The new year has arrived, and it’s a good time to look at some financial resolutions to get on top of your personal finances. Charlene Young, pensions and savings expert at AJ Bell, has come up with four personal finance tips to help make a dent in the admin, and maybe even provide a boost to your clients savings and investment pots.
1. Sort old pension pots
“Pensions aren’t always at the top of our list of priorities after a busy Christmas, but combining your old pensions can simplify your retirement planning and could end up saving you hundreds, if not thousands, of pounds in the long run.
“Auto-enrolment has successfully boosted how much we’re paying into pensions, but it’s also easy to end up with more pots than you can keep track of. Even if you already know where your old pensions are, it’s a good idea to see how they are doing and think about combining them.
“Combining pensions can put you in the driving seat to make better decisions about your future. This could include helping determine whether you need to pay in more money now or simply reduce your costs to help boost your pot in the long term. Different pension companies charge different amounts for managing and investing pensions. Combining your pensions may mean you can choose the right-priced plan and move all your pension pots to that company, paying far less in charges over time.
“The impact of reducing your pension charges can be significant over the long term. AJ Bell figures show that someone combining three pensions with charges of 1.5% to 0.75% could boost their pension pot by over £7,000 over 10 years or £20,000 over 20 years if they were to switch to a single, lower cost account.
“You can use the government’s free pension tracing service, or providers also have in-house pension finding tools, such as AJ Bell’s ‘ready-made pension’ service, which allows people to find their pensions for free as well as giving them the option to combine them into a ready-made pension account in one go.”
2. Check your pension investments
“How much you pay into your pension (and how early you start) is probably the key factor in determining what you’ll eventually get in retirement, but your choice of investments can provide a significant boost too – particularly over the longer term. If you’re starting out saving for retirement, your investment time horizon is likely to be 30 to 50 years plus, which is a long time in anyone’s book.
“Your workplace pension will be picked for you by your employer. If you take no action, you will be placed into the ‘default’ investment fund. Although this benefits from a cap on charges currently set at 0.75%, it will not be designed for you personally. Different default funds have vastly different investment strategies, meaning they deliver different investment outcomes for their members.
“While attitude to risk differs from person to person, generally younger investors can tolerate greater fluctuations in the value of their pension pot over the short term as they don’t need to access the money for decades. Historically, those who have been willing to accept market dips in the short term have generally been rewarded via returns over the long term.
“Paying into a workplace pension is great first step, but you should have a look at the default fund your money is going into and make sure you are happy with the investments you own and the level of risk you are taking. You might decide that you’d rather pick your own investments from the range on offer to you.”
3. Write a will
“It isn’t the cheeriest topic for a new year, but with over half UK adults failing to have a will in place, it’s more important than ever to plan what happens to your money when you pass away. Lots of people also wrongly assume their assets will go to different people when they die, so it’s crucial to ensure your affairs are in order and your wishes are known.
“With blended families being more common and people co-habiting but not being married, it’s essential your money and assets are going to the right place when you die.
“For example, if you’re not married then your partner won’t automatically inherit any of your estate when you die, regardless of how long you’ve been together. It’s particularly key to bear this in mind if you own the home that your partner, and potentially stepchildren, live in.
“You can set up a will yourself, using kits available, or you can go to a professional who will guide you through the process, which might be particularly useful if your situation is more complicated. Whilst the DIY route might seem tempting, you need to make sure the will is legally binding, otherwise your efforts will be in vain.”
4. Make the most of your tax-free ISA allowance
“Anyone can put up to £20,000 a year into an ISA which you can split amongst the different types of account. On top of this, anyone with children can open a Junior ISA and put up to £9,000 a year into it. These accounts are designed to shield money from the taxman, although keep in mind that money in Junior ISAs cannot be accessed until the child turns 18.
“The allowances for investment gains and income have been slashed in recent years. The capital gains tax (CGT) allowance now stands at £3,000 for the tax year – compared to £12,300 a couple of years ago. This allowance is the gain you can make when you sell or transfer an investment not already in an ISA or pension without paying CGT.
“In the recent Budget, the rate of capital gains tax increased. It means that the lower rate of capital gains tax, paid by basic-rate taxpayers, has risen from 10% to 18%, while the higher rate has gone from 20% to 24%.
“Likewise, the tax-free dividend allowance gives investors just £500 in dividend income tax-free for a tax year, compared to £5,000 back in 2016. Such a low allowance means that even smaller investors need to think about protecting their investments from the taxman. According to HMRC figures, £17.8 billion is due to be collected in dividend tax in the current year – over £3 billion more than three years ago.
“Wrapping your investments up in a tax-free account is more important than ever if you’ve got ISA allowance to spare. As well as paying in new cash, you can also move money into your ISA using a process called a ‘Bed and ISA’. This is where you sell an investment in your dealing account and buy it back in your ISA, so that it’s protected from tax in the future.”
