FIVE PERSONAL FINANCE HABITS WE SHOULD ALL ADOPT
While most of us think we’re pretty good with our money, we can all benefit from giving our finances a regular health check. If you’re looking to get to grips with your finances and develop better habits, then setting yourself some financial goals and drawing up a budget is a good way to get motivated. Priority debts are those that have the most serious consequences if you don’t repay them, and aren’t necessarily the ones with the highest interest rates. They include your mortgage and rent, council tax and utility bills. These need to be paid first. It also makes sense to keep a firm grip on your credit card spending. Once you have worked out your budget, you’ll know how much you can save each month.
HAVE A RAINY DAY FUND
Everyone needs to have some money put away for emergencies, and for the bigger, more exciting things in life like a special trip, a child’s education or a wedding. So, for most of us having some cash that we can access quickly to pay for unexpected things like an unforeseen bill, and some that steadily builds up for the future, makes good financial sense.
SAVE FOR YOUR RETIREMENT
Even if it’s currently decades away, if you’re working you need to be saving for it now. Pension contributions attract tax relief, and if you’re in a company scheme, your employer may pay into the scheme too.
LIVE BELOW YOUR MEANS
Life’s little expenses like a trip to the coffee shop eat into your cash. A daily £2.50 coffee would leave you worse off by £875 a year, meaning one small lifestyle change could leave you hundreds of pounds better off.
MAKE THE MOST OF YOUR MONEY
Once you’ve got your debts under control, got your emergency fund set up and begun to save regularly, then it’s time to think about investing for your future. If you’re new to investing, a stocks and shares ISA can be a great place to start. They are tax-efficient, and many offer you the opportunity to pay in a lump sum or make regular payments.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
ALMOST 16 MILLION DON’T HAVE CONTENTS INSURANCE– DON’T BE ONE OF THEM
Are your belongings protected against life’s unwelcome events? Home insurance is an effective shock-absorber that protects millions of families each year and provides them with valuable peace of mind. Having a home contents insurance policy in place means that if the unexpected were to happen, such as a burglary, leaking pipe or a devastating fire, then there would be a payout to help put things right. However, recent figures from the Financial Inclusion Commission (FIC) show that an alarming number of adults don’t have any insurance in place to protect their personal possessions.
Families need protection
With the average value of contents in a three-bedroom family home estimated at £55,000, it’s important to be fully insured at all times. The November 2017 FIC report shows that 1.2 million successful claims were made on household buildings and contents cover in 2016, with an average payment of just over £2,500 being made. For many households without cover, having to find this amount of cash to replace lost, damaged or stolen items to this value would be beyond the limit of their savings.
MORE THAN £400M LANGUISHING IN OLD PENSION POTS
With more people changing jobs over their working lifetime, the average saver can have multiple pension pots and have no idea how to track them down. What’s more, people move homes and can lose track of paperwork over the years. As a result, the Department for Work and Pensions (DWP) has estimated there are over £400m in unclaimed pension savings in the UK. If you’re in this position, then there are various steps you can take. Contacting old employers for details can be a good first step, and then there’s the free Pension Tracing Service provided by the DWP. This service was launched back in May 2016 and has been used more than a million times by savers.
WHAT TO DO IF YOU HAVE MULTIPLE PENSION SCHEMES
You may want to consider consolidating your various pensions into just one plan. Potential reasons for moving a pension could include seeking better investment performance, looking for lower charges to boost your retirement income and pursuing access to a wider range of investments.
But before you make your move, there are downsides that you need to consider.
If you’re in a final salary company pension, also known as a defined benefits scheme, it will often be best advice to
stay put because of the guarantees attached to your pension. Some money purchase schemes, referred to as defined contribution plans, also offer guarantees that need to be fully evaluated before transferring to an alternative scheme.
THESE ARE THE STEPS TO TAKE
• Keep a record of all your pension pots, so you don’t lose out at retirement
• Make pension saving a priority. Consider topping up your contributions whenever your financial circumstances allow, remember, within limits, they attract valuable tax relief
• Know your state pension age and get a forecast of how much you’ll receive
• Speak to us about arranging a regular review to help ensure your retirement plans remain on track.
