Getting your financial life in order

‘ISA season’ used to be an event, where banks and other financial institutions would get their marketing teams going on offering the best cash interest rates on ISAs. With current interest rates being unlikely to move for some time to come, it’s somewhat of a damp squib. ISA = Individual Savings Account.

Getting saving early really can pay off. Think about it – if your money is invested or earning interest today, you’ve a better chance of that money growing over a longer period of time.

Getting your financial life in order will pay dividends.

Remember, some basics…

ISAs are tax efficient ‘wrappers’. This means any future gains or income are free from tax. Simple. Some ISAs are flexible, meaning you can put money in & take it back out & put it back in again, using the ISA allowance based the net of these transactions.

You can have cash ISAs, Stocks & Shares ISAs (investing!), Alternative Finance ISAs (peer to peer lending), Lifetime ISAs (more on this later) and Junior ISAs (for children <18).

What are you doing with your cash?

A brief search recently (Apr’21) suggested a top interest rate in a cash ISA of 1.1%, if you lock that cash away for 5 years. For the privilege of locking your money up for 5 years, at 1.1%, the interest earned would be just £562. Over that period, the value of the cash will have been eroded to some degree by inflation. Inflation (CPIH) is 1% as at Apr’21, meaning this 1.1% interest rate is barely above inflation.

It is sensible planning to retain a cash reserve for emergencies, holidays and other purchases, but holding too much cash as a percentage of your assets is not going to work for you over the long term. You could invest some of your cash into a Stocks & Shares ISA for example.

Over the longer term (we would always suggest a minimum investment horizon of 5 years), history suggests investing, alongside dividends received, will outperform cash returns. There are no guarantees of course. You could invest in a tracker fund, which essentially follows a stock market index of some sort, for example the top 100 listed companies in the UK.

Can I have a Lifetime ISA (LISA) and a Help to Buy ISA (HBISA)?

These are ISAs designed to help first time buyers when buying their first property by providing a government bonus towards the purchase. The LISA is also a quasi-pension that allows non-first time buyers to save towards their retirement.

The good news is that you can have both a LISA & HBISA. You can no-longer open HBISAs and therefore this quandary is only applicable if you already have a HBISA. If you don’t, then a LISA is the only option and even then, you have be aged between 18-40 to open one.

➡Help to Buy ISA has a max bonus of £3,000, and outside of London, can only be used on homes up to £250,000.

➡LISA bonus is potentially larger (up to £1,000 a year for up to 32 years!) so depends when the  LISA is opened and can be used on a first property up to £450,000 anywhere in the UK

➡You can’t use the LISA for a house until you’ve had the account for 12 months – Help to Buy ISA is once you’ve got £1,600.

➡You can’t invest a Help to Buy ISA (cash only). You can invest a LISA if you want.

So, it depends on the value of a house purchase, when you plan to purchase it and what’s been saved in which account so far.

If the purchase is 1 or 2 years+ ahead, the LISA arguably offers more potential. It is possible to transfer a Help to Buy ISA into a LISA (but counts towards the £4,000 LISA annual contribution allowance)

Pensions

These aren’t linked to ISA season, but often come up in conversation alongside ISAs and tax year reviews each year. Pensions are for your future. The State Pension should provide a basic income for you, but in current terms it’s around £9,000 per year, per person. That’s not a huge amount of money and certainly won’t pay for many holidays and new cars.

Should I consolidate my pensions?

There is not a straightforward question, but good to see you thinking about the subject. Firstly, gather your recent statements from your pension providers. If you have a defined benefit (aka final salary) pension, it is sometimes possible to consolidate these into a defined contribution pension, but unless there are specific reasons for it, this is normally not suitable for most people and if the value of that pension is >£30,000, you legally have to take financial advice.

If you have a more common, defined contribution pension, it is normally possible to consolidate, but it is not a given. There may be benefits that would be lost on transfer.

If you’ve done your reading and research, you could transfer older pensions into a current workplace pension (which is likely to be with someone like Aviva, Scottish Widows or Nest). You could consider opening a Self Invested Personal Pension (SIPP), which provides more flexibility in terms of investment options and potentially more flexibility at retirement, but the downside is that either you or a professional will need to manage it and select the investments for example.

Don’t be put off by some administrative work – having pensions in one place, that’s easier to manage and maintain, is potentially better for you in the long run.

Some homework for you…

  • What pensions do you have?
    • Where are they, how much is in them?
    • Are there any guarantees or bonuses that would be lost?
    • Is there an option to take more than 25% tax free cash?
    • What investment options do you have?
    • Is there a penalty or cost to transfer?
  • Are your savings in ISAs? If not, why not?
  • How much of your savings / assets are in cash?
    • Consider the purpose for the cash
    • Investigate the potential for investing some of your cash
  • What are you doing with your savings for children?
    • Is this also in cash? Is that the best place for the long term?

This document is for general information and is not intended to address your specific requirements. In particular, the information does not constitute any form of advice or recommendation by WKM Wealth Ltd and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.

Appropriate independent advice should be obtained before making any such decision. Any arrangement made between you and any third party named, is at your sole risk and responsibility.

For your information we would like to draw your attention to the following investment warnings:

  • The price of shares and investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested
  • Past performance is not necessarily a guide to future performance
Neil Wattam
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Neil Wattam

Neil has worked in various finance and accounting roles since 2004, starting as an auditor, followed by senior positions within FTSE 100 and FTSE 250 companies, including as Finance Director. His experience of working in numerous businesses and sectors, including running a limited company, provides a sound base from which to help clients. Neil is a Chartered Accountant (ICAEW) and holds the Diploma in Regulated Financial Planning (CII). Neil is studying towards Chartered status with the CII.