Early bird investors

Does the early bird get the ISA worm?

If you’re an investor looking to maximise your Individual Savings Accounts (ISA) returns, it’s worth considering investing your ISA allowance as soon as possible each year, as soon as it becomes available on 6 April. Not only will this help ensure that your money is protected from taxes right off the bat, but it also means that your investment has more time to grow in the market. This can result in a bigger ISA pot in the long run.

Of course, this strategy may not be right for everyone, and there are risks to investing in the market. It’s important to carefully consider your investment goals, risk tolerance and overall financial situation before making any investment decisions. However, for many investors, investing their ISA allowance early on can be a smart move that pays off over time.

Highly efficient way to protect investments from tax

An Individual Savings Account (ISA) is a highly tax-efficient way for people to protect their investments from tax. In the 2022/23 tax year, everyone in the UK had an annual Capital Gains allowance of £12,300, which was reduced to £6,000 in the Autumn Statement on
17 November 2022. This will reduce further to £3,000 from April 2024.

However, when you invest into an ISA, you can enjoy tax-efficient returns and don’t need to declare any interest from an ISA or any income or capital gains made from it when completing your annual tax return.

Make sure you use your full ISA allowance

The maximum amount that can be invested into an ISA in the 2023/24 tax year is £20,000. This allowance hasn’t changed since April 2017 when it was increased from £15,240 and is higher than the £7,000 maximum allowance offered in 2008. However, any unused allowance will not carry over to the next tax year, meaning that it’s essential to make sure you use your full ISA allowance during the current tax year if possible.

Investing early can certainly offer many benefits, including an extra year of tax-sheltered growth. However, it’s important to be aware that investing outside of an ISA can come with tax risks. The halving of the dividend tax allowance this tax year means that you may end up paying tax on dividends earlier in the year if you hold investments outside of an ISA.

Take advantage of pound cost averaging

Starting an ISA early in the tax year provides many benefits when investing, particularly when it comes to setting up regular monthly payments into a Stocks & Shares ISA. By doing so, you can take advantage of pound cost averaging, which is a process of drip-feeding money into an investment over time in order to reduce the impact of market ups and downs.

The idea behind pound cost averaging is that when you invest a fixed sum every month, you’ll buy more units when an investment’s price falls, which can provide the potential for greater profits if they then rise.

Establishing a regular investment plan early on

Of course, the opposite can also be true – if prices rise, you’ll buy less. However, over time, pound cost averaging can help to smooth out the ups and downs in an investment’s value, reducing the risk of dramatic swings in your portfolio.

By establishing a regular investment plan early on, you’ll also be able to take advantage of the full tax year for your investments, allowing you to spread your investments across the entire year. This can help to reduce the risk of investing all of your money at a time when the market may be overvalued.

Good news is that you can transfer your ISA

Transferring an existing ISA could also be a practical option if you’re looking for a more competitive deal or want to consolidate your investments. The good news is that you can transfer your ISA at any point during the tax year, but it’s essential to take note of some things before you do.

For instance, you need to transfer the whole ISA, so you cannot partially transfer your existing Stocks & Shares ISA for the current tax year. It’s wise to check with your current provider if they impose fees for transferring out. Taking this step can help you avoid unnecessary costs and ensure that you get the most out of your investment.

Consistently max out your ISA allowance each year

The old adage holds true when it comes to investing: time in the market is more important than timing the market. This means that the longer your money is invested, the more time it has to grow and potentially compound over time.

Investing in an ISA can be a great way to grow your savings pot beyond the limits of a tax-efficient allowance. It’s important to consistently max out your ISA allowance each year, if affordable, and enjoy generous investment returns. Even if you don’t have a large lump sum to invest, you can still benefit from regular, small contributions from the beginning of the new tax year. So start saving and investing today and see how far you can go!

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, SO YOU COULD GET BACK LESS THAN YOU INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

State Pension

How much has the 2023/24 State Pension increased by?

If you are a UK resident planning for your retirement, it’s important to be aware of the State Pension changes that have taken effect in the new tax year. From April, the amount you can now receive as part of the UK State Pension has risen, which will be welcome news to those who have retired or are nearing retirement age.

Knowing what to expect from your future State Pension, and when you can expect to start receiving it, is an essential part of planning for retirement. This may involve making contributions to the National Insurance scheme, which can provide additional entitlements on top of the basic State Pension.

Unlike a private pension, the State Pension is a four-weekly payment made by the government to people who have reached the qualifying age and have paid enough National Insurance contributions.

In November last year, the government confirmed that the State Pension would increase by 10.1% – in line with September’s Consumer Prices Index (CPI) measure of inflation.

From April 2023, payments are:

£203.85 a week (up from £185.15) for the full, new flat-rate State Pension (for those who reached State Pension age after April 2016)

£156.20 a week (up from £141.85) for the full, old basic State Pension (for those who reached State Pension age before April 2016)

How is the State Pension age changing?

In addition to the increase in the pension amount, there are also changes being considered to the State Pension age. This means that the age at which you can start receiving your pension may be adjusted in line with life expectancy changes.

