2 ways you could be being too cautious with your money, and how a financial planner can help

Although it’s important to be aware of your spending in the cost of living crisis, being over-cautions with your money could also be damaging. Here’s why.

The cost of living crisis has topped headlines for more than a year now – and for many, it certainly isn’t over.

After Covid-19 lockdowns were eased, inflation began to soar, reaching a 40-year high of 11.1% in October 2022, the Office for National Statistics (ONS) reports.

More than a year later, inflation now stands at 4.6%; while a significant improvement, this rate still surpasses the Bank of England’s (BoE) 2% target.

What’s more, when inflation started to rise quickly, the BoE then began to hike the base interest rate in December 2021, bringing it up to 5.25% in August 2023.

The base rate has remained at this level between August and November. Now that inflation has begun to drop significantly, it could be that the BoE begins to ease the base rate too – for now, though, it remains at 5.25%.

With these cost of living factors at play, it would be understandable that you’re being cautious with your finances – no matter how wealthy you are. Interestingly, the Aegon Financial Wellbeing Index reports that 55% of average earners worry about their finances, and 1 in 3 top earners do too.

While being careful with your wealth during the cost of living crisis is sensible, being over-cautious could be detrimental in the long run.

Here are two ways you could be short-changing yourself financially, and how to stop.

1. Too much caution with your pension could lead to meagre growth

Amid the falling of real wage values and household bills rising significantly in the last year, the Guardian reports that more than 1 in 5 people have either stopped or cut back on their pension contributions.

If you’re still paying into your pension, you could also have considered this option. With the cost of running a household and other essentials going up – including the cost of car insurance rising by an average of 40% this year, the Evening Standard states – it’s understandable that “non-essentials” like pension payments may fall to the bottom of the list.

What’s more, with the market volatility of 2022 prevailing to some degree this year, you may be worried about invested pension assets, particularly as you approach retirement age.

Yet as you may be aware, cutting pension contributions now may lead to a shortfall in retirement.

Plus, as we’ve discussed in previous insights, the Lifetime Allowance (LTA) removal and increased Annual Allowance mean you have a greater opportunity to make tax-efficient contributions this year than you did in 2022/23.

If you are concerned about maintaining or increasing pension payments as you approach retirement, or are worried about how fluctuating markets might affect your drawdown options, we can help.

We can guide you through balancing your appetite for risk with your pension growth goals, enabling you to remain sensible while throwing over-caution to the wind.

2. Keeping hold of excess wealth unnecessarily may mean your children pay more Inheritance Tax later on

Another factor that could signal you’re being too cautious with your wealth is deciding to leave your entire estate in your will, rather than giving some wealth away over the course of your life.

Indeed, assets that surpass the combined Inheritance Tax (IHT) nil-rate bands are likely to be subject to a 40% bill. The nil-rate bands amount to up to £500,000 as of the 2023/24 tax year (if your assets include your main residence, passed to your direct descendants).

With this in mind, it could be prudent to discuss your wealth circumstances with a financial planner, and if you can afford to do so, begin reducing the value of your estate by offering financial gifts to your family members.

Understandably, the idea of giving away a significant amount of wealth, even to loved ones, could make you nervous – especially if you’re unsure whether this will affect your financial stability later in life.

This is where forming a financial plan with an expert can come in handy. We’ll conduct a comprehensive review of your wealth circumstances – from pensions to property and everything in between – and help you to figure out:

· How much you can comfortably afford to take as an income in retirement

· The risks associated with your investment portfolio, and how these could affect growth in either direction

· Any external factors that could come into play later, such as inflation, market volatility, and changes to your personal circumstances

· The amount you can afford to begin giving away to your family, and the tax-efficient routes that you could consider.

If you’d like to gain the confidence to begin reducing the value of your estate now, working with a Kellands financial planner may give you the boost you need.

Get in touch

To learn more about anything you’ve read here, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.


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