19 May Our 20 top financial advice tips – for investments, wealth and pensions
To mark our 20th year of providing sound financial advice, we’ve drawn together out top 20 tips for investments, wealth and pensions – to help keep your personal finances in top shape. As with any tips you may read online, they’re relevant at the time of writing and you should always take financial advice before acting on them. If in doubt, give us a call and we will be able to speak with you, to fully understand your personal situation.
Tip 1: Maximise your lifetime gifts
Christmas is coming, so consider your financial situation and lifetime gifts. If you have sufficient capital and income for today and your retirement, making an outright gift may be tax efficient. You can use the small gifts exemption of £250, the annual exemption of £3,000 or a gift from excess income – and qualify for relief from Inheritance Tax.
Tip 2: Include inflation on your retirement decisions
There’s no better time to be aware of the risk that inflation poses to your investments and pensions schemes. Rising prices eat away at the buying power of retirement funds, and with inflation up at around 10% you may rightly be concerned about the true value of your pension pot when you retire. Prices will go up. Plan for it now.
Tip 3: Combine your workplace pensions
It’s not uncommon to have two or more workplace pensions, especially now that anyone over 22 and making more than £10,000 a year is automatically enrolled into a pension by their employer. Often you don’t get a choice of pension provider, so you’ll potentially have multiple schemes that don’t match your investment criteria – and could be hard to manage. It’s sensible to think about your goals and transfer or combine pensions so that you are better prepared for the future.
Tip 4: Be aware of your tax allowances – and use them
Are you making the most of your yearly tax allowances? Sometimes it can take a bit of juggling, but you should be wise to where you put your money. For example, you can save up to £20,000 annually into an ISA and pay no Income Tax on the interest or dividends received. You don’t pay any Capital Gains Tax on profits from investments in a stocks and shares ISA. You can contribute up to £40,000 per year into your pension and benefit from pension tax relief.
Tip 5: Balance your investments with your partner
If you are one of a married couple or civil partnership, are you maximising your investment potential? Consider maximising and equalising the allowances available for each of you – including your ISA allowance, income tax and capital gains tax allowances, or pension contribution limits.
Tip 6: 3 Bs: Budget, Banks, Back-up – part 1
Budget: Every time we go into the shop everything seems to have gone up in price. With inflation making it feel like we are back in the 1970s, getting control of your finances is more important than ever. It’s essential to get a handle on where the money is going so you have to sit down with your bank statements and meticulously go through outgoings. This will help highlight where money is seeping out unnecessarily – and it’s not just going down the back of the sofa. Once you have a list of what’s essential and what is really discretionary you can start thinking about where there are savings to be made. How much are you drawing out from the cash machine? Maybe that should be restricted to once a week. Are you on the best deal for your mobile phone, TV, broadband and utilities? Are you paying interest on credit cards? We will cover ways of addressing these in a later post. But for now, it’s important to get the facts on where all that money is going.
Tip 7: 3 Bs: Budget, Banks, Back-up – part 2
A good way to stay in control is to have 3 current accounts for managing your everyday finances. 1. The first is for any income you receive – salary, investment income, rent from property etc. 2. The second is your expense account for all your bills and other fixed regular outgoings. 3. The third is your ‘pocket money’ account for leisure spending, nights out and treats. Every month you should transfer enough to cover your monthly bills from your income account to the expenses keeping a ‘float’ of a couple of hundred pounds in account 2 for the odd bill that might fluctuate. Then transfer a fixed sum to your ‘pocket money’ account and this is the only one you should draw cash from when you need it. Don’t be tempted to use a debit or credit card from any other account. If the ‘pocket money’ account runs dry before the end of the month, you need to tighten your belt. The rest of your income can go to building up your long-term savings.
Tip 8: 3 Bs: Budget, Banks, Back-up – part 3
As we all know from experience, we have to expect the unexpected. That’s why it’s vital to build up an emergency pot from your spare cash each month – even if it means limiting what goes to your ‘pocket money’ account and spending less on fun things for a while. Bouts of ill health, car/boiler breakdown and family emergencies are never welcome, so you need to be ready. It can be tempting to put emergency spends on the credit card, but that can turn out to be a costly mistake when you start paying interest. We recommend you keep a savings reserve of at least 3 months’ regular spending – but ideally 6. That’s around £10-12k for most people. This should be in an account that it is hard to access so you can resist the urge to splash out. With internet-based accounts, online shopping and a convenient app on your phone, these days it’s all too easy to dip into savings. A postal account, one in a building society with no branches nearby, or one where you lose interest if you take funds early, will help you to stay disciplined.
