It's the start of a new year - the traditional period for self flagellation, pointless gym memberships and unrealistic goal setting. But it's also a good time to take stock of your portfolio, and January this year in particular is the time to act if you want to be ready for new legislation on pensions and savings coming your way. So here are four areas to tackle this month to help you stay on top of your finances over the next 12 months.
Get your tax return in by the end of January
Filing tax returns is no one's idea of a good time, but the fines for filing late are punitive. It often involves a lot of preparation which can be the cause of missed deadlines. The paper-based deadline for the 2014-15 tax year has already passed, but online submissions need to be completed by the end of this month, 31 January 2016. Fines for a late return start at £100 for just one day and rack up to £10 a day every day after that if you are more than 90 days late. If you delay by six months you face those fines as well as the higher figure of a further £300 or 5 per cent of any tax due.
Take advantage of new allowances and save tax-efficiently
From 6 April 2016 the taxation of both dividends and cash changes. The first £5,000 of dividend income will be tax-free, but anything above that will be charged at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers.
All savings income will be paid out without income tax deduction, including interest on cash deposits, gilts, corporate bonds and peer-to-peer lending. Basic-rate taxpayers will then be able to earn £1,000 in savings interest a year tax-free, and higher-rate taxpayers £500. Danny Cox, chartered financial planner at Hargreaves Lansdown, says: "Investors should plan ahead to make the most of these new tax-free allowances to minimise the tax on their savings and investments."
Mr Cox advises ensuring you have fully used your individual savings account (Isa) and self-invested personal pension (Sipp) allowances. He also suggests sheltering income-producing assets in your Isa and Sipp before growth assets, saying: "This is because the rate of tax paid on income is generally higher than on capital gains, and that you can avoid capital gains tax altogether if your profits are less than £11,100 a year.
Furthermore, you can hold more low-yielding assets outside an Isa before exceeding the dividend allowance. For example, a £140,000 equity income portfolio yielding 3.5 per cent would pay out just under £5,000 a year in dividend income, which is tax-free within the dividend allowance. However, investors could shelter a £500,000 portfolio yielding 1 per cent before paying tax on the dividends.
Prepare yourself for pension changes
Anyone subject to a higher income tax bracket or on track to build up a pension pot of £1m or more should be thinking seriously about what to do next. Big changes to the pension landscape are expected again this year, and already announced changes to the lifetime allowance and annual allowances could affect you sooner than you think.
Last year, the government announced a cut to the pensions lifetime allowance from £1.25m to £1m, which will take effect this year. From April 2016 any excess you hold over £1m could be subject to 55 per cent tax, meaning you might want to consider steps such as taking out fixed protection (which lets you keep the £1.25m allowance but only if no more contributions are made) or taking a tax-free lump sum to avoid breaching the limit.
You could be affected even if you think your earnings are modest, points out Andy Cumming, head of advice at Close Brothers Asset Management. He says: "Those in final-salary schemes that will pay them approximately £35,000-£40,000 a year in retirement, with inflation added in over the years, could see themselves knocking on the door of the £1m allowance sooner than they think."
On top of that, those with earnings and pension contributions exceeding £150,000 will be affected by tapering annual allowances, which will reduce the allowance by £1 for every £2 of income earned over that bracket.
Further changes are expected in the March 2016 Budget. Higher and additional-rate tax relief is in the chancellor's crosshairs and Mr Cox says: "If bookies were offering odds on whether higher-rate tax relief will change in 2016, they probably stopped taking bets some time ago. Higher-rate taxpayers should assume that change will happen."
A current consultation on pension tax relief has noted that the cost of pensions tax relief is rising and two-thirds of it currently goes to higher and additional-rate taxpayers.
Jason Hollands, managing director at Tilney Bestinvest, says: "It is easy to see that the consultation may lead to a reduction in these reliefs as the chancellor looks for opportunities to cut costs. The question is whether he will favour a move to an Isa-like treatment where no upfront relief is provided but there is no tax on money withdrawn, or a move to a flat rate of relief somewhere between the basic rate of tax and the 40 per cent rate, such as 30 per cent.
"Anyone subject to the higher rates of tax with scope to top up their pension should therefore give serious consideration to doing so before the end of this tax year. That might involve mopping up any unused pension allowances from the three previous years, as well as the current one through a mechanism known as carry forward. As these are big decisions to be made, which might require professional advice, do not delay seeking help or doing your own research."
| Consider your goals and risk appetite As the end of the tax year approaches, many do-it-yourself (DIY) investors will start hunting around for new investments, making January the perfect time to take stock, before buying more. It is easy to let a portfolio drift, and vital you check regularly as to whether it is still fulfilling its function and meeting your goals.
Consider your goals and risk appetite What are you saving for and how happy would you be to lose the money in your portfolio? Now is a good time to redefine or check your goals, and assess whether you are happy with the level of risk you are taking. 2015 was a bumpy year and you might have realised you are not quite as willing as you thought to put your money on the line or, alternatively, that you are after higher returns and want to move up the risk scale. Knowing if you are saving for a holiday or for your future will help you determine how willing you really are to sacrifice the investment if things turn sour.
Check your diversification Have you got the right balance in bonds, equities, commodities or fixed return investments for your aims? "Getting the right asset allocation is the most important factor with investment returns," says Adrian Lowcock, head of investing at AXA Wealth.
Review your individual investments How have your individual stocks and funds performed, and are you happy with your chosen fund managers or have they serially underperformed? What about your chosen markets or asset classes? If one market or area has done particularly well it is less likely to repeat that performance this year. Think about what you want to be exposed to and whether this needs tweaking given current conditions. Also consider your balance of active and passive funds, and check that you are not paying over the odds for a fund generating only index-like returns. Hargreaves' Danny Cox says: "Investors should rid their portfolio of this dead wood, and replace these funds either with proper index trackers at a fraction of the price, or a truly active fund run by a talented and proven fund manager. It is absurd that some investors are paying more to invest in closet trackers than they would to invest with the UK's foremost fund managers such as Neil Woodford."
Take profits, sell high and buy low Mr Lowcock says: "It is human nature to avoid investing in stock markets when they have fallen or risk seems the greatest. Buy low, sell high is an obvious mantra, but few investors actually do it. When markets are low investor confidence is also low so they do not invest until markets have recovered and confidence returns. Don't follow the herd: buying when markets are low is a successful approach for long-term investors." Also think about whether to run your winners or take profits on your best performers, and redistribute to balance out your portfolio.
Consider consolidating your investments Mr Cox says: "Being able to look through your portfolio online 24 hours a day, seven days a week is a convenience that is available to investors these days, but there are plenty of savers who still run their portfolio from an overstuffed drawer full of paper. The new year might provide an opportune time to get rid of the paperwork and go electronic."
But don't do anything rash 2015 was an unnerving year, but don't take that as a sign you need to exit markets completely. Turbulence is to be expected with any investment and getting out at the lowest point is the worst call. Mr Cox says: "Volatile markets serve as a good reminder that you should review portfolios but not throw the baby out with the bath water. Market movements are perfectly natural, and a buy-and-hold strategy will usually provide better long-term returns." |