TWO-THIRDS WITHOUT LIFE INSURANCE DESPITE HEALTH WORRIES
A recent ‘Health, Wealth and Happiness’ report1 shows that poor health (29%) and concerns over family members’ health (24%) top the list of things likely to impact happiness, above the sudden death of a family member or friend (24%), terrorism (23%) and the impact of Brexit (17%). Despite health worries topping the list of concerns expressed, 57% of respondents haven’t taken out life insurance, with a further 11% not sure whether they have or not. This is particularly worrying when you consider how many of these people are likely to be homeowners who have mortgages.
Life insurance can be a financial lifeline at a sad and difficult time, paying off a mortgage if the borrower were to die. Critical illness cover can pay out a lump sum on the diagnosis of a serious illness as defined in the policy.
HOW PROTECTION POLICIES HELP FAMILIES
Protection policies don’t just pay a lump sum on death or the diagnosis of a critical illness, they can also help provide an income for families hit by an accident, sickness and unemployment, help parents pass their wealth on to future generations, and can have a major role to play in Inheritance Tax planning too. A payout from a policy could make the difference between your loved ones facing a financial struggle at a challenging and emotional period in their lives, and being able to maintain the sort of lifestyle you would want them to enjoy.
With state benefit provision representing merely a basic safety net, how would you pay the bills if you were sick or injured and couldn’t work? If the unexpected were to happen, how would you and your family manage financially? Coping with a long-term illness or injury can be stressful enough without the added pressure of money worries. Taking out an income protection plan offers peace of mind and security for your family, and means that you would receive a regular replacement income every month for a defined period of time.
PEACE OF MIND
With so many different types of policy available it can be hard to know which one is right for your circumstances and offers the best value for money. That’s where we can help.
1 LifeSearch, 2017
DIVIDEND ALLOWANCE REDUCTION FROM APRIL 2018
In the Summer Budget 2015, the government announced that dividend taxation would be reformed from April 2016 by replacing the Dividend Tax Credit with a £5,000 dividend allowance, and increasing the rates of tax payable on dividends in excess of the new allowance by 7.5 percentage points in each band, to 7.5% for basic rate, 32.5% for higher rate, and 38.1% for additional rate.
Previously, a basic rate taxpayer paid no tax on their dividend income; only higher rate or additional rate taxpayers paid tax on their dividend income.
INDIVIDUALS AND BUSINESSES AFFECTED
In the Spring Budget 2017, it was announced that the £5,000 dividend allowance would be reduced from £5,000 to just £2,000 for dividends paid on or after 6 April 2018. The Chancellor, Philip Hammond, said that the reduction was designed to “address the unfairness” around the dividend allowance, which he described as “an extremely generous tax break for investors with substantial share portfolios.” He said that about half the people affected by the reduction in the allowance were directors and shareholders in private companies. The cut in dividend allowance is likely to have a significant effect if you are a company director and take dividends as part of your remuneration package. Self-employed people often provide their services through companies, paying themselves a small salary which they top up with dividends to reduce their tax bill.
This change will directly affect those individuals with investments that are held outside tax-efficient wrappers such as ISAs and produce more than £2,000 of annual dividends. One of the ways to mitigate this tax hike is to make full use of tax-efficient wrappers, putting your investments into an ISA or a Self-invested Personal Pension (SIPP) if these products suit your investment needs and objectives.
OVER 50s NEGLECT PENSIONS – CHOOSING TO RELY ON INHERITANCE OR LOTTERY WINS
There’s increasing evidence that those aged over 50 are postponing making plans for their retirement, often relying on factors out of their control like a premium bond win or
receiving money on the death of elderly relatives. Others plan on selling their current property and downsizing to release cash for their retirement. However, that’s not a certainty either, as house prices can fluctuate. Over the past few years there has been a major shift in emphasis, with financial provision for our retirement years moving from being the responsibility of the state to being the responsibility of the individual, meaning we should all start saving for our pensions as soon as we can.
