23 Jan 2012
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Capital Hill
Capital Hill on...12 Financial Resolutions
Financial Resolutions for 2012
OUT with the old, in with the new! It’s that time of year when many of us resolve to turn over a new leaf. So what better opportunity to make some financial management resolutions to keep your pocket, pension and portfolio in optimum condition in 2012?
Some 26 million Britons planned to make New Year’s resolutions this year, according to research by comparison website Gocompare.com. Sorting out finances topped the nation’s priority list ahead of traditional vows such as getting fit and losing weight: 49%, 46% and 45% respectively of 3,000 adults surveyed said they would make these resolutions.
It was the first time since 2008 – which saw the onset of the credit crunch and ensuing recession – that a financial revamp was the biggest resolution.
John Miles, business development director at gocompare.com, said: “Unlike some of the health and lifestyle resolutions, there are several easy, practical steps people can take to make a real change to their finances in 2012.”
Capital Hill suggests 12 financial resolutions for 2012...
1. Plan your financial year
First things first, take stock! Note down forthcoming important financial dates, such as when your home and car insurance policies are due for renewal, your car road tax expires, MOT or service is due and tax return must be filed.
“Plotting key dates on a personal finance calendar is a great way to ensure you’re prepared for up-and-coming financial dates and obligations,” said Ray Black, an independent financial adviser and founder of Money-minder.com.
You should set aside regular dates to review your financial planning, from savings & investments to protection & pension plans.
2. Watch your rates
Don't let product providers enjoy the spoils of your inertia. Keep a close eye on when low-rate deals on your mortgage, credit cards or loans come to an end and when special savings rates run out as a prompt to review your situation.
The recently-launched SavingsChampion.co.uk website has a free rate tracker service that monitors UK-based savings accounts and keeps savers informed of any rate changes, including bonuses and fixed rate bonds maturing, as well as alerting users to better deals.
3. Shun loyalty
In most cases, loyalty doesn’t pay. Don’t be persuaded by so-called ‘preferential’ rates for existing customers, as you can often do better elsewhere.
HSBC’s ‘premier’ savings account, for example, purports to offer preferential rates for premier current account customers, but pays a pitiful 0.1% AER.
Pledge to scour the market for the best deals, whether you’re switching a current or savings account, hunting down the cheapest utility providers, investing your individual savings account (ISA) allowance or buying an annuity with your pension pot.
4. Be tax-efficient
Tax is a necessary evil, but why pay more than you have to? Interest and gains roll up free of income and capital gains tax (CGT) in an ISA. You can squirrel away £10,680 before the end of the 2011-12 tax year on 5 April, and £11,280 in 2012-13. Up to half the annual limit (£5,640 in 2012-13) can be put into a cash ISA and the rest into stocks and shares or, alternatively, you can put the full sum into a stocks and shares ISA.
Use other allowances, too. The CGT allowance can’t be carried forward: it’s a case of use it or lose it. This two-tier tax is levied at 28% for higher-rate taxpayers and 18% for lower taxpayers.
Realise gains up to the £10,600 allowance by selling or switching assets within your portfolio. If you’ve made losses, you might want to realise these, too. Losses can be carried forward indefinitely and offset against future capital gains – perhaps when you’re in the higher-rate tax band and your CGT rate is also higher.
5. Allocate assets correctly
Most married couples hold savings accounts in joint names, primarily for convenience. If one party is a higher-rate taxpayer and the other a non-taxpayer, income is taxed at 20%. However, by putting the account solely in the non-taxpayer’s name, interest is tax-free.
Anna Bowes, director of savingschampion.co.uk, said: “Does your spouse pay less tax than you? If so, consider putting more savings in their name. Then trust them not to spend the money when you’re not looking.”
If you have capital gains over the annual allowance, there is often merit in transferring assets between spouses on this front too: the 10% difference in the rate paid by basic- and higher-rate taxpayers equates to a saving of £1,000 per £10,000 worth of gains.
6. Move up the risk scale
You can save up to half your ISA allowance in a cash account. With many offering instant access, this is a good home for your emergency fund. However, with inflation running at around 5% p.a., Juliet Schooling Latter, head of research at discount broker Chelsea Financial Services, urges those with cash savings over and above this to take on more risk.
