Inflation eating your savings?

How to benefit from tax reliefs in the current financial year.

As your income increases, the complexity of your finances may too. Tax-efficiency is a key consideration when investing because it can make such an enormous difference to your wealth and quality of life.

However, the type of investment and tax-efficiency you should be looking for depends firstly on whether your priority is to save a lump sum for the future, or to draw an income today.

There are a number of allowances and reliefs available to UK taxpayers on their savings and investments. It is important to make use of these, as they can help to reduce your overall tax bill.

Maximise your ISA allowance

If you’re looking to save money on your taxes, if you’re a UK resident one way to do so is by contributing to an Individual Savings Account (ISA). With an ISA, you can shelter up to £20,000 of your income from taxation in the 2022/23 tax year.

Stocks & Shares ISA

If you’re looking to maximise your ISA allowance in this current tax year, you could consider opening a Stocks & Shares ISA. With a Stocks & Shares ISA, you can invest in a wide range of assets, including shares, corporate and government bonds, unit trusts, investment trusts, exchange-traded funds, individual stocks and shares and OEICs (Open Ended Investment Companies). Not only will your investment grow tax-efficiently, you’ll also benefit from the potential for capital gains.

Cash ISA

Another option is to open a Cash ISA. With a Cash ISA, you can earn interest on your savings without having to pay any tax on the interest earned. This makes it an ideal way to boost your savings while minimising your tax liability. A Cash ISA is available to anyone aged 16 or over, while an ISA invested in any combination of cash and shares is available to those over the age of 18.

Lifetime ISA (LISA)

If you’re looking to save for retirement, you may also want to consider opening a Lifetime ISA (LISA), which is available for people aged between 18 and 40. With a Lifetime ISA, you can save up to £4,000 in the current tax year. The government will add a 25% bonus to savings held in a LISA, up to a maximum of £1,000 per year, and this doesn’t count towards your ISA allowance.

The money saved in a LISA can be used for a wide range of purposes, including buying your first home or saving for retirement. It’s also important to note that any withdrawals from the LISA that are not put towards purchasing a first home before the age of 60 will incur a penalty of 25% of the value of the withdrawal — therefore losing the interest applied.

You need to bear in mind that the money you put into a LISA each year forms part of your overall £20,000 ISA allowance — so if you put £4,000 in a LISA during the tax year, you’ll be able to put £16,000 into other existing ISAs.

Junior ISA (JISA)

Finally, if you have children, you may want to consider opening a Junior ISA (JISA) for them. The Junior ISA is available to UK residents aged under the age of 18 who do not have a child trust fund account. Under-18s, or their parents can put up to £9,000 in a Junior ISA each tax year. The money saved in a Junior ISA will grow tax-efficiently and can be used for a wide range of purposes, including education and training costs.
If unused, your ISA allowance cannot be carried from one tax year to the next.

Consider putting more into a pension

If you’re a UK resident there are a number of reasons to consider putting more into your defined contribution pension. One is that the tax relief on your contributions are very generous. Another is that, if you are a higher rate taxpayer, you receive additional relief on your contributions. But some high earners should be aware that their annual allowance may be reduced.

Under the current rules for tax year 2022/23 the maximum contributions which are eligible for tax relief is the lower of your gross income and £40,000 including tax relief. Increasing your pension contributions is a very effective way of saving for retirement. By putting more into your pension, you will be able to build up a larger pot of money which can provide you with a comfortable retirement income.

Making the most of retirement prospects

It is also worth considering increasing your pension contributions if you have recently had a pay rise or come into some extra money. By doing this, you will ensure that you are making the most of your finances and making the most of your retirement prospects. You can also carry forward unused annual allowances from the previous three tax years, subject to certain rules, providing further scope for making contributions.

If you earn over £100,000, making pension contributions can be highly advantageous. Your personal allowance is reduced by £1 for every £2 of income above £100,000; this means your allowance is zero if your income is £125,140 or above. However, if you make a pension contribution, you are able to offset the reduction in your personal allowance.

