Is it time to spring clean your finances?

Saturday 20 March sees the official start of spring after the long, dark winter months which this year were spent in lockdown. This is a time of year when the mornings become lighter, the weather has started to warm and the daffodils have blossomed. This year, the sense of better days ahead that accompanies the arrival of spring will be especially relevant as we look ahead to an easing of lockdown restrictions that will (hopefully!) enable us to socialise with friends and family again.

Spring is also a time of year when many people like to give their homes a thorough freshen up and declutter with a traditional “Spring Clean”. Sweeping away the cobwebs and emptying the cupboards of accumulated junk and worn out clothes can be quite a cathartic experience, creating space and order and a sense of new beginnings.

However, why stop at cupboards, wardrobes and skirting boards? With the 5 April end to the 2020/21 financial year fast approaching, this time of year is as good as any to spruce up your finances, particularly given the end of the tax-year is fast approaching.

With that in mind, here is a check list of areas to consider:

1. Review your outgoings

Many of us are perhaps as not as diligent as we could be in periodically reviewing our regular outgoings. It is all too easy to build up standing orders and direct debits for subscriptions or memberships that end up under-used or even forgotten about. A little time spent reviewing your regular outgoings against your income can quite quickly help identify potential savings that can add up over the year. Alongside this, it really does make sense to check that you are on competitive tariffs for utilities and service suppliers and to shop around when it comes to renewing insurance.

2. Check whether you mortgage is competitive

If you have a mortgage and haven’t reviewed it for a while, now might be good time to do so. Interest rates are at an all-time low but that won’t remain the case forever. Re-mortgaging could enable you to cut interest payments and potentially fix these for a number of years. If you have accumulated extra savings during the many months spent at home, this might also be a time to consider paying off some of your mortgage.

3. Are you holding too much cash?

While the pandemic has been financially tough on many families who have suffered a loss of income, others may have seen their financial position improve due to a reduction in outgoings. In fact the UK household savings rate – the average amount of disposable income saved - has reached record levels over the last year as people’s ability to travel, shop and socialise has been severely curtailed.

Having a cash buffer for emergencies makes a lot sense, but with interest rates so low and inflation starting to creep up again, holding large amounts of cash that you might not need to touch for years will see the future spending power of this cash be quietly eroded over time. Now might be the time to consider whether you have the right balance between savings and longer-term investments. 

4. Dog proof your investments

If you already own investments, for example within Individual Savings Accounts and Pensions, when was the last time you checked how they are doing? The differences between the best and worst performing investment funds can be huge and it really is important to periodically review whether there are any that might be worth switching. In Bestinvest’s most recent Spot the Dog report, we highlighted 119 seriously poor performing funds that held almost ￡50 billion of investors’ hard-earned cash. The full report can be downloaded here

In taking a closer look at your investments, also considered whether you have the right spread across different types such as shares and bonds, as well as whether you are well-diversified across different market and industries. You may need to rebalance your spread of investments.

5. ISAs: use them, or lose them!

Every adult gets an annual Individual Savings Account allowance each tax year, enabling them to shelter a thumping ￡20,000 of savings and investments from the tax man. The allowance is available on a ‘use it, or lose it’ basis: if you do not take it up by midnight on 5 April then it will disappear for good. Importantly, ISAs are very flexible: you can withdraw your money from them at any point. If you have the funds available, there is no real reason not to fund an ISA by midnight on 5 April.

ISAs are particularly useful for long term investments such as funds investing in equity and bond markets. However, if you cannot decide where to invest or are unsure whether it is a good time, there is no need to make a rushed decision: most stocks and shares ISAs enable you to open the account with cash and then decide where and when to invest it later. If you change your mind, you can always withdraw the cash.

6. Own investments outside of ISA? Consider ‘Bed and ISA’

If you don’t have the cash available to maximise your ISA allowance, but do own shares or funds outside of ISAs, consider using these to fund an ISA before the tax-year end. Selling investments and then repurchasing them within an ISA, is a process known as “Bed and ISA” and is way of migrating as much of your investments as possible from a taxable environment into a tax-friendly one. When selling investments not held within ISAs or pensions, try to make sure the gains you make in selling them do not exceed your annual capital gains exemption of ￡12,300 so that there will not be tax to pay on the profits you make.