“If you’re saving in cash, consider equities instead,” she said. “Interest rates have been at record lows for almost three years and, with inflation as high as it is, a basic-rate taxpayer needs an account paying about 6% p.a. just to maintain the value of their savings while a higher-rate taxpayer needs 8% p.a. They just don’t exist, so you’re losing money if you’re in cash.”
Shares have historically been the top-performing asset class. In the past 50 years, they have returned an annualised 5.4%; government bonds have yielded 2.5% and cash 1.7%, according to the Barclays Capital equity gilt study 2011.
You can switch cash ISA holdings into a stocks and shares account, but not vice versa.
7. Don’t take too much risk
Patrick Connolly, head of communications at AWD Chase de Vere, the independent financial adviser, warns against being too gung-ho.
“Investors must be wary of taking too little risk and missing out when stock markets bounce back. However, many investors are worried about the volatility of stock markets and should, therefore, ensure they don’t have too much money invested in shares. By using safer assets they can ensure better capital protection and probably fewer sleepless nights.”
InvestorBee.com allows users to benchmark their current savings and investment habits against what people like them are doing, then choose the strategies that are right for them.
8. Spring clean your portfolio
Review your portfolio and get rid of any dud funds that have continually underperformed or no longer meet your requirements.
“Switching is free with many fund supermarkets and product providers these days, so you should be able to do this at no extra cost,” said Schooling Latter.
Consolidate your investments, too: instead of holding funds with different providers or fund supermarkets, put them all in one place.
“Many people will offer you an incentive to do this, so you have a little extra money to spend in the sales, or you can invest it too,” added Schooling Latter.
9. Rebalance regularly
Don’t sort out your portfolio then leave it to gather dust. Particularly in periods of high volatility your asset allocation can quickly get out of kilter with your objectives and attitude to risk.
“It’s a sensible practice to rebalance regularly, where you take profits from those assets which have performed well and reinvest in those that have done badly,” said Connolly. “This will help to manage the overall risk you’re taking in your portfolio and also mean you’re selling high and buying low – which should be what investment is all about.”
10. Plan your retirement
Around 9% of people plan to start a pension or take more action with their existing pension this year, according to investment website rplan.co.uk.
If your employer offers a pension scheme – particularly one they’ll contribute to on your behalf – join it. Otherwise, you’re passing up a free lunch. The taxman will top up your own contributions with tax relief which, for basic rate tax payers, turns every £100 that you pay into the scheme to £125.
If all else fails, marry a teacher. “Even after the proposed changes [to public sector pensions], they’ll have a good pension on which to retire,” said Schooling Latter.
11. Review your protection needs
Reviewing existing life insurance, critical illness and income protection plans is essential if you want to ensure you’re not paying more than you have to for the level of cover you need.
Some 12% of people polled by rplan.co.uk resolved to ensure they have the best insurance cover available, and the same percentage pledged to cut the cost of their insurance bill.
“Research carried out by money-minder.com in 2011 showed that if you took out your life assurance with your mortgage lender or bank you may be able to save thousands of pounds over the remaining term of the policy just by reviewing your existing plan and moving to a different provider,” said Black.
12. Write a Will
While many resolutions require will power, one that is easy to keep is arranging a Will. As many as one in three people in Britain die without making one.
Ian Mackie, sales and marketing director at Co-operative Legal Services, said: “Some think that it’s something to put off until later in life, or assume that their wishes will be carried out because they’ve been discussed with family.
“Unfortunately, that’s not the case and the only way to be certain that your property and possessions go to the right people is to write a Will.”
The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This article contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.
Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.
The value of any tax reliefs will depend on your individual circumstances and tax rates and reliefs, as well as the tax treatment of ISAs and pensions, could change at any time.
Author: Jennifer Hill
Jennifer is an award-winning British financial journalist. She recently left The Sunday Times, where she was deputy Money editor, to set up her own company, mediahill Ltd. She is a previous personal finance correspondent of Reuters, the global news service, and personal finance editor of The Scotsman newspaper.
She has won or been shortlisted for six Headlinemoney awards, the ‘Oscars’ of personal finance journalism in the UK. She has also scooped or been nominated for accolades from the Association of Investment Companies, Ignis Asset Management, the Association of British Insurers and the British Insurance Brokers’ Association.