Now that we’ve officially crossed into a new tax year, it’s time to put aside deadlines for a moment and… breathe. With the end of the tax year another 12 months away, now is an opportunity to take stock and refocus on your financial goals.
Financial wellness means knowing yourself, not just your finances. Swotting up on tax treatments is all well and good, but so too is properly understanding your personal motivations for investing. The following five points tackle both.
Learn the ISA and pension allowances
Annual allowances, the amount you can invest tax-free before tax charges kick in, haven’t changed much from last year.
As for under-18s, there’s plenty to celebrate now that the Junior ISA allowance has more than doubled to £9,000. This allowance is completely separate to the adult ISA allowance, but any contributions can only be accessed by the child named in the account – and only after they turn 18.
Meanwhile, the pension lifetime allowance, the limit of tax privileged pension funds an individual can accrue over their lifetime, has increased, albeit slightly, to £1,073,100. The pension annual allowance, the limit on how much can be contributed each year while still receiving tax relief, is unchanged (£40,000), although there are a few changes for higher earners (see below).
Establish clear investment goals
If you recognise the importance of long-term investing, the new tax year should look a lot like the old one. While we understand volatility in the short-term can be unnerving, our recommendation is to resist changing tack. In fact, our investment team argue volatility is your friend.
Unless your investment goals have changed, or your personal circumstances are materially different, there’s really no reason to change your investment parameters.
Remember, time in the market trumps timing the market. The sooner you start paying into a stocks and shares ISA, the more time your investments have to benefit from the effects of compounding. You may even consider right now an opportunity to “buy the dip”.
The start of the tax year is an ideal time to reflect on your timeframe and risk appetite. That way you can resist the temptation to make any rash decisions.
Develop healthy financial habits
What we’ve experienced recently, what with the spread of coronavirus and extreme market volatility, is an important reminder that investing is a risky business. It’s also a reminder that investors are emotional creatures, prone to sudden and irrational decisions. To protect yourself from said impulses, you might want to practise some healthy habits.
Remember, investing is about the long-term, and focusing only on the short-term has a nasty habit of provoking an immediate response. The principle of loss aversion holds that we feel the pain of loss – even potential losses – more than twice as acutely as we feel the joy of any gains. Investments very rarely rise or fall continuously. Peaks and troughs are part of the deal. Do yourself a favour: schedule a routine check-in and exercise a degree of restraint.
Routine can also be especially helpful if the investment process is automated – for instance, by direct debit transaction. When you invest as a matter of routine each month, regardless of market conditions, investing doesn’t feel like such a gamble.
This process of spreading your payments over time also has a second advantage – cushioning your losses if the market falls (see, pound cost averaging).
Wrap your head around pension tapering
As for higher earners with a tapered annual allowance, there have been notable changes to the threshold income limit, adjusted income limit and the minimum annual allowance for pension contributions.
The rules are somewhat complex, and you may want to seek advice if this applies to you, but basically many high earners have had their tax-free pension contribution limit raised and their minimum allowance reduced.
On the one hand, this means that you must be earning more than in previous years before your allowance is tapered. But a reduction to the minimum annual allowance means that, under the new tapering rules, your allowance could fall to as little as £4,000.
You’ll find more detailed information on changes to pension tapering and other pension rules on the HMRC website.
Get some advice
Some moments in your financial journey are simply too complicated to face alone. In which case, you might consider financial advice.
Since launching our personal financial advice service in 2018, we’ve found that people often gain comfort and value from an experienced professional to help them make more informed financial decisions.
We’ve likened it before to shedding that winter weight. You either eat a few less biscuits and drag yourself to the gym now and again, or you devise a healthy eating plan and have a personal trainer kickstart your success.
The start of the new tax year might just be the time for it.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.