REACHING YOUR PEAK
It’s widely accepted that workers are likely to reach their peak earning powers between ages 40 and 50. From the on, their incomes are likely to fall. Being aware that your earnings potential could be set to decline after your 40s can be a bit of a wake-up call for your pension and savings. At this age, the dilemma for many is how to strike a balance between saving adequately for retirement, whilst meeting all the financial needs of a growing family, and often looking after elderly parents too. However, the good news is that you get valuable tax relief on your pension contributions and, due to the benefits of compound interest and the potential for capital growth, even small contributions made now can make a real difference when it comes time to retire.
Following the introduction of auto- enrolment pension schemes, workers have an added incentive to save for retirement. Over 9.3 million people have now been auto-enrolled into workplace schemes. If you’re employed and haven’t joined your employer’s scheme, you should think about doing so. By the end of this year, all employers will have to provide a pension that they, as well as you, contribute to. If you’re already a member of a scheme, you could consider increasing your contributions to improve your pension outlook. In addition to joining a workplace scheme, you can
set up your own personal pension plan, a stakeholder plan or a Self-Invested Personal Pension (SIPP).
MONEY DOESN’T GROW ON TREES – TEACHING YOUR CHILDREN THE VALUE OF MONEY
Financial literacy isn’t a skill that we’re born with. Learning how to manage money effectively requires acquiring a few important life lessons that parents can pass on to their children from a relatively young age.
EARNING AND LEARNING
It makes sense to encourage children to handle cash as soon as possible to help them recognise its value, and to plan how to save some of their pocket money, so that they can save up to buy a new toy or book with their own money. After all, good things come to those who wait, teaching delayed gratification is a great lesson. It’s important that they realise you work to earn money and that it simply doesn’t pop out of the wall at the cash point.
LEAD BY EXAMPLE
It’s important for kids to understand what budgeting means to teach responsibility with money. If you demonstrate responsible buying by creating a budget before you go shopping, comparing prices, using money saving vouchers and curbing impulse purchases, you can lead by example. Older children need to know how to handle their money before they leave home. It can be an important life lesson for older children to learn how credit cards work, and how interest and charges are calculated, and how they can mount up if the balance isn’t cleared regularly.
When it comes to borrowing money, they need to know that there are many different types of loan available and that it’s important to understand how to compare charges and interest rates.
It’s also worth explaining to teenagers the value of having a good credit score, and how this can improve their financial chances when the time comes to enter into big financial transactions like taking out their first mortgage.
LEARNING TO SAVE
Junior Individual Savings Accounts (JISAs) are a good way for children to learn about the benefits of saving money for the future. The advantage of a JISA is that they are tax free and once the account has been opened by the parent or guardian, anyone can make contributions, including grandparents, friends and family. The savings limit for the 2018-19 tax year is £4,260.
Children gain control of their JISA at age 16, but the money cannot be withdrawn until they are 18. At that point, the account is automatically rolled over into an adult ISA, a valuable facility for those who want to continue saving or investing tax-efficiently.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
PENSION SCAMS PERSIST– TAKE NOTE
Scammers are out in force again, trying to part us from our pension savings. One in six pension holders in the UK have been contacted by a company – other than their pension provider – to discuss making changes or transferring their pension, according to the Pensions and Lifetime Savings Association (PLSA). They report that with the recent failure of the construction giant Carillion, scammers have been seeking to exploit defined benefit pension scheme members’ fears about the future of their pensions. The PLSA said that scheme members would be covered by the Pension Protection Fund which has the financial strength and experience needed to handle this type of situation on their behalf.
Just say ‘no’ The Pensions Regulator says that unsolicited phone calls, texts or emails about your pension are nearly always scams. Scammers will often claim they’re from Pension Wise or other government- backed bodies, but these organisations would never phone or text to offer a pension review. You can check out the latest scams doing the rounds by visiting the Financial Conduct Authority’s Scamsmart website at www.fca.org.uk/scamsmart.
It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.
The information contained within this newsletter is for information only purposes and does not constitute financial advice.
IF YOU WOULD LIKE ANY ADVICE OR INFORMATION ON ANY OF THE AREAS HIGHLIGHTED IN THIS NEWSLETTER, PLEASE GET IN TOUCH.