New Tax Year New You
As the new tax year began it brought very little changes within the world of tax.
It’s important to be aware of any tax changes that may affect you, but it is also recommended to the take the opportunity to review your personal taxes and finances now.
It’s understandable that the financial advice marketplace can be overwhelming, considering its various products, tax regimes and acronyms. That is why Anderson Strathernam have shared tips on how to ensure 2021 is the year you get on top of your financial health.
Make preparation for the rainy days
The best place to begin on your road to a healthier financial outcome is to create a rainy-day fund. You would not want to experience the inconvenience of a sudden boiler issue over the winter period, or an unexpected change to your income, without any sort of financial backup.
It is recommended to have a six-month expenditure within an accessible savings account that would keep your head above water. Consider segregating your savings, within multiple, clearly labelled savings accounts with their own investment purpose. Avoid dipping into your emergency account unnecessarily as they are an emergency pot for a reason.
Gain a bearing of your personal debt
It’s recommended that you review your credit card statement or mortgage agreements to ensure you have an idea of your monthly outgoings. Anderson Strathernam always recommends paying off any existing bad debts, especially those with high interest rates, as soon as possible.
Not all debt is bad
There are some cases in which paying off a debt may be ill-advised. If it is reasonably priced such as competitive mortgage or student loan, it may be better to invest elsewhere than to pay it off.
The key thing to consider is to separate the good from the bad debt. From then you can decide what the next steps are and how these fits into your wider financial plan.
Protect yourself and your family
Having a better understanding of your debts, can see you planning for the unthinkable and embrace your own tough questions:
- What would happen if you were to be diagnosed with a life changing illness?
- How would your household manage if you were unable to work?
- What debts would your family get if you die?
Considered as one of most important steps towards strong financial health is to have the necessary protection in place for your family’s future. Having peace of mind is priceless, financial experts can help create a well-rounded and robust protection strategy.
Anderson Strathernam advocates the balance of individual need and affordability. Your ongoing costs can vary according to your individual circumstance such as age and health. The good news is protection policies are usually affordable and the younger you are when you invest in a policy the more affordable the premiums will be, so now may be the time to act.
Gain an understanding of your expenses
If you’re finding that you’re asking yourself “where has all my money gone this month?” It’s valuable to analyse your expenditure habits. List your monthly expenses and categorise the necessities and luxuries.
Have a thorough check of your bank statements to add further clarity to your spending patterns. Could some of this money be directed more effectively elsewhere? Our default response is often “I can’t afford to save money into my ISA”. We’d recommend that you drill down to the finer details to really test this assertion.
Appreciate your pension
Having a pension is one of the most tax efficient ways to save for your future.
It is recommended that your contribution levels each month align with your overall affordability. If affordable, then saving money into your pension is one of the most sensible financial actions you can take. Valuable pension tax relief combined with the effects of investment compounding over time can make a significant difference to the value of your pension in the long term. How many other investments offer a 25% basic return before you invest in the markets?
The net returns for Scottish intermediate, higher or top rate taxpayers are even more lucrative, with net returns of 27%, 69% and 85% respectively. This chart indicates how much you need to ‘pay’ to receive £100 into your pension.
*Assuming further tax relief entitlement is claimed via self-assessment or directly from HMRC
Anderson Strathernam also recommend to take time to understand which underlying investment your pension is invested in. A pension is an efficient tax wrapper, but just as important to the value of your pension in the long term are the underlying investments it holds. Often when you join a new pension scheme, you’ll be placed into a default fund, however, nearing your retirement age is a trigger to review your fund selection – your risk tolerance will likely be lower when you become more dependent on your pension.
It’s important to remember that pensions are locked away for a long period, with no access to your finances until you reach the relevant minimum pension age. It’s recommended to consider other tax efficient wrappers such as individual savings account or ISA. Having one of these alongside a pension is advocated if you have any concerns around accessing your money.
If you’ve taken the first steps onto the property ladder, then you should be familiar with Lifetime ISAS (LISAs).
Financial planning is usually successful when it involves a healthy balance between different tax wrappers. This provides you with maximum flexibility, however when it comes to tax efficient long-term investing, a pension really is the number one stop shop.
Reclaim all pension tax relief
It is common to consider HMRC as a debtor, however in some cases HMRC tend to owe us money.
Unless you have elected to salary sacrifice, the payments we make as employees to our workplace pension receive basic rate tax relief at 20%. Effectively, paying £80 into our pension results in a final contribution of £100. However, Scottish income tax rates differ in comparison to the rest of the UK (for intermediate rate and above taxpayers). This means that those who pay income tax at the Scottish rates of 21%/41%/46% (in comparison to the UK rates of 20%/40%/45%) are entitled to reclaim the additional 1% from HMRC.
An important point to note is that you do not need to be a big earner to reclaim this entitlement. While higher and additional rate taxpayers should reclaim further relief via their annual self-assessment tax return, intermediate rate taxpayers, who otherwise aren’t a self-assessment taxpayer, simply need to call HMRC to reclaim any entitlement they’re due. So, if you earn more than £25,296 per annum then you are entitled to reclaim further tax relief on your pension contributions of 1% from HMRC. While this is unlikely to be significant, do not let this money slip away and be sure to give HMRC a call to discuss your situation. It is your money after all.
Get familiar with direct debits
Consider your payments towards your investments like any other direct debit and you’ll be less likely to notice the costs.
Your financial plan should include regular savings. Time your direct debits around pay dates like you would for your monthly bills. Over time you’ll barely notice these payments leaving your account. Further, your net disposable income (after all direct debits are paid) will be lower which should in theory shape a more disciplined approach to your expenditure habits. We’re all more carefree with our money when our bank accounts are healthier at the start of the month. Again, always contribute what you can afford as affordability is key.
Learn the negative effects of inflation
Inflation is known as the ‘silent charge’ within investing. It doesn’t appear on the costs of your investments, but it can greatly impact how your savings and investments compare year on year.
Taking in account the low interest rate environment, it can be difficult to make a ‘real’ return on bank account investments. We often perceive money in the bank as a ‘safe haven’, and while largely it is (subject to compensation restrictions), your future purchasing power is likely decreasing.
This 5-year performance graph shows inflation growth, as measured by RPI, compared to a 90-day notice bank savings account. The disparity between the two is evident, with bank account deposits (blue line) struggling to keep pace with inflation (red line).
This does not mean bank accounts don’t have their place. Anderson Strathernam only recommend that you invest in the financial markets if you have a minimum investment timeframe of 5 years, and thus bank accounts can often have their place in shorter investment horizons as well as building your emergency savings pot. However, holding significant sums in cash is generally not advised, as the erosive effects of inflation can offset any perceived security that comes with retaining sums in cash.
Bank accounts do offer security with our money, but ask yourself at what real cost?
This information is obtained from sources considered reliable, but its accuracy and completeness are not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.