Get ready to beat the ISA deadline

Time to give your financial future a boost?

Savers and investors have less than three months to use the £20,000 they can put into their tax-efficient Individual Savings Account (ISA) before the end of the financial year on April 5. The current tax year started on 6 April 2021 and ends on 5 April 2022.

ISAs enable you to minimise the amount of tax you pay on your hard-earned cash. Some ISAs give you instant access to your money and can be used to plan your finances for the short term. On the other hand, if you have longer term savings goals, you can invest in an ISA for your future.

Don’t lose your ISA allowance

There is a limit you can pay into ISAs each tax year and this is called your annual allowance. For the 2021/22 tax year, your annual allowance is £20,000 and you have until midnight on 5 April 2022 to use this allowance. If you don’t use your ISA allowance, you will lose it as it cannot be carried forward.

However, you will have a new annual allowance available from 6 April 2022 in the 2022/23 tax year, so if you have already put £20,000 into an ISA in the 2021/22 tax year, you could put another £20,000 away on or after 6 April 2022. You can only pay into one of each type of ISA in a tax year, within the annual allowance.

ISA OPTIONS:

Cash ISA

If you are a UK resident over the age of 18 (age 16 for a Cash ISA only), you can open one of each type in a tax year, providing you don’t exceed the annual allowance. Cash ISAs are suitable for your short-term savings goals as they don’t invest in the stock market but with current low interest rates, your savings won’t grow much, and you might not be keeping up with inflation. You might consider a Cash ISA as your ‘emergency’ pot of money for any unexpected expenses or a last-minute holiday.

Stocks & Shares ISA

This is a tax-efficient investment which allows you to invest your money in shares, government bonds (gilts) and property with peace of mind that you won’t pay any capital gains tax or income tax on the proceeds. This type of ISA is more suitable for your longer-term goals as they have the potential to out-perform Cash ISAs over the medium-long term, but with varying levels of risk.

The three main factors to consider when choosing between a Cash ISA and a Stocks & Shares ISA is the length of time you’ll be saving or investing, your appetite to investment risk and the impact of inflation over time.

Innovative Finance ISA

This is a type of investment account which allows you to lend your money through peer-to-peer lending platforms to receive tax-efficient interest and capital gains. You could be lending money to serve personal loans, small business loans or property loans or a combination of these.

Interest rates can often be much more attractive than Cash ISA rates, but peer-to-peer lending is a higher-risk form of investing and your capital is entirely at risk as there is no protection from the Financial Services Compensation Scheme (FSCS).

Lifetime ISA

If you are aged 18 to 39, and are looking to save for your first home or for later life, you could consider a Lifetime ISA. You can hold cash in a Lifetime ISA or choose to invest it just as you would with a Stocks & Shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday but remember that this £4,000 allowance contributes to your full annual ISA allowance.

The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), up to a maximum of £1,000 a year but you must be aware that a charge of 25% will be applied to any withdrawal if it is for any reason other than buying your first home, at age 60 or if you are terminally ill.

Junior ISA

A Cash or Stocks & Shares ISA account, or both, can be opened for a child subject to the annual allowance which is £9,000 for the 2021/22 tax year.

The account must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened. Savings in a Junior ISA account cannot be withdrawn until the child reaches 18.

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.

New Year’s tax saving resolutions

Make full use of your relevant tax planning opportunities.

With the tax year end, 5 April on the horizon, taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

We have provided some key tax and financial planning tips to consider prior to the end of the tax year. Now is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.

Check your PAYE tax code

It’s important to check your tax code. Your tax code is based on the amount of tax you should be paying and the amount you can earn before tax applies. The tax code is the identifier that tells your employer how much tax should be deducted from your salary each time you get paid. If you have multiple employers or pension providers, you may get more than one tax code. If you’re on the wrong one, you could be paying HM Revenue & Customs (HMRC) more than you ought to be. On the other hand, you risk getting penalised if you’re paying too little.

Transfer part of your personal allowance

Married couples and registered civil partners are permitted to share 10% of their personal allowance between them. The unused allowance of one partner can be used by the other, meaning an overall combined tax saving. The amount you can transfer is £1,260 for 2021/22 and a transfer is not permitted if the recipient partner pays tax at a rate higher than the basic rate of 20% (higher than the intermediate rate of 21% for Scottish taxpayers).

Contribute up to £9,000 into your child’s Junior ISA

The fund builds up free of tax on investment income and capital gains until your child reaches age 18, when the funds can either be withdrawn or rolled over into an adult ISA. Relatives and friends can also contribute to your child’s Junior ISA, as long as the £9,000 limit for 2021/22 is not breached.

Tax-free savings and dividend allowances

For 2021/22, savings income of up to £1,000 is exempt for basic rate taxpayers, with a £500 exemption for higher rate taxpayers. The tax-free dividend allowance is £2,000 for all taxpayers. Married couples and registered civil partners could save tax by ensuring that each person has enough of the right type of income to make use of these tax-free allowances.

