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Point of View

Spring clean your finances

By Carl Drummond, Wealth Planner

Every year, in March, there’s a flurry of activity as savers and investors hurry to get their finances in order before the end of the tax year. Now that the rush is over, and we’re into a new tax year, we thought we would look at ways of avoiding this last-minute panic. A bit like making your new year’s resolution in January, now is a great time to plan your finances, and make sure everything is in place to make the most of the new tax year. Here are a few things to consider:

A monthly approach to saving

You can invest up to £20,000 a year into an ISA, which equates to £1,666.66 a month, and any returns are free of income and capital gains tax. If you start saving monthly into a stocks and shares ISA, rather than investing a lump-sum in 12 months’ time, your money has the potential for capital growth straight away. You also spread the risk by investing in the stock market over time, rather than all at once when equities might be expensive. Plus, you’re less likely to squander that money as the year progresses.
 
Let’s say you’re able to invest £1,666.66 a month for the next five years, and your investment achieves an average 5% return. You will have saved nearly £100,000, which will have grown to £113,912. Over ten years, you’ll have invested nearly £200,000, which will have grown to £260,006 – a rather nice tax-free lump-sum of £60,000.
 
Of course, not everyone can afford £1,666.66 a month, but even a third or a quarter of that gives you the potential of a good tax-free return.

Maximise your household’s pension savings

Paying into a pension remains a tax-efficient way of saving money. You can save up to £40,000 a year, and up to £1.03 million over your lifetime. If you’re not currently maximising your annual allowance, you should seriously consider contributing more – especially if you’re a higher rate tax payer. For every 60p you contribute, the government effectively adds 40p.  
 
Admittedly, the annual allowance starts to taper off for those earning more than £150,000 a year, falling by £1 for each £2 of earnings above. The pension annual allowance reduces to £10,000 for anyone with an income above £210,000. But you can carry over unused allowance from previous tax years, and if someone in your household is not working, you can pay into a pension on their behalf. They can invest up to £2,880 a year, and the Government will top this up by £720 (basic rate of tax), giving a gross annual contribution of £3,600.  
 
The other benefit of pension savings is that you can access them when you’re age 55 (from the age of 57 as of 2028), and you’re free to spend them how you like. If you die before you are age 75, any money left in your pension can be passed on to your beneficiaries without paying inheritance tax up to the Lifetime Allowance. If you are over 75, then it will be taxed at your beneficiaries’ income tax rate. Many people are now using other savings and investments (such as ISAs) to fund their retirement, leaving their pension intact for as long as possible.

Challenge your spending

If you think you can’t afford to invest in an ISA or pension, then perhaps it’s time to analyse your spending habits.
 
Look at how much you pay for broadband, energy, your mobile phone and TV, and shop around to find a better deal. You’ll be amazed how much you can save. It’s also a great time to review your mortgage – especially as interest rates look set to rise. There are still some good deals out there, and you could save yourself hundreds of pounds. Contact Sanlam’s mortgage department if you want a mortgage review to see how much you can save.

Don’t procrastinate

As we enter a new tax year, my advice is to start thinking about your savings now. The sooner you take advantage of your tax allowance, the better. And anyway, it’s better off in your pocket than the tax man’s.

The tax treatments and information contained in this document are based on current tax law and HMRC practice as at April 2018 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.