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

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.

Recession-proof your finances

10 practical steps to ensure your money is working hard for you.

In these uncertain times, it’s more important than ever to make sure your finances are in order. The Bank of England believes that a painful squeeze on our living standards, driven, primarily, by soaring energy prices, is set to intensify and will push the UK economy into recession later this year.[1]

Making your finances recession-proof is all about taking practical steps to ensure your money is working hard for you. It is vital to be completely honest with yourself about your financial situation.

By conducting a thorough audit of your finances and gaining a comprehensive understanding of all your incomes and outgoings, this will show you exactly where your cash is going and, most importantly, help you identify problematic spending behaviour.

Here are 10 tips to help you recession-proof your finances:

1. Make a budget and stick to it.

This will help you keep track of your spending and ensure that you’re not overspending.

2. Save, save, save!

Try to put away as much money as you can into savings account so that you have a cushion in case of tough times.

3. Invest in yourself.

Take the time to learn new skills or improve upon existing ones. This will make you more valuable in the job market if you need to make a job or career change.

4. Remove any unnecessary payments.

Look at your bank account and remove any pain-free direct debits. Consider if you’re currently paying for things you don’t really need, for example subscriptions.

5. Time to switch.

Look at energy tariffs, home insurance, car insurance, broadband, TV package, mobile tariff – now might be a good time to switch.

6. Stay disciplined with your debt.

Make sure you’re making all of your payments on time and in full. This will help you avoid costly late fees and keep your credit in good shape.

7. Pay off high interest.

Prioritise any high-interest debt, such as credit card debt, freeing up more money in your budget to cover other expenses if your income decreases.

8. Have an emergency fund.

This is a must in case you lose your job or have any unexpected expenses. Try to save up at least between 3 to 6 months’ worth of living expenses so that you’re expenditure is covered.

9. Diversify your Income.

Don’t put all your eggs in one basket. Having multiple streams of income can really help. If one income source starts to dwindle – or gets eliminated completely – this will provide other sources to fall back on.

10. Diversify your investments.

In addition to diversifying your income, it’s also important to diversify your investments. Review your investment portfolio and make sure your investments are spread across different industries and even different types of asset classes.

Source data:

[1] https://www.bankofengland.co.uk/monetary-policy-report/2022/may-2022

Show me the money

How to invest your money and avoid costly mistakes.

It’s not surprising that the world of investing can seem complex, especially in the current global economic climate. Investors face an endless supply of market news, many investment choices and often-changing market conditions.

There are a number of key principles that every investor should follow with the aim of building an effective long-term strategy designed to achieve their financial goals.

Here’s our rundown of the 10 principles that every investor needs to know:

1. Set investment goals

It’s important that you set yourself investment goals – this will help you stay focused and on track to achieving your financial objectives – with a well-structured plan in place, you can confidently stay committed to it.

There are a number of factors to consider when setting your goals, such as your age, investment timeframe and risk tolerance.

2. Plan on living a long time, and saving more for it

People aged 65 years in the UK in 2020 can expect to live on average a further 19.7 years for males and 22.0 years for females, projected to rise to 21.9 years for males and 24.1 years for females aged 65 years in 2045[1].

Investors should start early, invest with discipline and have a plan for their future.

3. Cash is rarely king, and inflation eats away at your purchasing power

Cash is a popular asset class, but its important to remember that it is not always king – inflation can erode the purchasing power of your cash, making it a less attractive option in the long run.

When inflation is taken into account, cash typically lags behind other asset classes such as stocks and bonds which can mean that over time, cash will generally be worth less in terms of purchasing power.

4. Start early, and re-invest income, compounding works miracles

Compounding is often called the eighth wonder of the world – by starting to invest early and reinvesting your income, you can take advantage of compounding to build your wealth over time.

The power of compounding is so great that delaying investing by even just a few years, or choosing not to reinvest income, can make an enormous difference to your eventual returns.