The government says 12.4 million people currently receive the State Pension. Men and women born between 6 October 1954 and 5 April 1960 start receiving theirs at the age of 66.

But for people born after this date, the State Pension age is gradually increasing to 67 by 2028 and 68 by 2046. At a cost of £105 billion, the StatePension accounts for just under half the total amount the government spends on benefits.

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.

Mind the State Pension gap

Knowing how much you’ll receive is vital for planning your future finances.

The State Pension age is set to rise to 67 by 2028, followed by a subsequent rise to 68 between 2044 and 2046. However, there is currently a review being conducted to determine the appropriateness of the existing timetable.

This review will help to determine whether further adjustments to the State Pension age will be required in the future. As a result, it is likely that individuals’ retirement planning will need to be flexible enough to accommodate potential future changes to the State Pension age.

Accessible information

New research has revealed that one in seven (14%) of retirees received less money from the State Pension than they had expected[1]. This highlights the need for more accessible information on what individuals can expect to receive from the government during their later years.

The study also revealed that a fifth (20%) of retirees were unaware of how much they would receive from the State Pension before they retired, while one in ten (9%) found it challenging to determine what their payments would be.

Knowledge gap

The lack of awareness was observed not only among full-time workers but also part-time workers, with the knowledge gap being significant between homeowners (38% unsure) and those living in rented accommodation or with family members (50% and 54%, respectively).

The study also found that pre-retirees shared a similar level of uncertainty regarding their State Pension. Approximately three in ten (28%) respondents did not know their State Pension age, while 44% were unaware of the amount they could expect to receive from the State Pension upon retirement.

Triple Lock

Questions surrounding the ‘Triple Lock’ and the potential for the planned rise in State Pension age to 68 to be brought forward have added to the uncertainty surrounding the State Pension.

It’s essential to note that individuals need to claim their new State Pension as it is not granted automatically. Typically, an invitation letter would be sent no later than two months before reaching the State Pension age, explaining the steps to claim the pension benefits.

Pension entitlements

If someone is nearing the State Pension age and has not received an invitation letter, the individual could still submit a claim. In such cases, the quickest way to apply for the pension is online.

The constantly changing landscape can make it difficult to keep up with the latest information and seek advice on the value of pension entitlements and the age at which people will qualify for payments. As the State Pension is a crucial source of retirement income for many people, knowing how much they will receive is vital for planning their future finances.

Source data:

[1] Boxclever conducted research among 6,000 UK adults. Fieldwork was conducted 6 Sept–16 October2022. Data was weighted post-fieldwork to ensure the data remained nationally representative on key demographics. Comparisons to data from last year are taken from Boxclever research among 4,896 UK adults conducted between 16 and 23 July 2021.

Giving while living

What will your legacy look like?

April brought a host of changes to the UK’s tax regime, with some thresholds for taxes such as additional rate Income Tax being lowered while others, such as Corporation Tax, are increased.

However, the Inheritance Tax (IHT) nil-rate band has remained stagnant at £325,000 since 2009, despite the meteoric rise in property prices over the same period. This has resulted in an all-time high of £6.1bn being collected in Inheritance Tax in 2021/22.

Freezing of the nil-rate band

Chancellor Jeremy Hunt announced in the Autumn Statement on 17 November 2022 that the government had frozen the IHT thresholds for two more years. As the threshold was already frozen until April 2026, it means that the threshold is now frozen until April 2028.

If you own a home worth over £1 million, there is a risk that your loved ones may face a costly IHT bill upon inheritance, due to the freezing of the nil-rate band. While there is an additional residence nil-rate band (RNRB) of £175,000 that can apply when passing on the property you lived in, married couples or those in registered civil partnerships can transfer the allowance, enabling most couples to pass on up to £1 million tax-free, assuming they pass on their home to their direct descendants.

Wealth to future generations

However, if your total estate exceeds £2 million, the RNRB will be tapered. For every £2 by which your individual estate exceeds £2 million, the RNRB will be decreased by £1. Professional financial advice can help homeowners plan to mitigate the impact of IHT.

Downsizing is a popular method to manage IHT, but this presents the challenge of passing on the sale balance to your loved ones. Planning for the transfer of wealth to future generations can be an uncomfortable topic for many families. However, proper estate planning can ensure a smooth and stress-free transition of family wealth to loved ones.

Feeling financially squeezed

It’s understandable that many people are feeling financially squeezed in the current climate, and as a result, we are likely to see a rise in ‘giving while living’. This refers to the practice of lifetime gifting to loved ones, particularly adult children who may be struggling to make ends meet during the ongoing cost of living crisis.

However, it’s important to note that the extended freeze on thresholds will mean that many people will now need to seek professional financial advice more than ever to protect their wealth and ensure that it is passed on according to their wishes, without being caught out by unforeseen taxes in the future.

Source data:
[1] https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-annual-bulletin#inheritance-tax

INHERITANCE TAX AND ESTATE PLANNING ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

call: 01422 349 131

email: info@iftwm.com

Month: June 2023