Make sure you have a prosperous, as well as a happy, New Year!
Follow these 12 financial resolutions to make sure you enjoy a prosperous New Year.
The New Year is a great time to make a fresh financial start. Make a resolution to cut out and keep our checklist, and boost your family’s wealth and security in 2014.
Following these 12 New Year financial resolutions could make your family healthier, wealthier and wiser in 2014.
1. Get the taxman off your back.
Nearly seven out of 10 Britons do nothing at all to reduce the amount of tax they pay and as a result they pay £4.6 billion in tax unnecessarily. As a high earner, you have more incentive than most to cut your tax bill. There are many legitimate things you can do, such as making full use of your family’s tax-free ISA allowances, and seeking capital gains tax and inheritance tax advice, that will leave you more of your money to spend on the things you enjoy. Tax is complicated, so speak to a specialist planner.
2. Work out your net worth.
Saving for your retirement is one of the most important things you will ever do. Yet many people don’t know how well their plans are progressing. Four out of five people have no idea what their pension will be worth when they retire. Dig out all your pension and ISA annual statements to see where you stand today and track down any missing investment plans or savings accounts. You might be worth more than you think.
3. Work out what you need to retire in comfort.
Just because you’re on a high income now, doesn’t mean you will be well off in retirement. Right now, a single man with £100,000 in his pension pot would be able to buy an annual income of just £5,500 a year. That’s not exactly riches. If he had £200,000, he would generate twice that amount, or £11,000 a year. To get the equivalent of the national average salary in retirement, currently £26,500, you would need roughly £500,000 in your pension pot. And that would only buy you a level income. If you want that income to rise in line with inflation, you will need even more. No wonder many high earners face an income shock when they give up working.
4. Claim your pensions tax relief.
Pensions tax relief is hugely valuable, especially for higher earners. They can get tax relief of up to 45% on their pension contributions, but there is no guarantee this will continue. There is a growing political campaign to cut pensions tax relief for higher earners. Your contributions are subject to an annual allowance of £50,000, falling to £40,000 in 2014/15. Use it if you can. You may also be able to carry forward any unused allowance from the past three years.
5. Consider putting all your investments in one place.
It is all too easy to end up with a mis-mash of different personal and occupational pensions, ISA and other investment funds, and a string of online share dealing accounts. Consider consolidating your pensions into a single pot, for example, by setting up a self-invested personal pension (Sipp), if you haven’t already done so. Having all the information in one place allows you to monitor and manage your pension and other savings more easily. It also reduces the risk of some of your pot going astray.
6. Review your risk profile.
Next, look at where your money is invested. Does it still match your risk profile? The closer you get to retirement, the fewer chances you should take with your money. You might want to reduce your exposure to, say, high-risk emerging markets, and even stocks and shares generally, and switch your gains into cash or bonds. Again, consider taking specialist financial advice, to strike the right balance in your portfolio.
7. Check your life insurance.
More than 12 million Britons don’t have a financial back-up plan in case of financial disaster, such as accident or sickness. As a high net worth individual, you have plenty to protect. If you have dependants, such as a partner or children, you should start with life insurance. If you already have life cover, make sure you have taken out enough to protect your family’s lifestyle.
8. Ask whether you need other protection.
Life insurance isn’t the only protection you need. You are four times more likely to suffer a serious illness before age 65 than die. One option is critical illness cover, which pays out a tax-free cash lump sum if you suffer a serious illness such as cancer, heart disease and stroke. One in five will go on long-term sick leave during our working lives. Income protection will pay you a tax-free replacement income if you fall ill and can’t continue working. It is vital cover, yet only one in 10 people have it. Ask your adviser what you need.
9. Review your mortgage.
The average mortgage rate recently hit an all-time low of 3.47%. If you’ve got plenty of spare equity in your property, you can find deals for as little as 2% or 3%. If you’re paying more than that, it’s time to shop around for a better deal. Say you have a £250,000 repayment mortgage on a 15-year term charging a variable 3.99%. Switching to a five-year fix at 2.85% will save you £8,400 in interest repayments over the term of the deal, possibly more if interest rates rise in that time.
10. Think of the kids.
If you’re not saving for your children’s future, start now. If you invested just £84 a month for 18 years, you could build a lump sum of £25,000. Even £50 a month over the same period could build a fund worth nearly £15,000, which would make a decent contribution to a house deposit. And you can invest a lot more than that, without having to pay tax on the growth or income. In the current tax year, you can save up to £3,720 into a Junior ISA, or £310 a month. It’s your children’s future, so get started now.
11. Get strategic.
It is easy to get bogged down in the details of your personal finances, but sometimes you have to think a little more strategically. What are your personal aims in life? How long do you plan to carry on working? Would you like to strike out on your own? When do you plan to retire? Would you like to retire overseas or own a home in the sun? The answers to these big life questions could determine how and where you invest your money.
12. Write your Will.
Writing your will may not be the most optimistic way to ring in the new year, but it is one of the wisest. Two-thirds of adults currently have no will, however, and many would bequeath financial worries to their loved ones if they died suddenly. If you do have a will, you might need to amend it if your personal or family circumstances have changed. You don’t want to leave a bitter legacy.
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