occasion. But unless you know the complicated rules around Inheritance Tax and gifting, you might leave the recipient with a potential tax bill in the future.

Your professional financial adviser can ensure that you make tax-efficient financial gifts within the specified limits. They can also assess how much you can afford to give away without causing yourself financial difficulty.

Leaving assets to loved ones

When you make a Will, you’ll want to ensure that your money, assets and property go to the intended recipient. But if your estate is larger than the current threshold of £325,000 (2020/21 tax year), Inheritance Tax of 40% may be applied, meaning that a large portion could be taken by HM Revenue & Customs.

Your professional financial adviser can suggest options that will protect your wealth from tax and ensure that it goes to your loved ones.

Starting to invest

Investment always involves an element of risk, but the level of risk involved varies significantly between different asset classes, markets, industries and geographical areas, to mention just a few. It can be very difficult to assess the level of risk involved in an investment. Your adviser will help to match you with investments that are appropriate for your goals and investment risk.

Being targeted by scammers

When you’re contacted unexpectedly by someone with an incredible investment opportunity, the returns they promise can make it very difficult to turn down. Unfortunately, these opportunities often turn out to be scams.

If you’re considering an opportunity or have already handed over money to someone you suspect is a scammer, your professional financial adviser is there to help. They can suggest legitimate ways to safeguard and grow your money.

Source data:
[1] Office for National Statistics Research, Personal and economic wellbeing in the UK, May 2020

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.