January is a month when we put aside the excesses of Christmas and set goals for the coming year.
From drinking less or going on a diet to taking up a new hobby or joining a gym, the New Year gives people a chance to take stock and reset parts of their lives.
It can also be a great time to give your finances a detox or, at the very least, to take stock of where you are financially.
Many of us might be put off from doing so because, when it comes to our personal finances, it is hard to know where to start.
“January is often a time when people plan out what they want to do for the year and identify changes they want to make to their lives, and peoples’ finances are an integral part of that,” says Adrian Lowcock, head of personal investing at Willis Owen.
“The problem is that financial matters are complex at the best of times, and there are so many places you can start. Tax returns, investment reviews and long-term planning are all considerations, but there are some must-dos which investors can focus on.”
Below, Lowcock identifies ten tips to give your finances a fresh start in 2021.
- File your 2020/21 tax return online by 31 January
Tax returns can be submitted online until 31 January 2021. It is important not to miss this, or you will face a fine, starting at £100 if your tax return is up to three months late. You will also be charged interest on late payments.
To file a self-assessment tax return online you will need a HMRC account and this can take a week to get because you need to be sent an ‘activation code’ in the post – so don’t wait to act.
Completing a tax return also involves some preparation, as you may need to gather relevant documents such as pay slips, records of any bank interest, or dividends received in the year.
- Review your budget
As many households will attest to, controlling spending in January can be a must as the excesses of the Christmas period come home to roost. However, this doesn’t have to be a negative experience. Use this as an opportunity to plan for the next 12 months and give any spending habits a good detox. Review all your bills and look for ways to cut them. Remove any unnecessary spending and plan to save for those larger items – such as holidays or next Christmas – in advance.
3. Consolidate your investments
Make things easier for yourself in 2021 and make sure all your investments are easy to manage and review. ISAs and Self Invested Personal Pensions offer transparency and are relatively easy to consolidate on to a platform. When choosing the right platform for you think about the choice of investments, ease of use, and the costs. Before consolidating any pensions, first check with each pension provider that there won’t be any excessive penalties or loss of valuable benefits.
- Rebalance your portfolio
Before considering any new investments, it is worth reviewing your existing holdings as well as your investment goals and objectives. Existing portfolios will drift away from their original weights over time as each investment will perform differently. This can lead to the risk of a portfolio changing significantly, and potentially no longer being suitable.
Given that many people make new investments in February and March in the run-up to the tax year-end, it is a good discipline to review your existing holdings beforehand as it should provide an insight into the areas that you should focus on for any new investments. This will ensure you have a balanced portfolio.
- Use your ISA allowance
ISAs are the first port of call for tax-savvy savers and investors. They allow your savings and investments to grow free of any additional tax whilst also offering considerable flexibility as you can withdraw your investments at any time without a potential tax hit on the way out. The annual ISA allowance is now a significant £20,000 and you can hold a wide range of investments inside them, making them equally useful for those just starting out or those in retirement looking to take an income or draw on capital.
- Review your pensions
There has been a considerable amount of change to pensions in recent years, with greater flexibility in how benefits are taken. Pensions have also become a very tax-efficient way to pass wealth onto the next generation. Yet many old pension contracts may not be able to facilitate these features, and it is therefore vital to review existing plans if you have not done so recently.
Furthermore, with a lifetime allowance of £1.073 million and the introduction of a tapered annual allowance for high earners, it may require a change in approach to contributions.
- Make sure you have a will
Dying without a will, known as intestate, can leave your loved ones and dependents in a terrible financial situation, adding considerably to an already stressful situation.
Even if you have written a will, it is important to make sure it is up to date with current tax rules, as well as your circumstances and wishes. The good news is a will probably only needs reviewing and updating every five years, although it should be done more frequently if there have been any major changes in your life, such as marriage or the birth of a child.
8. Maximise pension contributions
Pensions are very attractive to higher rate income taxpayers, who can get tax relief at their marginal rate of taxation. For example, a £10,000 gross contribution from a 40% taxpayer would only cost £6,000.
The future of tax relief on pension contributions has been in doubt for several years. They cost the Treasury a lot in missed tax revenue, so it is important to act sooner rather than later as the rules may change at some stage.
- Make use of your capital gains allowances
If you own investments outside of tax-free wrappers (ISAs and pensions), then you can crystallise returns this tax year of up to £12,300 without incurring Capital Gains Tax. Many investors forget to utilise this potentially valuable allowance. It might make sense utilising this and using the proceeds to fund an ISA or pension contribution so that over time as much of your investments as possible are sheltered in tax-efficient accounts.
- Review your goals
Everyone’s lives are busy, and it is easy to get bogged down in the day-to-day without focusing on the bigger picture.
However, the start of the year is an opportunity to think truly long-term. What are you saving for over the next ten or fifteen years, are you likely to achieve it, and are your retirement plans on track? These things don’t need checking every week, but the start of the year is a great time to review this.
Adrian Lowcock, Chris Tuite
Head of personal investing Director & Head of Consumer Finance
Willis Owen MRM London
07849 846387 020 3326 9925
Notes to Editors
Willis Owen is one of the UK’s leading online investment service providers. Founded more than 20 years ago Willis Owen now has around £1bn of funds under management and has acted as an intermediary for over 150,000 customers and hundreds of millions of pounds worth of investments,
Willis Owen Limited is authorised and regulated by the Financial Conduct Authority.