Happy new tax year. While it is unlikely that many champagne corks were popped, 6 April was a landmark for anyone who wants to take a fresh look at their finances.
“This is often a good time to take stock,” says Sarah Coles, a personal finance analyst at Hargreaves Lansdown. “Revisit things like savings, investments and pensions at least once a year to make sure they still reflect your needs.”
Here’s how to prepare yourself for the (tax) year ahead.
Pensions
Now is as good a time as any to take stock of pension savings in old and new schemes to see what they are worth, and the projections of what you will get when you retire.
The Money Advice Service, and many pension providers, have online calculators. Put in a target income on retirement, contributions and current pots, to estimate how much more you need to contribute before you retire.
If someone is considering changing the levels of risk in how their pension is invested – to either try to make their money work harder, or to take a more conservative approach amid changing markets – then age is key. Younger investors are at the best stage to take a risk, says Rebecca O’Connor, head of pensions and savings at Interactive Investor. “It seems counterintuitive to invest such a valuable pot of money into higher-risk investments for young workers who are new to pensions, and might want to feel their way at first. But higher-risk strategies over the long term tend to outperform. The key bit is ‘over the long term,’” she says.
“If you wanted your money in three years to buy a house, higher risk would not be the right strategy. Nor would it be if you are an older worker very close to retirement. Higher risk at this point leaves you exposed to heavy losses should the markets nosedive.”
A growing number of people want to live a greener lifestyle in 2021 and shifting your finances towards sustainable options is a key way to do this. Check how your workplace pension is invested. If the default option is not prioritising ethical investments, many schemes offer the option of moving into sustainable funds. This should not compromise the returns you get, says O’Connor.
Make sure you are happy with what the fund manager is investing in. “When choosing any ethical or sustainable fund, check the top holdings first. Your version of ethical might not be their version of ethical.
“If it isn’t, and you really know your own mind on what you want, self-invested personal pensions (Sipps) can provide the control you might benefit from,” she says.
Sipps, essentially DIY pensions, allow consumers to invest and manage their own money.
It is also worth looking now at the fees you are paying for the management of both workplace and personal pensions, and comparing them to other providers.
“If you don’t know what fees you are paying on your current and past pensions, check and compare. You might end up horrified at what you have been paying without realising it over the years,” adds O’Connor.
Isa now, not later
The end of the tax year is traditionally met with a rush of people investing in Isas as they use up their £20,000 annual allowance before the deadline. But leaving it until the last minute means you can miss out on a year of returns.
Jason Hollands, of financial advisers Bestinvest, says that in the last 40 tax years, the stock market has delivered positive results almost 80% of the time. “If you are in a position to use your Isa allowance early, you are highly likely to enjoy an extra year of tax-free growth,” he says.
Coles says that someone who invested on the first day of the tax year every year for the past decade would have seen their investments grow by a third, whereas those who invested on the last day would have seen them rise by a quarter.
The extra time also allows you to consider your options before putting away your money, instead of feeling any pressure at the end of the year.
“For those who already own some investments, that means firstly looking at how these are spread across different markets and identifying major gaps that might be worth plugging – such as too little in the UK or Asia, or too much in the US, as well as checking how your existing investments are doing and perhaps deciding whether some might need to be moved,” says Hollands.
“Another merit … it provides scope to drip feed cash into investments over the months ahead, rather than taking one big plunge at the end. Investing in phases, or even monthly, can help iron out some the volatility that can unnerve investors.
“Regular, bite-size investing becomes a natural and virtuous habit that is both easier on your cash flow and helps remove the influence of emotions and sentiment that can cloud judgment when news headlines are either gloomy, or when over-optimism might lead share valuations into expensive territory.”
Tax changes
The minor changes to the income-tax thresholds in the last budget have come into effect. The personal allowance has risen to £12,570 and will stay there until April 2026, while the £50,000 higher-rate threshold has gone up to £50,270 before freezing. This means anyone close to the thresholds could be tipped over if their wages go up, even in a minor way, so it is worth looking at the options to avoid a higher tax bill.
“This includes making pension contributions, or taking advantage of a salary-sacrifice scheme through work – this is where the government lets you give up a portion of your salary before tax to spend on certain things free of tax, like pensions, childcare vouchers, cycle-to-work, and technology schemes,” explains Coles.
The amount you are paid is then reduced and so are your income tax and national insurance contributions.
The lifetime allowance, the amount that you can save for your pension with tax relief, has also been frozen at £1,073,100 until 2026. The advice for people approaching that figure is that they should look at their plans.
“While there are still reasons to exceed the lifetime allowance – for example, where you benefit from a matched employer pension contribution – those at risk of going over the limit should review their savings and investment strategies to make sure they are still suitable,” says Tom Selby of AJ Bell.