Individual Savings Accounts (ISAs)

You can put the entire amount into a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, or any combination of the three. Usually when you invest, you have to pay tax on any income or capital gains you earn from your investments. But with an ISA, provided you stick to the rules on how much you can pay in, all capital gains and income made from your investments won’t be taxed. Every tax year you have an ISA allowance, which is currently £20,000 for the 2021-22 tax year.

Utilise any capital losses

If you realise capital gains and losses in the same tax year, the losses are offset against the gains before the capital gains tax exempt amount (£12,300 in 2021/22) is deducted. Capital losses will be wasted if gains would otherwise be covered by your exempt amount. Consider postponing a sale which will generate a loss until the following tax year, or alternatively realising more gains in the current year.

Maximise pension contributions

The annual allowance for 2021/22 is £40,000. To avoid an annual allowance tax charge, the pension contributions made by yourself, and by your employer on your behalf, must be covered by your available annual allowance. If you haven’t used all your allowance in the last three tax years, it might be possible to pay more into your pension plan by ‘carrying forward’ whatever allowance is left to make the most of the tax relief on offer, though bear in mind the amount is still capped at 100% of your earnings. However, different rules apply if you’ve already started to take money out of your pension plan and you’re affected by the Money Purchase Annual Allowance, or if your income when added to your employer’s payments are more than £240,000.

Pay pension contributions to save NICs

If you pay pension contributions out of your salary, both you and your employer have to pay National Insurance Contributions (NICs) on that salary. When your employer pays a contribution directly into your pension scheme, the employer receives tax relief for the contribution and there are no NICs to pay – a saving for both you and your employer. You could arrange with your employer to cover the cost of the contributions by foregoing part of your salary or bonus. You must agree in writing to adjust your salary before the revised pension contributions are paid for this arrangement to be tax-effective, although pension contributions are not caught by the clampdown on salary sacrifice arrangements.

Make a Will and review it

If you die without making a Will, your assets will be divided between your relatives according to the intestacy rules. Your surviving spouse or registered civil partner may only receive a portion of your estate, and Inheritance Tax will be due at 40% on anything else above £325,000 (up to £500,000 if the Residence Nil Rate Band is available).

Leave some of your estate to charity

Where you leave at least 10% of your net estate to charities, the Inheritance Tax on the remainder is charged at 36% instead of 40%. The exact calculation of your net estate is quite complicated, so its important to receive professional advice when drawing up or amending your Will.

Make regular IHT-free gifts

As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, these gifts will be free of Inheritance Tax. The recipients of the gifts need not be the same people each year.

Use the IHT marriage exemption

If your son or daughter is about to marry, you and your spouse can each give them £5,000 in consideration of the marriage, and the gift will be free of Inheritance Tax. The marriage exemption can also be combined with your £3,000 a year Inheritance Tax exemption to allow you to make larger exempt gifts. You can make an Inheritance Tax-free gift of £2,500 for a grandchild’s wedding. Registered civil partnerships attract the same exemptions.

Make IHT-free gifts each tax year

These gifts are free of Inheritance Tax and, if you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000 but you can only carry forward the £3,000 allowance for one tax year. Remember, you and your spouse or registered civil partner can each give £3,000 out of your capital every tax year in addition to gifts you make out of your regular income.

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.

Generation vexed

A third of Gen Xers not confident they can fund their retirement.

With 57% of Gen Xers wanting to save more for retirement but struggling to do so, a quarter (25%) plan to work part-time past the State Pension Age (SPA) to plug an expected income shortfall in retirement, while 17% plan to work full-time. However, they have serious concerns about whether they will be able to continue working later in life.

The findings, which are contained in a report from the International Longevity Centre (ILC) show why many people in Generation X continue to be ‘Generation Vexed’.

As many as 37% of all Gen Xers plan to work later in life to boost their retirement income, while for 25% this is their only plan.

However, they have several concerns they fear will constrain their ability to do this:

59% are worried poor physical health will restrict their ability to work.
31% are concerned poor mental health will impact them.
31% fear age discrimination will restrict their ability to retain or find another job.

Other concerns include not having the right skills to adapt to the changing job market (19%) and a fear that the economic impact of the pandemic will make it harder to remain in work (17%)

These concerns are perhaps understandable, especially as 36% of all Gen Xers, and one in three (33%) of those whose only plan for retirement is to work longer, also have a health problem or a disability.

Meanwhile, almost two-thirds (62%) of those who plan to work past the SPA to address an income shortfall in retirement are confident they’ll be able to do so – but they may find this is not always possible as a quarter (25%) of this group currently have a health problem or disability, and some 7% expect to provide care to an adult in the next five years.

Source data:

[1] All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 6,035 adults aged 40-55. Fieldwork was undertaken between 13 – 24 November 2020. The survey was carried out online. The figures have been weighted and are representative of all UK adults aged 40-55. Calculations based on survey stats calculated by ILC. All references and methods are available in the full report, which can be downloaded here: https://ilcuk.org.uk/slipping-between-the-cracks/

Planning for early retirement

What are the financial consequences to stopping work in your 50s?