5. Returns and risks generally go hand in hand, so be realistic about your objectives and what you can achieve

Of course, you always want to aim for the highest possible return while taking on the least amount of risk – but in reality, there is usually a trade-off involved – the higher the potential return, the higher the risk. And vice versa.

Therefore, if you want to target a higher level of return, you have to be willing, and able, to tolerate larger swings in the value of your investments along the way.

6. Volatility is normal, so keep your head when all about you are losing theirs

Volatility is a normal part of the market, so don’t let it rattle you – keep your head when all about you are losing theirs, and remember that the best time to invest is often when others are panicking.

So don’t panic when the markets are down. Instead, stay calm and focused on your long-term goals.

7. Timing the market is difficult, staying invested matters

It’s no secret that timing the stock market is difficult. In fact, it’s often said that trying to time the market is a fool’s errand – by staying invested you ensure that you’re participating in the long-term growth of the market and helps to mitigate the effects of volatility.

Staying invested in the market allows you to take advantage of opportunities as they arise. By staying invested, you’ll be in a position to buy when prices are low and sell when prices are high.

8. Diversification works, don’t put all your eggs in one basket

By spreading your money across different investments, you can minimise your risk and maximise your chances of success.

Over time, different investments will tend to even out, so the aim is to grow your money even if some investments under perform due to market movements.

9. Review your portfolio

Reviewing your investment portfolio allows you to monitor your progress and ensure that your investments are performing as expected, giving you the opportunity to make changes to your portfolio if necessary.

It helps you stay disciplined and focused on your long-term goals.

10. If it seems too good to be true, it usually will be

Promises of high returns with little or no risk are almost always too good to be true – there are a lot of scams out there, and many people looking to take advantage of unsuspecting investors.

Before investing, consult with a financial professional to help you understand the risks involved.

Source data:

[1] The Office for National Statistics (ONS) – Past and projected period and cohort life tables: 2020-based, UK, 1981 to 2070

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.

Self-employed vulnerable to financial shocks

New research highlights that 81% aren’t seeking financial advice.

As more and more people reject the traditional working structure in favour of becoming self-employed, some people could be at risk of financial insecurity as they lose out on employee benefits that offer protection in the present, and financial planning for the future.

New research highlights this groups vulnerability to financial shocks and the importance of expert financial advice to open up conversations to ensure that all aspects of protection are discussed, and that the right solutions are in place to help create financial peace of mind.

Facing financial hardship

If you are self-employed, you may not have the same safety net as those who are employed by someone else. If you become sick or injured and are unable to work, you could face financial hardship without income protection insurance.

Income protection insurance could help replace your lost income if you are unable to work due to an illness or injury. It can give you peace of mind knowing that you will still be able to meet your financial obligations even if you are unable to work.

Seeking financial advice

Over half (57%) of self-employed workers in the UK rely on personal savings when they are not working, yet a massive 81% aren’t seeking financial advice according to new research[1]. Over two-thirds (64%) of those who are self-employed in the UK revealed they are without a regular income, with just one in five (23%) receiving a monthly pay packet.

The research also found that almost half (48%) of self-employed people see their income fluctuate as a result of owning their own business, with a similar proportion (49%) putting this down to being a freelancer, contractor or consultant.

Vulnerability to financial shocks

As the cost of living rises and private rents and mortgages in the UK increase at the fastest rate in five years, a quarter (24%) of those surveyed said they only had enough money to cover such costs for three months if they were unable to work.

With the research highlighting the group’s vulnerability to financial shocks and the importance of expert financial advice, worryingly one-quarter (24%) say they hadn’t thought about seeking professional advice.

Secure financial protection

Not being eligible for Statutory Sick Pay (SSP) can prove a real problem for the self-employed and their financial resilience – during the pandemic, a fifth (21%) of all applications to the Test and Trace Support Payment scheme were from this group, according to a Freedom of Information request by The Community Union.

And while many have taken steps to secure financial protection for themselves and their families, 13% of self-employed workers in the UK still don’t have critical illness cover or life insurance.

