Make financial planning a New Year resolution and don’t forget that ISA
NEW Year is traditionally a time for resolutions. Many involve joining gyms or starting diets, but what about your financial health?
The last few months of the tax year can see a surge in activity as many people consider using their tax allowances before they lose the ability to do so, but a diligent approach and consistent forward planning can lead to a much healthier overall financial position.
Affordability and suitability are key, but there are many aspects that could and should be considered as part of your New Year focus. Have you used your ISA allowance in full, for example? The limit for 2016/17 is £15,240 (rising to £20,000 in April) and if it is not used each tax year it is lost.
An ISA is an excellent way to save free from income tax and capital gains tax and can be a useful additional savings vehicle to boost funds in retirement.
What about your £11,100 capital gains tax allowance? This is invaluable in managing your portfolio gains on a regular basis. Further, is your portfolio shaped to take advantage of the £5,000 dividend allowance?
The recently introduced pension freedom rules brought flexibility to the fore, but it is sensible to check that your current plan is a modern, flexible contract and that your nominations are up to date. Your nomination confirms the person/ people you would wish to inherit your outstanding pension pot after your death.
Further, have you maximised your pension contributions this tax year? Higher or additionalrate tax relief can be obtained if appropriate on contributions made before April 17.
The annual allowance (the rate at which you can get maximum tax relief) is currently £40,000, but there are restrictions for higher earners who may see their allowance reduced to £10,000.
However, there is also an option to utilise “carry forward” of unused pension allowances for the three previous tax years so if you have not maximised your contributions, and have the relevant earnings to do so, you could potentially contribute in excess of this year’s standard annual allowance of £40,000.
The lifetime allowance reduced from £1.25 million to £1m in April this year. This is the limit on the amount of pension benefit that can be paid without triggering an extra tax charge. There are options for those who have funds in excess of this level but some may have to move quickly.
Individual protection 2014 will maintain the lifetime allowance to the lower of £1.5m or the value of benefits at April 5, 2014 but must be applied for before April 2017. Individual protection 2016 will maintain the lifetime allowance at the lower of £1.25m or the value of benefits at April 5, 2016.
While there is currently no end date for applications for individual protection 2016, for anyone who may have larger funds, it will pay to take positive action to check values and available protections prior to April this year if you have not already done so.
Finally, inheritance tax (IHT) was once said to be a “voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. There are many legitimate steps that can be taken to mitigate your IHT liability in order that the tax man does not inherit more than your children.
IHT is paid at 40 per cent on individual estates greater than the current nil-rate band of £325,000. However, it is fully inheritable by spouses and so can be up to £650,000 on second death.
There is also a new residence nil-rate band being introduced and, with the benefit of careful planning, IHT can certainly be reduced or even avoided completely.
Essentially, as part of your future financial planning, utilising key reliefs and allowances mean that you can invest significantly and legitimately for a healthier financial future for you and your family.
‘‘ A diligent approach and consistent forward planning can lead to a much healthier overall financial position
Carol Anne Mitchell is a chartered financial planner at Executive Benefit Search.