7. Transfer savings and investments to your spouse

If you are married or in a civil partnership, you can transfer assets between each other without incurring a tax liability. The technical name for this is an “inter-spousal transfer” and it is one of the simplest things a married couple can do to organise their family finances tax efficiently.

Inter-spousal transfers – which are easy to effect by contacting the broker or investment platform you use and completing an instruction – enable you to switch shares or funds you want to sell to your partner first, so that as a couple you can benefit from two sets of annual exemptions on capital gains. And where a gain is going to exceed these exemptions, if one partner is subject to lower rates of tax than the other, an inter-spousal transfer ahead of selling can help reduce the overall amount of tax exposure.

Another benefit of inter-spousal transfers of savings and investments is that it can enable couples to make use of two ISA allowances (￡20,000 per person), two dividend allowances (￡2,000 per person) and two sets of the annual savings allowance whereby basic rate taxpayers can receive up to ￡1,000 of interest tax-free but higher rate tax-payers just ￡500. Additional rate tax-payers, subject to the 45% income tax band, have no annual savings allowance.

However, before transferring shares, funds or cash to your spouse, it is important to understand that they will become the full, legal owner of the assets.

8. Consider adding to your pension

Private pensions are not as flexible as ISAs as you cannot currently access your benefits until age 55 at the earliest. However, they are unrivalled in their tax-benefits and should be the cornerstone of most people’s long-term financial plans. The State Pension alone provides only a very modest level of income and so if you want to live a comfortable retirement, investing in a pension should be a high priority. The earlier you start, the better.

When you contribute to a pension, you receive tax relief at your marginal rate of income tax. For a higher rate taxpayer, this means that a ￡10,000 gross contribution costs just ￡6,000 after relief at 40%. For most people the annual pensions allowance is up to ￡40,000 gross this tax year but even non-taxpayers such as children or a non-earning spouse can subscribe up to ￡2,880 in a pension and still receive a state top up of ￡720 in respect of basic rate tax, making a gross contribution of ￡3,600. It may seem odd contribute to a pension for a child, but it really is one of the most potent financial gifts you can make as the time invested could see an early contribution grow into a significant pension pot over their lives.

9. Track down missing pensions

Some 23 million people are now members of workplace defined contribution pensions, in large part due to automatic enrolment. Yet as people move jobs a lot more regularly than previous generations, they are now often collecting multiple small pension pots in the process. It is very easy to lose track of these by forgetting to tell previous employers that you have changed address if you move. It really does make sense to spend some time tracking down these missing pensions, as collectively they can represent a significant amount of wealth that you will one day need to live off and if you don’t know where they are, how can you know whether they are doing well? Once you have tracked these down it may be worth consolidating them into one plan where you can keep a closer eye on things. But before transferring any pension, it is important to check that you are not going to incur hefty penalties in doing so.

If you need help in tracking down missing pensions, a good place to start is the Department of Work and Pensions free online Pensions Tracing Service here. 

10. Give your children or grandchildren financial head start with Junior ISAs

If you have children or grandchildren, then contributing to a Junior ISA on their behalf can be a great way to give them a financial head start in life. This could be used to help them cope with the costs of a future degree course or to get their foot on the property ladder early by having the funds available for a deposit on their first home. You can invest up to ￡9,000 a year in a Junior ISA for a child younger than 18-years old, with all the returns on the investments held within them accumulating tax-free. Not only is that up to ￡162,000 contributions over 18-years, if we assume a 5% average annual return after costs, the pot could be wort ￡265,851 at the end of this period.

The funds within a Junior ISA cannot be accessed until the child is 18-years old, by which time a considerable sum could be accumulated. At this point, the Junior ISA converts to an adult ISA and so can continue to grow tax-free for as long as the recipient is willing to leave the investments in place.

Making lifetime financial gifts like this also reduces the potential exposure of a parent or grandparents’ estate to inheritance tax when they die. Of course before you gift money to children and grandchildren, do make sure that you are on track to have sufficient funds in place for your own retirement.

This is not an exhaustive list but a starting point to consider. Do remember that a financial adviser can help you get a proper plan in place.