New year, new finances: Five money resolutions for 2022

January is a month where most people stay in, shun socialising and have a bit of spare time on their hands, so it’s the ideal time to tackle some of that boring life admin that you’ve been putting off. The bonus is that you could make a decent amount of money from tackling some of these tasks, which is often much-needed at the start of the year.

Sort old pensions

One of the first tasks is to track down any old pensions that you have lost track of. According to the DWP, people switch jobs on average eleven times during their careers – which means a lot of different pensions to keep track of. It’s estimated there could be 1.6 million ‘lost’ pension pots in the UK, with each one being worth an average of £13,000 per pot. So it’s worth digging out your old paperwork.

Your first port of call is finding any old paperwork that will tell you where your pension is and how to log-on to see its value and transfer it. If you can’t find any documents, you can use the Government’s pension tracking service to find where it is now. Tracking down these old pots makes sense for a number of reasons. Firstly, knowing how much you have saved in total will help you work out how much you might need to save in the future to enjoy the retirement you want.

Secondly, once you have located any old defined contribution funds you can consider combining them with your existing provider. This will make your pension easier to monitor and manage, but also means you could benefit from lower charges, greater investment choice and more flexibility when you decide to access your fund. Just double check before you transfer any old pensions whether they have any guarantees attached, as these could be lost if you switch to a new provider.

Start saving for your children

The last thing you’re likely to think of in the early sleep-deprived days of having a baby is opening a savings account for them, but if you’re fortunate enough to have some spare cash each month that you can put away, it’s a good idea to get into the savings habit early for your child. Saving small amounts when they’re little can really add up, and help to pay for things like university, buying a car or a house deposit in the future. 

If you managed to save just £100 a year every year since a child was born you could have £3,000 put away when they turn 18, assuming it’s invested and gets 5% a year growth after fees. Putting away £50 a month would equal more than £18,000 by the time they turn 18.

Saving on behalf of a child is a great way to give them a financial head-start in life. Lots of people default to saving in a cash account for their children, but children also have such a long investment horizon that they are ideally placed to ride out the ups and downs of the stock market in search of higher long-term returns. 

You can now save up to £9,000 a year into a Junior ISA for a child, which is a pipe dream for many families, but it means that you can add lump sums to any regular savings, on birthdays or Christmas for example. In a Junior ISA returns are free from income and capital gains tax, and it can be rolled over into an adult ISA when they turn 18 and save the child from any additional tax on their investments when they grow up.

Write a will

No one wants to think about death, which is why so many people put off writing a will. But lots of people wrongly assume the assets will go to different people when they die, which is why it’s crucial to ensure your affairs are in order.

With families being more complicated now and people co-habiting but not being married or having children from different relationships it’s more important than ever to ensure that your money and assets are going to the right place when you die.

For example, if you’re not married then your partner isn’t automatically entitled to any of your estate when you die, regardless of how long you’ve been together. It’s particularly key to bear this in mind if you own the home that your partner, and potentially step-children, live in. 

It’s a relatively painless process to get a will: there are some kits that let you do it yourself or you can go to a professional who will guide you through the process. If you go down the DIY route you need to make sure the will is legally binding, otherwise your efforts will be in vain.

Make the most of your cash

The Bank of England has just announced an interest rate hike, which is good news for savers who have suffered for years with record low interest rates. However, anyone with money in savings can’t just sit back and expect that extra interest will be added to their account, they have to go hunting for it. 

Lots of people have built up significant savings during lockdown but most of it is languishing in current accounts or old savings accounts earning nothing. Now interest rates have risen we will hopefully see rates increase in the Best Buy tables, meaning savers can get a bit more interest for their money.

However, this will require switching accounts and getting the best deal possible for your money. The top easy-access account now pays 0.71%*, so if you need instant access to your money that’s likely to be your best bet. 

Anyone who doesn’t need access to the money immediately can fix their savings to get a higher return. However, with the Bank of England expected to increase interest rates again next year savers need to weigh up the benefit of getting a higher rate now vs missing out on any potential increase next year.

The bad news for savers is that inflation is high and set to move higher, and no savings account is paying enough to keep pace with inflation. This means that any money in cash is losing value in real terms, which means the amount you can buy with it year-on-year is diminishing. Firstly, savers desperate for a higher return need to be wary of deals promising guaranteed cash returns at very high rates, as these are likely to be scams. Secondly, they should look at how much cash they actually need and whether they can afford to invest some of it, to get a potentially higher return.

Beat the tax hikes by using your ISA and pension

Investors are concerned about more tax rises next year, on top of the increase to National Insurance and dividend tax rates that we already know about. A survey of Youinvest customers found 62% of people** think that 2022 will bring even more tax increases.

This means that putting your money in tax-efficient accounts now, before the end of the current tax year, could pay off even more in the long run if rates do rise. Anyone can put up to £20,000 a year into an ISA and most people have a £40,000 annual limit for their pension. On top of this, anyone with children can open a Junior ISA and put up to £9,000 a year into it.

Income investors should also prepare their portfolios for the dividend tax increase, with rates rising by 1.25 percentage points from April next year. The move means that anyone taking home more than £2,000 a year in dividends, outside an ISA or pension, will now face a slightly higher bill. At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225.

The tax breaks afforded by pensions and ISAs will become even more valuable if taxes rise and investors should look to maximise the savings they hold within these shelters, outside the clutches of the taxman.

*According to MoneyFacts data, as of 17 December 2021

**Source - results based on survey of 2,896 AJ Bell Youinvest customers between 6 and 10 December 2021.

These articles are for information purposes only and are not a personal recommendation or advice.