Financial planning / News

Your 2021 Financial Checklist

January brings with it the opportunity to take stock and refresh your financial priorities. David Pugh, our Chief Commercial and Strategy Officer, looks at some of the key areas worth considering.

Like most people, I’m sure you’re glad to say goodbye to 2020 and are looking forward to this next year with a little more optimism.  You may well have put a New Year’s Resolution in place or even started Dry January or Veganuary, but this time of year is also a useful point for reviewing your finances. The thought of a financial review can feel overwhelming, and not knowing where to start can mean it’s easy to put off, so a list of priorities might help:

1  Protect your family

Adequate cover should really be the first point addressed and is just so often overlooked. Life insurance, Critical Illness cover and Income Protection should all be considered carefully (certainly for those with young families) and if you’re living outside of the UK, then ensuring adequate international health insurance should absolutely be a priority. None need to be overly expensive but it’s essential to have some form of protection in place so that your family are protected if something were to happen. Nobody likes to think of their own mortality (although the past year may have made many of us reflect on this more than usual) but it’s a possibility that needs to be planned for, which leads onto the next point:

2  Review Your Will, and make sure it’s up to date

People’s lives and financial positions are ever changing, and so is our tax environment. It’s essential to keep an up-to-date Will to ensure that your estate is passed on in the most efficient way possible. If you’ve assets dotted around the world your situation may be even more complicated, so it’s even more important to have good arrangements in place, with a suitable Will for each country.

It’s also wise to arrange a Lasting Power of Attorney if you haven’t already, to ensure that a trusted relative or friend could make decisions on your behalf if needed. There are two options to consider putting in place – a Health and Welfare LPA and one dealing with Property and Financial Affairs.

3  Your tax obligations

Make sure you are up to date with your tax reporting, residence status and your HMRC listed address and contact details. If living overseas, you’ll need to keep an accurate record of your visits to the UK to support any claim to be UK non-resident. 2020 may well have proved a tricky time if you’ve been stranded in the UK for an extended period and therefore obtaining qualified tax advice to make certain of your tax residency status would be sensible. If you have any UK tax to pay or need to complete a Tax Return for any other reason, be aware of the main UK tax reporting dates:

– Online (commercial software needed if you are non-UK resident) Returns by midnight 31 January 2021
– You must pay the tax you owe by midnight 31 January 2021

4  Get organised managing your money

21st century technology has made money management a whole lot easier. There are numerous apps available to help monitor outgoings and identify which costs to cut back on. We often advise clients to segregate the necessary costs from the luxuries and perhaps note everything down into a spreadsheet for ease. It’s a useful exercise and can work as a base to start planning your finances in a more effective way. We typically recommend you set aside a minimum of six months’ expenditure in cash as an emergency fund. Any significant balance above this should be considered for investment to protect against inflationary erosion over time.

5  Use your allowances

We’re each entitled to an Inheritance Tax (IHT) exemption of GBP3,000 on a ‘use it or lose it’ basis. If you didn’t make use of last year’s exemption, you can carry it over to make a £6,000 gift this year; a sensible tax planning exercise. If you live overseas, it may be useful to gift assets without paying UK tax while you remain UK non-resident. Do remember that if the gift is above your annual allowance then the ‘seven year rule’ applies; you may need to survive for seven years from the point of making it for it to be free of IHT.

IHT is charged at 40% for estates worth more than £325,000. If you’re planning on leaving a property (it must be your primary residence) to a direct descendent, they will also be entitled to a further £175,000 Residential Nil Rate Band – meaning you can pass up to £500,000 of your estate before IHT is due. If you’re planning to leave all of your estate to your British domiciled spouse, both allowances can be used meaning up to £1 million can be inherited before tax applies.

With the UK government having borrowed so much to cover the costs of the Covid-19 bill, it’s inevitable that tax rises will be needed to pay it back. It’s expected that Capital Gains Tax will be a focus with potential adjustments to the allowance (currently £12,300/annum) and/or the rates (10% or 20% for securities, and 18% or 28% for property). As changes are announced, and if you’re worried they may affect you, please seek professional advice.

6  Review your financial goals

Obviously, everyone’s goals differ based on aspirations for the future, earnings, liabilities, dependents, stage of life and so on. It’s important that you take some time to reflect on your own personal situation, think about what you want to achieve, and what’s needed to get there. The more specific you can be, the better. Some clients are focused on buying a second home, and others on travel, or leaving behind something for their children.

As you progress through life, your priorities will inevitably change and you may need to consider lots of different situations including planning for school/university fees, paying off your mortgage and funding your retirement. Keeping your plans up to date allows you stay on track and achieve your life goals to achieve financial freedom.

7  Keep your investment strategy tax efficient

When it comes to investments your planning should always take account of tax so that your assets, liabilities and income are structured in an efficient way.

If you’re abroad and planning to return to the UK consider your investments and the effects of UK tax in advance (six to 12 months is preferable). And when you become UK tax resident make sure you use the allowances provided including Individual Savings Accounts (ISAs) which offer significant tax breaks.

8  Don’t let emotions dictate your financial decisions

2020 saw the shortest significant peak-to-trough fall in stock market history over the course of just one month. In fact, we saw two of the 10 best, and two of the 10 worst days in market history in just a fortnight. Many investors panicked and allowed their emotions to get the better of them, causing them to act. Those who try to time the markets very rarely get it right and will most likely regret making a knee-jerk reaction. It’s important to remember your original strategy and timeframe. Appointing a financial professional can help guard against the tendency of acting irrationally and may reduce unnecessary stress too.

Whatever this year brings, I wish you a more promising and settled 2021, and stay safe.