Getting Your Personal Finances Into Shape

12 April 2017  |  Dr. Ella Rabener
Getting Your Personal Finances Into Shape
The blossom is out and spring is upon us.
It’s time to give your personal finances an annual spring clean to make sure that you are well set for the year ahead. Tax allowances have re-set and fintech businesses are increasing their presence in the marketplace. Here are 10 personal finance tips that help you take advantage of these changes and allow you to get your finances in shape.

Spring has sprung and the new tax year has started. It’s time to get your personal finances in order to ensure that you make the most of all the various products available. ISA allowances have never been higher and fintech continues to revolutionise the personal finance industry. Here are 10 tips about how you can get your finances ship-shape as we enter a new tax year.

Tip 1: The balance of your current account should cover six months’ worth of outgoings

Life is full of surprises and no one wants to be caught short financially. Make sure you have enough cash to cover six months’ worth of expenses. This will provide a decent cushion should you need to pay for any unexpected bills. Don’t keep too much in cash though as rising inflation and low interest rates will gradually erode the value of your savings.

Tip 2: Pay off credit card bills and overdrafts

Even though interest rates are at an all-time low, over time, savers paying interest on overdrafts and credit cards will be subjected to the negative side of compounding. You may think you have a cheap loan, but a little interest every month really does add up and it’s worth getting rid of any debt before you start thinking about exposure to capital markets.

Tip 3: Max out your annual ISA allowance

£20,000 I hear you say! A serious hike up from the 2016/17 allowance of £15,240. Savers don’t pay income or capital gains tax on any investments held within an ISA and this tax relief allows significant long-term benefits. You won’t receive tax relief on anything beyond £20,000, so put any extra cash into your SIPP instead.

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Tip 4: Max out your annual SIPP allowance

The SIPP is the other government-funded tax wrapper you can take advantage of. The annual allowance hasn’t changed for a couple of years and stands at £40,000. Money paid into your SIPP will automatically receive basic rate tax relief (20 percent), so if you put £8,000 into your SIPP, the government will top this up by 20 percent to reach a total contribution of £10,000.

Higher rate and additional rate taxpayers can claim an extra 20 and 25 percent tax relief respectively. This means that it would cost a higher rate taxpayer only £6,000 to secure a SIPP balance of £10,000 (having received 40 percent tax relief).

The tax relief on SIPPs are a great way to save, the only downside is that your money is locked up until retirement. When you turn 55 you can legally access your pension and will find yourself with several options. Options include; taking a 25 percent tax-free lump sum, purchasing an annuity or leaving it there and saving for a few more years. Any providers that tell you that you can make withdrawals before turning 55 are probably a scam. The tax relief on ISAs isn’t as favourable as that of SIPPs but ISAs are more flexible.

The government recently launched a new scheme to help us track down old pensions. If you have moved jobs in the past and lost track of an old workplace pension scheme, just have a look at this government website.

Tip 5: If you have any cash left over, open a General Investment Account (GIA)

Any money you have left over once you have paid your debts and reached your annual tax wrapper allowances shouldn’t be left sitting in cash. Inflation is on the rise and interest rates are at an all-time low, so your long-term returns are not going to benefit from sitting in cash. You can read more about the negative impact of staying in cash in our article: Why an Interest Rate Rise Won’t Save the Savers.

Opening a GIA will make sure that your money is working hard for you. The value of £1,000 cash, in a bank account since 1995, would have increased by about 30 percent today in real terms. The effect of inflation offsetting gains from interest rates has prevented the value from rising any further. By contrast, the FTSE-100 Total Return Index has risen almost 300 percent over the same period. Opening a GIA will offer you the possible market uplift that cash simply cannot offer.

Tip 6: Interest rates have never been so low, why don’t you consider remortgaging?

There are a few reasons why you may want to think about remortgaging and digital mortgage brokers, such as Habito or Trussle, can help you make sure you are on the best deal possible.

Your current mortgage deal may be about to end, after which your lender will probably put you on the standard variable rate. Start looking around for a better deal a few months before your rate ends.
Interest rates are at an all-time low at the moment and you may be able to shop around and find a better deal. There may be a cost associated with exit so it’s important that you look carefully at the numbers to make sure a switch would offer worthwhile savings.

The value of your home may have risen significantly since taking out your mortgage. This may mean that you find yourself in a lower loan-to-value band, making you eligible for a lower rate.

Tip 7: Check the profitability of buy-to-let

Recent Budget changes have challenged the profitability of buy-to-let property. Landlords would be wise to check that their property portfolio is still profitable when compared to other investment opportunities. Increasing the diversification of assets is almost never a bad thing anyway.

Budget proposals announced in 2015 are set to halve the tax relief on buy-to-let mortgages in an attempt to ‘level the playing field’ between buy-to-let landlords and ordinary first-time buyers. Landlords are able to offset the cost of the mortgage interest from the rental income when calculating profits, but this relief will decrease from 40 or 45 percent down to 20 percent.

Combine this with the new rules introduced in April 2016 which increased stamp duty on buy-to-let properties by three percent. Buy-to-let margins must certainly have been squeezed.

Tip 8: Get up to speed with new approaches to currency exchange

Cheap and efficient digital currency exchanges are emerging. These enable you to transfer money all over the world more quickly and easily than ever before and also allow you to save money on currency exchange.

Revolut and TransferWise both use spot rates to exchange currency, meaning you get the best rate available at the time and don’t pay any commission (but watch out for potential changes to their T&Cs). They allow you to send money all over the world and withdraw foreign currency from ATMs abroad while charging substantially lower fees than traditional banking models.

The UK is now recognised as the leading fintech global hub.

– Lawrence Wintermeyer, CEO Innovate Finance

Tip 9: Change bank accounts

In the UK there are several new challenger banks, such as Monzo, Starling or Atom. These might be able to offer you a better deal than the one you are currently on.

Traditional high street banks may be charging you a monthly fee just to hold your cash on deposit. You may also be incurring costs for going into your overdraft or using their foreign exchange services, both of which can probably be done more cheaply elsewhere.

Challenger banks have sophisticated apps and websites that can give you a full picture of your spending; helpful when it comes to keeping track of your monthly expenses. Their current accounts are usually free and their overdrafts quick and easy to apply for. However, make sure you weigh the benefits of keeping a long-term relationship with your existing bank intact, in case you want to use banking services the new challenger banks cannot offer (yet).

Tip 10: Get your technology up to date

Technology is a great enabler and the industry advances made over the past decade have allowed for the emergence of a fintech revolution. Check Google’s Play Store or Apple’s App Store for the highest-ranked personal finance apps that really do make life easier. Time well spent, for sure, as they will save you time later.
Image: Timo Vijn/Unsplash

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Photo Ella Turquoise Circle
Dr. Ella Rabener
CMO & UK CO-FOUNDER
Ella combines finance expertise, completing a doctoral degree in business and advising leading financial institutions while working with McKinsey & Company, with several years of experience building e-commerce startups, most recently as founder and CEO of Westwing.ru.