Early retirement may be the ultimate dream for some, but the coronavirus (COVID-19) pandemic made it the only option for many. Figures from the Office for National Statistics show that over-50s had the highest redundancy rate between December 2020 and February 2021[1].

Retiring early can give you that change of lifestyle you’ve been craving, open doors to new experiences and potentially improve your health. But there are financial consequences to stopping work in your 50s.

What is the financial impact of early retirement?

Traditionally, people retired between the ages of 60 and 65, but there’s no set age that you need to give up work. In fact, anyone with a pension pot can access it from age 55 – although this is set to rise to age 57 from 2028.

Retiring early requires some careful planning. It can put significant pressure on your funds as your new income is likely to be less than your pre-retirement earnings. You might have various sources of income for your retirement ranging from your personal and/or workplace pension, the State Pension, investments and other savings. Reviewing your financial situation and determining how much money you need to live a comfortable life in retirement is an important first step.

Something to bear in mind: if you’re aged over 55, your State Pension won’t be paid until you reach age 67. If you stop working before then, you could be relying on income from your private pension savings for more than a decade.

It’s also worth bearing in mind the impact of inflation. Prices have steadily increased over the past decade, for example, holidays, luxury goods and even basic necessities have become more expensive. So if you’re looking at a retirement of 25 years or more, you could see the purchasing power of your pension income decrease due to rising prices.

How to assess your financial situation

Understanding your individual financial situation can make a big difference when it comes to making decisions around your retirement savings. Fully assessing your personal finances can help give you a clearer picture of whether early retirement is feasible.

Here’s a checklist of what you should consider:

1. How do you plan for a varied retirement?

If you’re planning to retire early, think about what type of lifestyle you want to enjoy in later life. This will then help you determine what you’re saving towards. You might plan to travel, embark on a journey of further education or simply spend more time with loved ones – whatever you decide to do, you’re going to have demands on your retirement income.

When you’re reviewing your financial plans, it could be worth looking at those first early years of retirement as something separate. For example, including more in the budget for multiple holidays a year, or dinners out and trips to the theatre. Then take a look at how your lifestyle may modify as you slow down in later life. There may be fewer trips and holidays to take, but there could be increased care costs.

Taking early retirement means that you almost have to plan for two different retirements. One that caters to the immediate future, where you’re likely to still be very active. And one where a slower pace of life comes into play. Each will have a different focus and therefore different demands on your money.

2. How many years do you expect to be retired?

There are obviously no guarantees on how long any of us will live, but when it comes to retirement planning, you’ll need to make an informed guess.

It’s worth considering family history, as well as factors such as your gender and geographical region. If you expect to live to around 85, but plan to retire at 55, you’ll need to save enough to support yourself for 30 years – but don’t forget, you may live a lot longer than you expect, and you’re likely to want leave something for your loved ones.

3. How much will your State Pension be?

In order to understand your income requirements in later life, you’ll need to know when you can collect your State Pension and how much it’s likely to be.

The State Pension age is under review and is gradually being pushed back so it’s in line with life expectancy. Other factors, such as your gender and the year you were born, make State Pension ages vary. You can check your State Pension age here.

Currently, the maximum State Pension is £179.60 per week, or £9,350 a year[2]. However, you’ll need to have made, or be credited with, 35 years of National Insurance contributions to qualify for the full amount[3].

4. How much do you have in your private pension pot?

As the State Pension is not really enough to live on, the likelihood is that workplace or private pensions will make up a significant part of your retirement income.

When you retire, you can use some or all of your pension savings to buy an annuity, which then pays you a regular retirement income for either a set period, or for life. Alternatively, you can keep your savings in your pension pot and ‘drawdown’ only what you need, as and when you need it. You must have a defined contribution pension to be able to do this (your workplace pension provider will be able to inform you on whether you do).

The first step, before making a decision, would be to track down all of your pension pots and ask for a pension forecast. Estimate how much you can achieve via a drawdown, an annuity, or a combination of both. And remember, the value of any investments can fall as well as rise and isn’t guaranteed.

5. How can you ensure your pension pot will last?

Having an understanding of your retirement income and outgoings can help you to plan for the future. Perhaps you’ve reviewed your finances and realised you can retire early, or you might decide to wait a few more years to help you boost your pension pot that bit more.

The key thing to understand is that your retirement is completely personal, and the amount you will need will depend on your specific circumstances and expectations. If you’re in any doubt about the financial impact of early retirement, you should obtain professional financial advice.

Source data:

[1] Living longer: older workers during the coronavirus (COVID-19) pandemic. Data source, Office for National Statistics, May 2021.
[2] Having more for retirement. Data source, GOV.UK, August 2021.
[3] The new State Pension. Data source, GOV.UK, August 2021.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). 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.