Tip 9: Spend cash
Inflation reduces the value of your cash, and if you need income – perhaps because of retirement – it makes sense to spend your cash reserves rather than selling your investments. Making withdrawals from a pension when markets are low can reduce the life of your pension pot considerably, so it may be worth deferring taking pension benefits in favour of spending cash. As always, you should take financial advice on your own personal circumstances.
Tip 10: Dealing with disaster – part 1
No-one likes to think about it but the two certainties in life are still ‘death and taxes’. There’s only so much we can do to reduce the impact of tax. But there is a lot more we can do to deal with the financial impact of an unexpected early demise. Maybe you have mortgage protection, and that’s good, but your earnings probably cover more than just the mortgage. For most people, the cost of a decent level of extra life cover is a lot less than what you pay for your car insurance. And you are worth a lot more to a bereaved spouse than your car if you get written off.
Tip 11: Dealing with disaster – part 2
Most people are sensible when it comes to insuring against death and have at least some life cover for their mortgage. But with improved healthcare, it’s now much more likely that you will survive a serious illness and the life cover won’t pay out. So, it’s important to put in place some protection that will cover your debts if you get really sick and can’t work. A Critical Illness policy will pay out a lump sum on diagnosis of most major diseases so you can repay debts and take your time to make a full recovery. You can often add Critical Illness cover to a mortgage protection policy which should keep costs down.
Tip 12: Annuities still exist
Since April 2015, when pension holders were given more freedoms to choose what to do with their pension pots, the idea of buying an annuity fell out of favour. However you can use some of your pension pot to buy an annuity for some guaranteed income, and you can leave the rest of your investments in place. For older people the annuity rates tend to improve as life expectancy declines. So be sure to consider annuities in your pension planning because they may help achieve your objectives.
Tip 13: Tax efficient pension contributions
You can in theory contribute as much as you like into a private pension scheme. But this could put you at risk of paying tax. Only the first £40,000 you contribute per annum will be tax free. You’ll be taxed at your level of income tax for anything above this. It may be wise to speak to us if you’re thinking of making a significant contribution.
Tip 14: Where there’s a Will
You may think you don’t own much and so it’s not worth having a Will. But dying without one – known as intestacy – can cause a lot of problems for those left behind, particularly if you are on a second marriage or living with a partner and not married. It’s not just finances that are affected. If you have children and you don’t leave instructions or appoint guardians, the State can step in. Is that what you want for your biggest asset?
Tip 15: Start a pension early
Retirement may seem a long way off but starting to save early will make it a lot easier to build up the big pot you will need to pay for a comfortable retirement. For every 10 years you delay saving you will probably have to double the amount you save. You may already contribute 5% of pay to your workplace pension, but you can pay as much as you want (up to 100% of pay for most people). You get a tax uplift of at least 20% on everything you put in. So, your £80 becomes £100 on day 1. If you start early you can start small so ‘every little helps’.
Tip 16: Pensions alternative
If you are under 40 you may not want to commit to something you can’t touch for more than 20 years. An alternative is saving into the Lifetime ISA. You get a tax uplift similar to pensions and can take the money as a tax free lump sum when you are 60. But for younger people the big bonus is you can also use the funds as a deposit on your first house. A couple can have one each, which can go a long way to getting on the property ladder. You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
Tip 17: Unconventional investments
People typically invest in stocks, bonds and cash. But during a recession there may be alternatives that look a better option. They tend not to correlate with conventional investments. This can include private equity or venture capital, hedge funds, commodities and derivatives contracts. But you could invest in art, antiques, real estate, oil, gold… even wine and whiskey. There are no guarantees, but they may prove an effective hedge against inflation.
Tip 18: Review your portfolio
Whether your investments are in shares or in pensions that invest in them, this is a time of high uncertainty. Consider optimising your portfolio and investment mix. Diversify by looking at cash, stocks, bonds or real estate, or different industries, company sizes, and different ratios. Or move holdings to bonds or commodities. But remember that you should buy low sell high – so it may not be wise to sell when shares are down.
Tip 19: The skies will clear
Recessions don’t last for ever, and tend to be followed by a period of economic growth. This requires you adopting a longer-term focus to ensure a healthier financial position. Define your goals, establish how realistic they are, and consider the economic uncertainties. This will guide your forward-looking investment decisions.
Tip 20: Get advice
Whenever you make financial decisions, you are best to seek financial advice – whether it’s around pensions or wealth. As Benjamin Franklin once said, “An investment in knowledge pays the best interest.” Do speak with PX if you need sound advice. Remember, for Over 50s you can also seek an appointment with Pension Wise, a UK government-backed service from MoneyHelper.
The value of investments & the income derived from them can go down as well as up, and you can get back less than you originally invested. This article does not constitute personal advice. Prevailing tax rates and reliefs are dependent on your individual circumstances and are also subject to change.