Assessing whether your finances are in tip-top shape before the new tax year starts could produce a meaningful outcome. To help optimise your circumstances, here are six things to tick off your list:
- Maximise your tax-free allowances: ISAs and pensions allow you to benefit from tax-free growth over time – with maximum individual allowances each year of £20,000 for adult ISAs, £9,000 for Junior ISAs and £60,000 for pensions. You should use as much of these allowances as you can afford. For pensions you may also be able to boost your pot by using up to three years of previously unused allowances. For ISAs, you can benefit across the family with, for example, £58,000 a year able to be sheltered from the taxman for a family consisting of two adults and two children.
- Ensure you have diversified investments: It’s impossible to predict which assets will perform best from year to year. For example, among a list of 15 major asset classes, it is commodities, REITs (property trusts), developed world equities, gold, emerging market equities and high yield bonds that have all topped the table in recent years for sterling-based investors – and in other years have often skirted the bottom of the table. To ensure you can target growth opportunities and also protect against potential losses, it’s crucial to have an efficiently invested mix of assets in your investment portfolio, whether that’s in your pension, ISA or taxable portfolios.
- Minimise your fees: If there is one thing you should do over the next few months – and a habit to embed for the years to come – you should scrutinise the fees you are paying on any investments. If the all-in charges are too high, you should take your business elsewhere. What’s too high? As a rule of thumb, your total investment costs shouldn’t come in at much more than 1% each year. If you are also paying for financial advice, that might rise to a total all-in cost of 1.4%. If you read the finer print, you may well find you are paying 1% per annum more than that, or even double in many cases.
As we have said many times, including recently, the impact of what seems like a minor difference is actually hugely costly – overpay by 1% per annum in fees, and you will be giving away 14% of your capital unnecessarily over 10 years. That means for every £100k that you have invested, £14k could be in your pocket rather than someone else’s over 10 years (this assumes 5% average annual returns). Don’t let it happen to you.
All else being equal, high fees are the single greatest threat to the value of an investment or pension portfolio – and you shouldn’t hesitate to act to rectify the situation. Investment is important to help combat the long-term effects of even subdued inflation; just make sure you are not being punitively charged for doing so.
- Use your CGT allowance: When we make a profit from selling an investment capital gains tax (CGT) may be due. The individual annual exemption amount was reduced from £12,300 to £6,000 in 2023 and will be cut further to £3,000 from April 2024 (double that with a partner’s allowance). So if it is not possible to shelter potential gains in a tax wrapper such as an ISA or pension, you should act before the new tax year starts on 6th April to benefit from a higher allowance.
- Helping the next generation: If you can afford to pass on some of your wealth – to help a child or grandchild – you should make use of the rules which can help you. Each year we are allowed to gift up to £3,000 without inheritance tax (IHT) applying, and if you didn’t use your allowance last year you can bring forward an extra £3,000, and double that amount for a couple. You can also give away larger sums – and if you live for seven years after you make the gift, there is no IHT to pay, with a downwards sliding tax scale over the course of those seven years.
- Consider financial planning advice or guidance: Studies by the International Longevity Centre (ILC) have found that those who take regulated financial advice are measurably better off a few years later. However, whether or not to take advice will often depend on your age and circumstances.
Financial planning advice can be very worthwhile if you are building up to retirement, you have an inheritance or are getting divorced – these are circumstances where you will want to establish a proper plan. There is real value, for instance, if you aim to retire in 10-15 years’ time and, after taking advice, any subsequent action you take fuels a positive accumulative effect. Alternatively, not taking advice may mean you make mistakes you didn’t even know you should have avoided.
It may be hard to see the value of advice immediately, but it usually pays off in the long run. That said, you probably don’t need financial advice if you are simply funding an ISA each year – so be wary of companies who are charging you for advice that is surplus to your needs.
This is where financial planning guidance can be very useful – guidance is typically for more simple needs and a nice way to have a ‘Financial MOT’ to make sure you are doing the right things as you save and invest (both you individually and a partner if that’s your set-up). A guidance session is lower cost and, while it is not regulated financial advice, can neatly direct you towards the things that will help ensure you are thinking about the important items that are relevant to your situation.
By addressing the points above you could make a meaningful difference to your financial outcome in the years to come. And if you need help in any way, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.