Source data:

[1] The research was carried out online by Opinium Research across a total of 2,002 UK adults (Booster sample of 502 self-employed workers and 1,015 Renters). Fieldwork was carried out between 21st – 27th October 2021.

Managing the impact to your pension

Just two out of five have planned for inflation in retirement.

Retirement planning can be complex at the best of times so it is easy to understand how some people can find it daunting to take into account factors like inflation. The reality is that inflation hurts everyone, but it can be especially harmful to retirees.

Whether it’s the price of food, fuel, energy or other goods and services that we purchase, inflation is definitely increasing. The current economic climate clearly illustrates just how important it is to consider the impact of inflation on your future retirement income and take proactive steps to manage this.

Reaching historic highs

Just two out of five (37%) over-55s have planned for the impact of inflation on their spending power when they stop work, according to new research[1]. As the Consumer Price Inflation continues to reach historic highs, many over-55s who are either approaching retirement or have retired are facing an inflation shock as they try to manage their retirement income.

Indeed, 41% admitted they had not planned for inflation or did not know whether they had. The other 22% say they just have not planned their retirement income at all. Interestingly, the current discussions around inflation has impacted peoples approach to retirement with 43% of those who are working full-time planning to factor this challenge in – up from 39% of those who have already retired.

Retirement spending power

The current challenging economic situation is also encouraging a more thoughtful approach to retirement with only 15% of the employed confessing to a lack of retirement planning compared to 23% of those who are already retired.

Among those who say they have planned for the impact of inflation on their retirement spending power more than a third (34%) say they can rely on the State Pension keeping pace with rising prices while 33% believe their company pension will rise in line with inflation.

Inflation rose sharply

As well as looking to the State Pension and company pensions, the 30% of those who have prepared for inflation say they have anticipated the need for their income to rise each year and have approached their savings accordingly.

Around a quarter (26%) say they have considered how much spending they might need to cut if inflation rose sharply. The main reason for failing to take account of inflation was its unpredictability – 31% say they did nothing because they could not forecast it – while 30% say they had been caught out by the recent increase in inflation after years of stability.

Explore different options

The importance of future proofing your finances is clearly moving up the agenda and when you compare retirees with those over-55s who are still working, you can see that the recent inflation shock has encouraged people to plan more carefully.

No one wants to find that as they age, they need to cut back more and more just to make ends meet. While saving as much as possible for retirement and careful planning is clearly important, it is also vital to consider all your assets and to explore different options, whether it is boosting your tax-free savings, downsizing or accessing your housing equity.

Source data:

[1] Key Advice 18 May 2022.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR MORTGAGE IS SECURED ON YOUR HOME, WHICH YOU COULD LOSE IF YOU DO NOT KEEP UP YOUR MORTGAGE PAYMENTS.

EQUITY RELEASE MAY INVOLVE A HOME REVERSION PLAN OR LIFETIME MORTGAGE WHICH IS SECURED AGAINST YOUR PROPERTY. TO UNDERSTAND THE FEATURES AND RISKS, ASK FOR A PERSONALISED ILLUSTRATION.

EQUITY RELEASE REQUIRES PAYING OFF ANY OUTSTANDING MORTGAGE. EQUITY RELEASED, PLUS ACCRUED INTEREST, TO BE REPAID UPON DEATH OR MOVING INTO LONG-TERM CARE. EQUITY RELEASE WILL AFFECT THE AMOUNT OF INHERITANCE YOU CAN LEAVE AND MAY AFFECT YOUR ENTITLEMENT TO MEANS-TESTED BENEFITS NOW OR IN THE FUTURE.

CHECK THAT THIS MORTGAGE WILL MEET YOUR NEEDS IF YOU WANT TO MOVE OR SELL YOUR HOME OR YOU WANT YOUR FAMILY TO INHERIT IT.

IF YOU ARE IN ANY DOUBT, SEEK PROFESSIONAL FINANCIAL ADVICE.