AJ Bell analysts Tom Selby and Laith Khalaf, outlines six financial resolutions people could consider to get the most out of their savings and investments in 2021:
Laith Khalaf, financial analyst, AJ Bell:
1. Make the most of your Covid cash savings
“Over the course of 2020, savers stashed away around £150 billion in cash accounts. Lots of this was probably accidental saving, money that would normally be spent on holidays, clothes, going out, or any of the myriad other things we’ve been unable to do as a result of lockdown.
“Unfortunately, the rates of interest paid on most of this cash is derisory and with inflation expected to rise in 2021, it’s slowly but surely going to be losing its buying power. Savers should seek to make the most of their cash by shopping around for the best rate and considering locking some of their cash away in fixed term accounts to harvest higher rates of interest.
“For money that can be stashed away for 5-10 years or more, savers should consider investing in the stock market. This comes with higher risks, but usually higher returns too. You don’t have to put 100% of your cash into equities if you want to be cautious, or it’s possible to seek out more conservatively managed trusts like Personal Assets or RIT Capital that are less volatile than the market at large.”
2. Utilise your ISA and Pension allowances
“Something which is pretty much nailed on for 2021 is tax rises. Don’t know where, don’t know when, but the government needs to repair its finances and taxation will play a big part. The OBR reckons the government needs to raise anywhere between £27 billion and £102 billion by 2025/26, depending on what your definition of balancing the books is.
“The March Budget looks like it could be a platform for the Chancellor to start to clean up public finances, though clearly this depends heavily on the course of the pandemic over the next few months. We don’t know where the axe will fall, but capital gains tax looks like a prime candidate for a hike, after an OTS report commissioned by the Chancellor recommended such a move last month.
“Higher rate tax relief on pensions could also be a tempting target for the Chancellor, though it would be fiendishly complicated to implement, not to mention deeply unpopular. In a recent AJ Bell survey* of DIY investors, one fifth of those are planning to invest more next year said that the potential withdrawal of tax reliefs was a key motivation.
“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.”
*Survey conducted online by AJ Bell Youinvest between 5 – 10 December. 2038 responses were received.
3. Start saving for your children
“If you’re fortunate enough to have some spare cash each month that you can lock away, get around to opening that savings account for your child. Putting away small amounts when they are little can really add up, and help to pay for costs such as university, buying a car or a house deposit in the future.
“Putting away just £100 a year every year since a child was born can add up to £3,000 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. 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, where returns are free from income and capital gains tax. It can also be rolled over into an adult ISA and save the child from any additional tax on their investments when they grow up.”
Tom Selby, senior analyst, AJ Bell:
4. Check your pension plans are on track
“You should be able to able to view your private pension (or pensions) online. Usually these sites will show a range of information including the value of your fund, how much you have paid in, how much investment growth you have enjoyed and the costs and charges you have paid. Some will also have tools which allow you to estimate how much your pot could be worth at your chosen retirement date, based on assumptions around investment growth and contributions.
“Those who have lost their jobs or incomes due to Coronavirus may have been forced to stop saving as a result. This isn’t something to panic about, but getting back on the retirement savings horse as soon as you can afford to is really important.
“As a very rough rule of thumb, aiming to save roughly half the age at which you start contributing as a percentage of your salary is a good place to start. So, for example, if you start contributing to a pension at age 25 that implies a total contribution of 12.5%, while delaying until age 30 means you might need to set aside 15%. If that rule of thumb sounds overly ambitious, saving something is better than nothing, as your contributions will be boosted by upfront pension tax relief, as well as matched employer contributions in your workplace scheme.”
5. Consolidate your old pensions into one place
“According to the DWP, workers switch jobs on average eleven times during their careers – with each job potentially coming with a new, slightly different pension arrangement. It is estimated there could be 1.6 million ‘lost’ pension pots in the UK representing £19.4 billion of retirement assets – or around £13,000 per pot.
“Tracking down these old pots makes sense for a number of reasons. Firstly, knowing how much you have saved at the moment will help you determine how much you might need to save in the future to enjoy the retirement you want.
“Secondly, once you have located any old DC funds you can consider combining them with your existing provider. This can not only make your pension easier to monitor and manage, but you could also benefit from lower charges, greater investment choice and more flexibility when you decide to access your fund.
“Before you transfer any old pensions you have, check whether they have any guarantees attached as these could be lost if you switch to a new provider.”
6. Check your state pension entitlement and consider filling in any gaps
“The state pension is the foundation upon which most of our retirement income plans are built. The ‘new’ full flat-rate state pension is worth £175.20 a week in 2020/21, but to qualify for this you need to be a UK resident and have a 35-year National Insurance (NI) contribution record.
“You need at least a 10-year NI record to qualify for any state pension (although a deduction will be made if you have an NI contribution record lower than 35 years). They do not have to be 10 qualifying years in a row. It is possible to fill in any NI contribution gaps you have in order to boost your state pension entitlement, but you can usually only pay for gaps in your NI record from the past six years. The rate for ‘Class 3’ NI in 2020/21 is £15.30 a week, so if you needed to buy a year of missing NI exactly this would cost £759.60.
“Before going ahead you should contact the Future Pension Centre to double-check buying extra NI will boost your state pension entitlement. You should also consider speaking to a regulated financial adviser to discuss the available options. You can also check your state pension entitlement at https://www.gov.uk/check-state-pension.”