As the new tax year begins, Chartered Financial Planner Chris Bull explains why even in times of crisis it is important to plan your finances early.
Spring clean sorted, and garden furniture out ready for Spring? With a new tax year in play, make time to plan your finances early this year.
The new tax year, arriving in the midst of a financial crisis, undoubtedly presents planning opportunity. However, this time, it is paired with apprehension and heightened anxiety for both family health and finances. Under such duress, it is easy to defer financial planning decisions. In some instances, this is wise, but for all it is a time to reassess and be strategic.
Planning early - Funding early in the tax year is a great habit, however in a period of turmoil, fundamentals become ever more important. Before committing monies to an investment, reassessing anticipated income versus expenditure and cash reserves is crucial.
Those who have cash to invest with a long-term timeframe in mind, have a decision to make. The brave will buy into the current market dip, sensing a market rebound as we emerge from the crisis. Others may prefer to phase their investment in over a period of months, known as pound cost averaging. This helps to lessen the risk of mistiming an investment.
Remember, it is possible to fund tax allowances, whilst retaining funds in cash, if this is your preference for the time being. At some point a strategy to enter the market will be needed to avoid the long-term impact of inflation. The potential opportunity cost here, is missing a market rebound in the months ahead, whilst waiting for confirmation and comfort that a global recovery has been achieved.
Pensions and ISAs
For 2020/21 the ISA allowance remains £20,000. Junior ISAs (for under 18s) allowances have shot up to £9,000, and the clever Lifetime ISA (for 18 to 40 year olds) remains at £4,000, with a £1,000 government top up.
For most, the pension annual allowance remains at £40,000. The thresholds have moved for the tapered annual allowance, with some winners and losers.
Those with taxable earnings under £200,000 will now enjoy a full allowance, however higher earners will need to recalculate their tapered allowance, with the minimum now reduced to just £4,000.
If you were previously caught by the tapered annual allowance, it is wise to seek advice on your pension funding strategy moving forward.
The pension Lifetime Allowance – nudges higher to £1.073m. The current market falls provide a planning opportunity in this area for those with larger pots. I have recently advised a client to take £80,000 tax free cash to place into ISAs for 19/20 and 20/21 (across husband and wife). The monies can remain invested tax free, with less lifetime allowance utilised than would have been at the height of the market.
Realising gains and making gifts to the family
A silver lining to market falls, is the ability to close out positions which would have previously incurred unpalatable tax liabilities. The capital gains tax exemption now sits at £12,300 for 2020/21.
Similarly making capital gifts to the family at current market values can be very effective. I am currently realising £325,000 from a client’s portfolio as part of a gifting exercise to their adult children. The size of the gift (and with no previous gifts made) it ensures that an IHT liability will not fall due.
The falls in the market has lessened the capital gains tax implications, and as monies are being reinvested by the children, they ought to benefit from a future market recovery, thus boosting the effectiveness of the gift.
To discuss any of the above, or for some financial planning help and advice, please contact us.
The information provided should not be viewed in isolation and is provided for information purposes only. It should be considered in conjunction with other relevant information which is available, including that which is held within the public domain. Any views or opinions expressed within this material are provided in good faith and based upon our understanding and experiences of UK and HMRC legislation, regulation and the financial services market place at this time which is subject to change without notice.
The content is intended to provide an overview of possible considerations or options. It should not be construed as an invitation to invest and if you feel that the content is relevant to your circumstances you should seek personal independent financial advice, which can be offered by us at your request. Kellands reserve the right to charge additional fees for financial advice services. The fees payable will be agreed with you in advance before we commence work on your behalf.
Please note that past investment performance is not a guide to the future performance. Potential for profit is accompanied by the possibility of loss. The value of investment funds and the income from them may go down as well as up and investors may not get back the original amount invested. An investment plan is a long-term commitment.