FIVE NEW YEAR RESOLUTIONS FOR 2022

The beginning of a New Year presents the perfect opportunity to explore a shaping up your finances.

In the same way you might make a plan to be healthier this year, there are also measures you can take in an attempt to build your wealth and put measures in place to protect it.

Here are five ways you can improve your finances in 2022:

1. Sort out old pensions

Round up all your pensions to make sure you’ve got the full picture for your retirement savings. You might even unearth money you had forgotten about. Losing track of a pension is more common than you might think with around 1.6 million lost pension pots worth £19.4 billion, according to the latest estimates[1].

If you think you have some money lurking in an old workplace pension scheme, you can get in touch with your former employer and ask for the details. Be ready with the dates you worked there and your National Insurance number. The Government’s Pension Tracing Service can help reunite you with your savings if your old employer is no longer trading.

For personal pensions, you can try the Pension Tracing Service. You will need the name of the provider to find the contact details. Where old life companies have been taken over and no longer trade under that name, the database will recognise it anyway and direct you to the new provider that now looks after those schemes.

If you don’t have any luck there, try Experian’s Unclaimed Assets Register (UAR). This is more comprehensive because you can search for old shares and insurance policies, as well as pensions.

2. Don’t leave too much in cash

Money that’s earmarked for the future – rather than what’s in your rainy-day account – will see its value eroded if it’s left in cash for the long-term. This is even more apparent now with rising inflation and ultra-low interest rates. This combination means your money is guaranteed to make a loss when it comes to real returns over the long term. Save for a rainy day, invest for your future.

3. Use tax allowances

There are plenty of allowances to make use of. Remember the tax year runs from 6 April to 5 April, so make sure you use allowances before it’s too late.

One of the most popular is the ISA allowance, which is £20,000. You won’t pay income tax, dividend tax or Capital Gains Tax (CGT) on any investments you hold in an ISA. You don’t even need to mention it on your tax return. Parents can also open a Junior ISA and save up to £9,000 a year into it. Crucially, an ISA allowance cannot be rolled over into next year. If you don’t use it, you lose it.

You should also consider the valuable tax breaks from pensions. If you’re a basic rate taxpayer, for every £80 you pay in, the taxman will top it up to £100. And if you’re a higher or additional rate taxpayer you can claim back up to an additional 20% or 25% through your self-assessment tax return.

Don’t forget that some investments also offer upfront tax benefits, so if you want to invest in start-ups and younger companies, investments such as Enterprise Investment Schemes, better known as EISs, could be attractive to you. There’s also a Venture Capital Trust (VCT) – another investment offering upfront tax benefits, that is designed to raise money for start-ups.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

4. Write a Will

Making a Will ensures your assets and possessions are passed on to the people you choose. Without one your wealth will be passed according to the “laws of intestate” – and not your wishes. Writing a Will can save on inheritance tax as well as spell out how you wish your wealth to be distributed.

5. Talk to a professional

A financial adviser can help you understand your financial priorities and put a plan in place to help achieve goals. Professional advice can go a long way to provide peace of mind that you are addressing the needs of you and those of your family.

Advice can be viewed as an investment in itself. Receiving professional financial advice between 2001 and 2006 resulted in a total boost to wealth (in pensions and financial assets) of £47,706 in 2014/16[2].

Source:

[1] https://www.abi.org.uk/news/news-articles/2020/05/19.4-billion-of-pension-pots-unclaimed-just-because-of-house-moves/

[2] https://ilcuk.org.uk/financial-advice-provides-47k-wealth-uplift-in-decade/

PENSION TRAP – DON’T GET CAUGHT

Saving pots for emergencies provide an important buffer for when times get tough. But many without adequate nest eggs have been forced to raid their pension savings either to bolster their own income or to help family over the last 18 months.

A total of 1.4 million people cashed in £9.4billion throughout 2020 under the financial strain caused by lockdowns, according to official figures[1].

While the pension freedoms, introduced in 2015, allow savers to access every penny of their retirement savings, there are important consequences of drawing on that money. Once you have dipped into your pot, the amount of money you can pay into it -and claim tax relief on- reduces.

That’s because withdrawing income (over and above the 25% tax-free lump sum) usually triggers the Money Purchase Annual Allowance (MPAA), which reduces the amount you can pay in with tax relief by 90% from £40,000 to just £4,000.

Once you’ve triggered the allowance you can’t go back to putting a higher amount in. It’s irreversible.

When the MPAA is applied you also lose the ability to carry forward up to three years of unused allowances in the current tax year.

This sting in the tail could severely limit the amount you’re able to save for the future.

New research[2] from Canada Life has shown that nearly one in ten of over 55s have accessed their pensions while on furlough to help make ends meet. Many over 55s have flexibly accessed their pensions, with 7% using both their tax-free cash and drawing down additional sums.

However, two fifths of people were unaware of the restrictions on the amount they can continue to contribute to their pension pot.

Worryingly, 40% are aware of the restriction but are uncertain about the detail. Many overestimated the allowance as almost £7,000 a year – almost double the real MPAA limitation of £4,000.

Consulting a financial adviser before accessing pension savings early is the smart move as you could struggle to get retirement plans back on track with the lower limit in play.

Yet many of those who dip into their pension fail to take advice.

Anyone who has started taking money from a private pension –whether it be a one-off lump sum withdrawal or a regular monthly amount – must first convert their pension into an income drawdown account. Drawdown allows you to take out what you need, and leave the rest invested in the stock market.

Worryingly, an estimated 100,000 drawdown plans are taken out each year without the guidance of a financial adviser[3].

This is significant because an adviser would be able to flag up the pitfalls and important tax consequences.

It’s not just the MPAA you need to be aware of. You can also be hit with a large tax bill when withdrawing money from your pension. After the 25% that you are allowed to take tax-free, any amount withdrawn is taxed at your normal income tax rate.

Raiding a pension could also impact future benefit claims, for example support with council tax or affect universal credit claims.

An adviser can also, crucially, assist with ways in which you can take money out of your pension without triggering the MPAA.

There have been a number of campaigns among pension providers urging the Government to scrap the MPAA. However, this is not to be relied upon.

Source:

[1] https://www.gov.uk/government/statistics/flexible-payments-from-pensions#history 

[2] https://www.canadalife.co.uk/news/nearly-half-of-furloughed-workers-make-changes-to-their-retirement-plans/ 

[3] https://www.fca.org.uk/news/press-releases/fca-proposes-rules-investment-pathways-and-other-measures-improve-retirement-outcome%20s-consumers