Are your financial plans and investments still fit for purpose? Vanguard’s Zoe Dagless with 10 suggestions to help get your finances in order in 2023.
By Zoe Dagless, senior financial planner, Vanguard, UK
We all know it’s going to be a difficult 2023. Higher taxes and interest rates will only add to the inflationary squeeze on disposable incomes as the UK economy experiences a lengthy expected recession.
But the new year brings with it new hope too – a potential end to the central bank war on higher inflation and, with any luck, an end to the conflict in Ukraine too.
It’s also a good time to take stock of the lessons of the past year and to reassess the way we manage our money and our financial priorities. Are our financial plans and investments still fit for purpose?
With that in mind, here are 10 investment tips from me which you may wish to consider.
1. Reassess your emergency cash fund
Given growing cost-of-living pressures, do you still have enough cash set aside to cover an unexpected major expenditure or dip in income? A rule of thumb is to have enough emergency cash to cover at least three months of your household outgoings. Always ensure you have enough of a cash buffer before you consider investing.
2. Review your budget and make a plan
Look at your household outgoings and expenses. Itemise them all. Ask yourself where and how you could conceivably cut your costs and increase the money at your disposal. Should you be paying off more of your debt – especially high-interest debt? How much wiggle room do you have to save and invest?
Plan your finances to get from where you are now to where you want to be. It will help you to focus and to prioritise. A plan is not there to weigh you down; it's there to clarify your aspirations and to help you achieve them.
3. Re-evaluate your goals
Part of that process includes thinking about your goals. Are they still the same? Do you have any new priorities? Are you still on track to reach them? Should you consider investing a little more money each month to ensure you do get there?
Remember: even small amounts can add up and the more time you give it, the more it will do so. Invest another £50 a month and, after 20 years, it could be worth an extra £20,000-plus to you1. Compounding is a powerful force and it can help to grow your wealth in the face of inflation. Make sure it's on your side by thinking about investing more, and sooner.
4. Cut your investment costs
It’s your money you’re investing after all. So keep more of your returns for yourself rather than give it away in platform fees, fund charges and the like. Ask yourself: How much could you save by transferring your pensions and individual savings accounts (ISA) to a lower cost investment services provider? What kind of difference could it make to your future returns and spending power? As a yardstick, consider that every 1% saved in costs on a £100,000 total portfolio represents an extra £1,000 invested each year. Were that cost saving to earn an average annual net return of, say, 5%, it would compound within 15 years to £21,578 – that’s comfortably more than two extra state pensions.
5. Start a new investment habit: use your tax allowances
Are you making the most of the tax breaks available to you? Do you have an ISA, for example? What about a self-invested personal pension (SIPP), or a Junior ISA for your children?
All profits made within an ISA, Junior ISA or SIPP are exempt from tax. So too is any income received. In the case of a SIPP, you also get back the income tax you’ve paid on the money you use for your contributions – which for most people is 25p for every £1, and more for higher-rate taxpayers.
So make the most of your annual allowances. These currently stand at £20,000 in the case of an adult ISA and £9,000 in the case of a Junior ISA. Once the tax year ends on 5 April, a new one begins.
Gross pension contributions – including those paid into a SIPP – can total 100% of a person’s earnings up to a maximum £40,000 in any tax year. So make the most of the opportunity. Just remember to make the most of any employer-matching on your workplace pension first before investing in your SIPP.
6. Start a new investment habit: invest via direct debit
How do you pay into your SIPP and/or ISA – via irregular lump sums or monthly direct debt? A direct debit is a great way to keep your investment plans ticking away out of sight, in the background. Depending on market conditions, you may also benefit, potentially, from more pound-cost averaging.
7. Make the most of your CGT allowance
If you’re worried about having to pay capital gains tax (CGT) on the investment profits you might be sitting on in your general trading account, remember that the tax-free annual allowance more than halves to £6,000 next tax year and is set to halve again to £3,000 in 2023/24. So make the most of the current £12,300 CGT allowance while you can. And look to move more of your investments into an ISA or SIPP.
8. Rebalance your investments
If your goals change, rebalancing your investments is an option. Your asset allocation – your mix of shares and bonds – is a key driver of portfolio returns and should be shaped by your goals, in accordance with our first two investment principles. But even if your goals haven’t changed, some adjustments may still be needed. If you’re targeting a mix of 80% shares and 20% bonds and your shares perform better than your bonds over the year, for example, your portfolio may contain more higher risk assets than you initially intended.
Some multi-asset funds rebalance automatically to maintain a constant ratio between shares and bonds. But if you use funds as building blocks to design your own portfolio, you may wish to rebalance manually every so often.
9. Eliminate any cash drag
Do you have an excess of cash building in your investment account? This may be because of the cash dividends paid on some exchange trade funds (ETFs) or it may be because you were sometimes unable to buy an exact number of fund units each time you funded your account. If so, perhaps now is a good time to make sure this money is fully invested. After all, it’s time in the market not market timing that counts most in the long run and every little helps.
10. Do some admin
Are your contact details with your investment provider up to date? Does your pension have named beneficiaries? Pensions, unlike ISAs, do not form part of a person’s estate. As such, they are not covered by a will. So make sure your pension provider knows who they are.
Indeed, do you even have a will in place? It’s not something that people like to think about but it’s worth considering, especially if you have children, as no one knows what the future will bring. Similarly, you may want to consider making a power of attorney to ensure that a loved or trusted person is able to make decisions on your behalf if for some reason you become incapacitated.
1 Assumes an investment return of 5% per year after costs.
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.
Any tax reliefs referred to in this article 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.
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