Daniel Gould, of Daly, Hoggett & Co. in Rickmansworth, looks at some of the financial planning issues to consider during 2009.
With difficult economic conditions and most people feeling the pinch, now more than ever it is important to get financial plans organised and on track for the future. Of course, this can mean different types of planning for different people so it can be useful to have an overview of some of the options that could be available to you.
If you have existing loans or mortgages, reduce debt. It is almost always good practice to repay debt as quickly as possible, particularly if the interest that you are paying is higher than the interest on your savings. Clear your credit cards monthly.
If you are unfortunate enough to be made redundant you might receive a lump sum redundancy payment, depending on your length of service at the company. The first £30,000 of redundancy is paid tax-free, with any excess being subject to tax. Depending on the flexibility of your employer and the company pension scheme you could arrange for any money in excess of £30,000 to be paid into your pension plan, boosting your scheme and saving yourself the tax.
If you have a fixed rate or discounted rate mortgage that is coming to an end, and you are looking for a new deal you’ll find that there are significantly less choices nowadays – and lenders are more stringent as to who they are willing to lend to. You should fully research your mortgage options well in advance of your current deal finishing, and if you are faced with the prospect of higher payments you can plan for the increase in cost.
Make the best use of your money and budget your spending so that you can cover all the essentials and make allowances for potential increases in costs. It is essential to set aside some savings for emergencies and shop around for your utilities, car insurance, house insurance and other regular outgoings.
If you do take on new borrowings, consider not just the monthly costs now, but what those costs might be if interest rates rise or when special deals might end. Would you still be able to afford the repayments?
It is not just the return on your investment that is important in difficult times, but the return and security of your investment. With that in mind, do not just go for the best headline rates but consider the financial security of the institution where you deposit your money. Savers will struggle to find good interest rates for their cash, and for pensioners living off interest this is a major concern, so do shop around.
Do not panic and cash in your investments as you will have already suffered falls, and by cashing in you will be banking your losses. Historically, the markets have started to recover before we start to get the good news stories but, in the meantime, speak to your adviser so that you can understand what is happening to your portfolio rather than simply worrying about it.
If your strategy is to invest in shares for the long term, you may consider this a buying opportunity. If you are nervous, spread your investment into the markets over several months.
Invest in the right mix of assets for your level of risk and invest with the right manager. Investing with the right fund managers over the long term makes a huge difference to your return so you should regularly review the performance of your investments and fund managers.
If you have cash in the bank generating low interest then now is the time to consider investing in a pension and taking advantage of the tax reliefs available on pension contributions. In practical terms, for every £100 contributed by a higher rate taxpayer the government will add £25, with an additional £25 claimed from the government through your Tax Return. This results in it costing you £75 to invest £125 in your pension scheme.
The falls in stock market values are good news for regular savers, as you will be buying shares at cheaper prices, with the likelihood that you will get better profits when markets recover. Do not stop your regular pension payments but make sure they are at a sensible level to provide you with a reasonable income at retirement.
For people nearing retirement, now is not the time to bury your head in the sand. Instead you should look at the effects of the 2008 stock market falls on your pension fund and plan corrective action if necessary.
Landlords may be facing a period of losses arising from falling rents, rising mortgage costs or lack of tenants, while the ongoing running costs of the property continue. Tax planning allows for these losses to be set against other property income in the same year, or carried forward indefinitely so that they can be used at a later date when profits return. Greater tax advantages apply if you are renting out a qualifying furnished holiday home, as losses arising can be offset against other income.
If you are thinking of gifting assets to future generations in order to save inheritance tax, then this is an ideal time to do so tax efficiently. Certain assets, when they are given away, are assessed to capital gains tax based on the growth in the value of the asset. In recent years, with high values, the capital gains tax has been a disincentive to gift. With lower share values and falling property prices, however, the capital gains tax payable is likely to be significantly lower compared to the past, making these areas of inheritance tax planning of interest again.
Despite the powerful sense of gloom all around us, there are plenty of areas to consider – so take some positive action at the start of 2009 by addressing your personal financial plans… overall, the situation might be better than you expect.
As with all types of pension, investment and tax planning,
independent professional advice should be sought.