Paying more into pension plans and individual savings accounts (ISAs) might not seem a priority right now for many people, given the money pressures resulting from the cost-of-living crisis and the after-effects of the yearly Christmas binge.
With the tax year-end less than three months away, though, it’s still a good time to begin thinking about it – and more so this year, given the looming changes to the UK tax landscape.
Here’s an essential 10-point checklist to get you started:
1) Check how much of your 2022/23 ISA allowance you have left
Every adult gets a £20,000 ISA allowance per tax year. No unused part of this allowance can be carried forward into the following tax year. So, consider making the most of the opportunity to shelter your investments from HM Revenue & Customs by using as much of your 2022/23 allowances as possible, before it disappears.
2) How much of your 2022/23 pension allowance do you have left?
Everyone can get tax relief on their pension contributions. For those who pay income tax, this is currently capped at £40,000 of a person’s gross relevant earnings – or 100%, if lower1,2. This means basic-rate taxpayers can invest up to £32,000 of their net earnings and get £8,000 on top from the government. Higher-rate taxpayers can claim back even more through their annual tax return. What’s more investors can also still carry-forward unused allowances from the three previous tax years, as long as you were a member of a qualifying scheme in the intervening period. So this may be your last chance to claim tax relief from way back in 2019/20.
Remember that these allowances apply across all your pensions – whether workplace or personal pensions, including self-invested personal pensions (SIPPs). So, check the contributions you’ve paid in total so far this tax-year (and in the three previous tax years) to work out how much of your allowance you still have left.
3) Are you making the most of employer matching?
Under current rules, employers must pay a minimum 3% of an employee’s total earnings into a company pension. Added to what you usually must pay in, this makes for a total minimum of 8%. However, some employers also match additional voluntary contributions made by the individual to their company pensions. It’s usually capped but constitutes a free boost to your pension savings, so should usually be fully used before making contributions to other pension schemes.
4) Whether employed or self-employed, have you opened a SIPP yet?
But what about all the different pensions you may accumulate over time? Data from the 2021 census shows that one in 11 people on average change jobs each year3, which means each of us could end up with several pensions. This is where having a SIPP can help because you can use it to bring your pensions together. And the earlier in your career you get a SIPP, the more manageable, potentially, it becomes to consolidate your company pensions since you can do it as you change jobs4.
There’s even less reason not to have a SIPP if you’re self-employed and have no company pension, since you might otherwise be left relying on just the state pension later in life. There are other advantages too because aside from the tax savings you could make on your contributions, the potential to carry-forward unused allowances means a SIPP can adapt to your circumstances as your earnings fluctuate.
5) Have you tracked down your old pensions?
While you’re at it, why not begin tracking down those old pensions of yours, by contacting your old pension provider or former employer or using the government’s pension tracing service. According to the Pension Policy Institute, unclaimed pension pots totalled £26.6 billion in 2022. This is a figure that has risen by 37% since 2018, which just goes to show how easily many of us lose sight of our pensions as we change jobs. Tracking down long-forgotten pensions could make all the difference in making sure you have enough money to retire on.
6) What about your children’s investments?
Worth checking too is the yearly £9,000 Junior ISA allowance. If you are the parent or guardian of a child, now may be the time to open a Junior ISA for them or bump up their Junior ISA savings. Plan well and you could help give them a strong start to adult life or even fund them through higher education. Remember also that it is not necessarily all down to you; once you’ve opened a Junior ISA account, other relatives can gift contributions too.
7) Have you checked what you’re paying for your investments?
Costs are something many investors tend to overlook even though they can have a major adverse impact on their potential long-term wealth. Whether it’s the cost of the investment platform you use, the ISA or SIPP you invest through, or the funds you invest in, the differences can build into huge sums over time, as this earlier article underlines. So check what you are currently paying and consider how much you could save by switching provider or fund manager.
8) Make sure you don’t get caught out by capital gains tax (CGT) and dividends tax.
The amount you can earn from the sale of an investment, asset or business and not pay tax on is broadly set to halve and halve again over the next couple of tax years. The same is true of dividends tax. As such, it’s more reason to ensure your investments are sheltered from CGT and dividends tax within an ISA or pension. So, if you currently have investments in a general account, now may be a good time to consider transferring these into an ISA or SIPP, while you can.
For more on CGT and the incoming changes to CGT and dividend tax allowances, read this article.
9) Think about the impact of inflation on your investments and goals.
For many of us, the squeeze on incomes could have a bearing on the amount we each feel able to invest. However, if you’re tempted at all to cut back on your ISA or SIPP contributions, consider first the implications for your long-term financial planning and the goals you hope to fulfil. The future ‘you’ won’t thank you for it if you veer off course now.
And if you do have some wiggle room, consider whether now is the right time to up your contributions just to stay on track with your goals. After all, if the present is more expensive than it used to be, so is the future. Or how about setting up a regular ISA or SIPP payment, if you haven’t done so already – just to reinforce your discipline and average out the price at which you invest, so you’re not at the mercy of unlucky market timing.
Even if now isn’t the right time, maybe set yourself a reminder to consider such things later?
10) Are you holding too much cash?
Cash savings rates may be rising now but they don’t tend to keep pace with inflation, whereas shares have a strong long-term track record of delivering above-inflation returns5. So over and above your emergency cash funds – which should at least cover three months of your outgoings – now may be an optimal time to invest more of your money in stock markets. After enduring a tough ride in 2022, markets are cheaper than they have been for a long time. So much so that our economists believe the long-term outlook for investors has improved. It’s food for thought also if you have cash sitting in your investment account, as it will likely drag on your long-term portfolio returns.
1 For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.
2 £2,880 if you don’t pay income tax.
3 The Analysis of job changers and stayers report concluded that on average, around 9% of people changed jobs each year between 2000 and 2018, ranged from a post-recession low of around 5.7% in 2010 to a high of around 10.9% in both 2017 and 2018.
4 Not all pensions may be suitable for transfer – least of all defined benefit (DB) schemes, which are increasingly less common but pay a guaranteed income. If in doubt, ask a financial adviser.
5 For more on this, read What can investors learn from 2022?
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.
Any tax reliefs referred to in this document are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
This article is designed for use by, and is directed only at, persons resident in the UK.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Asset Management Limited. All rights reserved.