If you have children or grandchildren, you’ll be aware how important Halloween has become in recent years. Brits now spend an eye-watering £400 million on the spooky holiday, on everything from costumes to sweet treats.
So, with Halloween just around the corner, we’ve highlighted five scary financial mistakes you should avoid this October 31…
Taking your pension pot without advice
Recent data from the Financial Conduct Authority showed that, in the year to 31 March 2019, almost half of all pension plans were accessed without regulated advice or guidance being taken by the holder.
48% of all people accessing their retirement savings did so without advice, with almost three-quarters taking more than 4% of the fund value each year. This compares with guidance from the Institute of the Faculty of Actuaries who suggest that 3% would be a more suitable drawdown rate for a 55-year-old, and 3.5% for a 65-year-old.
Accessing your pension savings without advice can lead to several potential problems:
- You could end up with a tax charge if you withdraw more than a 25% lump sum, or you could find yourself in a higher tax bracket
- You could withdraw too much, meaning you could run out of money in later life
- Failing to shop around could see you pay more in plan fees and charges
- Withdrawing could see you miss out on the benefits of staying in your pension for longer
- You may have other assets and it may be more suitable to access these first.
If you’re approaching retirement and wondering what to do with your retirement savings and how to structure your pension income, speak to a professional first. A financial adviser or planner can help you make the right decisions.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
2. Staying invested in cash for too long
According to recent data from JP Morgan, investors have withdrawn 3% of assets under management from equities in 2019, twice the level of withdrawals made during the financial crisis.
James Thomson, who runs the £1.8bn Rathbones Global Opportunities fund says: “That data is striking because the negative feeling towards equities is worse than when we were in a crisis, despite the fact we are not in a financial crisis right now.”
While many investors retreat to cash or fixed income investments during market turmoil, holding too much of your money in cash can negatively impact your financial plan.
For example, around 72% of ISA money is in cash. Considering that inflation is around 2% and the top easy-access cash ISAs are only paying around 1.5%, investing in cash is currently struggling to even keep up with the cost of living.
While cash investments are secure, and equities involve an element of risk, the average returns on equity-based investments have traditionally been better.
Equity (and bond) investments have historically outperformed cash over the long term. According to Morningstar and M&G, the average annual return on UK investments between 1989 and 2014, adjusted for inflation, is 5.2% for equities and 4.6% for bonds.
Although cash is considered secure staying in cash for too long could impact your returns and your ability to generate the income and lifestyle you want in later life.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
3. Paying any Standard Variable Rate (SVR)
Whether it’s your mortgage or your electricity supply, there’s rarely a good reason for sitting on a provider’s Standard Variable Rate (SVR).
Typically, you’ll revert to your provider’s SVR after a low-cost initial deal comes to an end. This might be a fixed-rate mortgage, a credit card balance transfer rate or a fixed tariff energy deal.
In most cases, sitting on a SVR means you are paying too much. There are normally lots of deals out there that can save you money:
- Mortgage – Recent data from Moneyfacts showed that the average mortgage SVR in the UK was 4.9%. This is compared to the average two-year fixed-rate deal which is 2.64%. If you’re sitting on your lender’s SVR then you may be able to significantly reduce your repayments (and the interest you pay) by remortgaging to a better deal.
- Gas/electricity – If you’re on your supplier’s standard tariff then head online to a price comparison site to see if there are cheaper gas and electricity tariffs.
- Credit card – If your purchase or balance transfer deal has ended, there may be other credit card deals out there that save you money when compared to your card provider’s SVR.
Your home maybe repossessed if you do not keep up repayment on your mortgage.
4. Not benefiting from government bonuses on your ISA
If you’re aged between 18 and 39 then a Lifetime ISA allows you to save for your retirement with the added perk of a government bonus based on the money you invest.
You can contribute £4,000 of your annual ISA allowance to a Lifetime ISA and the government will contribute a bonus of 25% of the amount you invest (so, up to a maximum of £1,000 each year).
You’ll receive the bonus every year until you reach the age of 50 and, as it is paid monthly, you’ll also benefit from compound interest. You can continue to save tax-efficiently after the age of 50 but you will no longer receive the bonus.
When you reach the age of 60 you can withdraw your funds. If you access your money before the age of 60, you’ll pay a 25% exit penalty (unless you use the money to find the deposit for your first home).
5. Not using IHT gift allowances
The latest HRMC figures show that Brits paid £5.4 billion in Inheritance Tax last year, with IHT falling due on 4.6% of all deaths recorded in the UK.
If your estate is likely to exceed the IHT threshold when you die, one of the scariest financial mistakes you can make this Halloween is not to take advantage of the available gift allowances.
There are lots of ways that you can make gifts in order to reduce the value of your estate (and, consequently, your potential IHT bill). These include:
- Annual gift allowance – While you’re alive, you can gift £3,000 a year using your annual exemption. Any part of the annual exemption which is not used in the tax year can be carried forward to the following tax year.
- Gifts worth under £250 – You can give as many gifts of up to £250 to as many individuals as you want (apart from anyone who has already received a gift of your whole £3,000 annual exemption).
- Wedding gifts – If you make a gift before a wedding (and the wedding happens) you can gift up to £5,000 to a child, up to £2,500 to a grandchild or great-grandchild, or up to £1,000 to another relative/friend.
- Charitable gifts – If you give a gift to a charity, museum, university or community amateur sports club, this is exempt from tax.
- Political gifts – you can give an IHT-free gift to a political party under certain conditions.
Of course, any gift you make to a relative will be exempt from Inheritance Tax if you survive for seven years after making the gift. This is a ‘Potentially Exempt Transfer’ (PET).
If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT. If the combined value is more than the IHT threshold, tax may be due.
Get in touch
Want to have a chat about any of the factors above? Get in touch. Email firstname.lastname@example.org or call (0161) 8080200.
The Financial Conduct Authority does not regulate Tax Advice.
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