5 practical tips to help get your finances sorted before the new tax year

woman smiling and holding a piece of paper.

As 5 April 2022 is fast approaching, now is the time to plan for how you can make your savings and investments more tax-efficient.

Preparing a few months in advance of the deadline may help you feel less stressed by the end of the tax year, which can be a make-or-break time for you to use your allowances and capitalise on all the available tax efficiencies.

Here are five practical tips to get your finances sorted before the end of the tax year.

1. Maximise your ISA contributions

As you may know, ISAs, or Individual Savings Accounts, are a handy tax wrapper that can be used to grow your wealth without increasing your tax bill. If you want to make an investment before 5 April, it’s wise to make sure you’ve maximised your ISA contributions.

While ISA contributions don’t qualify for tax relief, money in an ISA is protected from Income Tax and Capital Gains Tax, no matter how much profit you gain.

Here are a few ISA options you could explore:

  • A Cash ISA, into which you can contribute up to £20,000 every tax year, although experts are predicting that Cash ISAs may not perform well in the wake of rising inflation.
  • A Stocks and Shares ISA that allows you to invest up to £20,000 in equities.
  • A Lifetime ISA (LISA), designed for buying your first home or retirement. The contribution limit is £4,000, with a 25% government top-up applied to every contribution. The catch here is that to open a LISA you must be over 18 and under 40, so you must make your first payment before you turn 40.

The total amount an individual can contribute to ISAs in the 2021/22 tax year is £20,000. This can be split between several different ISAs, but you must be careful not to exceed this limit.

For example, if you have a Cash ISA that you paid £5,000 to in May 2021 and a LISA that you put £4,000 into, then you can only invest the remaining £11,000 into your Stocks and Shares ISA before 5 April 2022.

If you have children and want to invest on their behalf, a Junior ISA (JISA) for under-18s could be a good place to start. You can pay up to £9,000 into a JISA before 5 April 2022.

If you are saving into a JISA for your child, this is a separate account and you can save a full £9,000 in the 2021/22 tax year.

For more guidance on opening an ISA and investing your wealth, get in touch. We can help you understand all your options and advise you on suitable investments to fit your circumstances and long-term financial goals.

2. Contribute as much as you can towards your pension

Your pension may be a profitable place to invest your wealth as the tax year ends.

In the 2021/22 tax year, the Annual Allowance means you can benefit from tax relief on pension contributions up to £40,000 a year, or 100% of your earnings, whichever is lowest.

Although you can continue to pay into your pension once you hit this limit, you would no longer be able to do so in a tax-efficient way. Any contributions over your Annual Allowance may incur a charge.

If your spouse or partner isn’t working, they are still entitled to basic-rate tax relief and can contribute a maximum of £3,600 gross to their pension in the 2021/22 tax year.

If you have already begun flexibly drawing your pension, this will have triggered the Money Purchase Annual Allowance (MPAA). This will limit the amount of tax relief you will get on your contributions. Once the MPAA is triggered, you’ll only get tax relief on £4,000 of your contributions.

While this doesn’t prevent you from making higher contributions, you may find it more beneficial to invest excess money elsewhere.

No matter how much you are able to put into your pension, your contributions will provide valuable tax relief, and any profits your pension investments yield will not be taxed while funds are invested.

Because you can’t earn tax relief on contributions that exceed your earnings in the same tax year, it may be useful to invest as much of this year’s earnings into your pension as you can.

As well as maximising pension contributions in this tax year, you can also “carry forward” contributions from the three preceding tax years. If you didn’t make any pension contributions, or you didn’t contribute the maximum possible, you can use carry forward to make up the shortfall.

5 April 2022 is the last chance to take advantage of your 2018/19 Annual Allowance.

If you are planning to contribute the maximum amount you can into your pension, make sure to check your proximity to the Lifetime Allowance (LTA) first. As announced in last year’s Budget, the LTA will remain at £1,073,300 until 2026.

If your pension savings are near to this amount, get in touch and we’ll help you understand your options.

3. Use your annual exemption to gift up to £3,000 to family members

If you are planning to leave money to your children or grandchildren when you pass away, it could be wise to begin gifting them smaller amounts of money annually, to avoid paying unnecessary Inheritance Tax (IHT).

You can gift family members up to £3,000 each tax year, split across however many people you wish. This is known as the “annual exemption” and is a tax-free way to begin giving your loved ones their inheritance.

You can only carry this forward one additional tax year, so if you have annual exemption remaining from the 2020/21 tax year, it may be wise to take advantage of this exemption before 5 April.

If you exceed the £3,000 mark, you could pay IHT on the amount above £3,000 if you were to pass away fewer than seven years after the gift was bestowed.

This article explains more about ways to help mitigate IHT liability. Alternatively, get in touch and speak with one of our financial planners before the end of the tax year.

4. Use your Capital Gains Tax (CGT) allowance

Your Capital Gains Tax (CGT) allowance of £12,300 for the 2021/22 tax year could help you pay less tax on profits you’ve gained from selling your assets.

CGT is applied to profits gained on assets that have increased in value since you bought them. It also applies to assets you give away or allocate to another person.

Assets that are liable to CGT include:

  • Properties that are not your main residence, unless you rented this residence out or used it for business
  • Belongings valued over £6,000 (excluding your car), such as art or jewellery
  • Business-related assets
  • Most shares (not within an ISA), investments within a General Investment Account (GIA) and some bonds

The CGT allowance is referred to as a “use it or lose it” allowance, meaning you cannot carry it over to the next tax year. If you want to make the most of your allowance before 5 April, now is the time to act.

5. Consult a professional

When it comes to making your wealth as tax-efficient as possible, you may find it useful to consult a professional. An expert financial planner can help you make a strategy to reduce your tax liability and grow your wealth.

Get in touch and talk to one of our financial planners. They will discuss your short- and long-term financial goals and ensure that you’re making the right moves to protect and grow your wealth. Part of the process will always involve ensuring that your financial plan optimises all the tax allowances available to you each year.

Get in touch

There’s a lot to take into consideration when you’re trying to maximise your tax planning strategy. If you’re feeling the pressure and time is against you, we can help.

If you have questions about the end of the tax year or want guidance on how to capitalise on your allowances before 5 April, get in touch with us today.

Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.

The value of your investments (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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Has the pandemic changed your life plans? Here’s how working with a financial planner can help

A social distancing floor sign

In recent months, the pandemic has changed many things about our daily lives. For example, for IT professionals such as yourself, it may have brought about a shift towards remote working, instead of being in the office every day.

However, one of the biggest impacts of the virus is the major disruption to many people’s long-term goals.

According to a recent study by Aviva, more than half of Brits have had to rethink their retirement plans because of the pandemic. If you’re one of them, seeking professional advice can help to give you greater reassurance about reaching your life goals.

Working with a planner can help you to know your risk tolerance

One of the biggest psychological effects of the pandemic has been that it’s made many people more risk-averse. It’s not hard to see why, as the virus has caused a significant amount of economic disruption.

According to government figures, the UK’s GDP fell by 9.7% in 2020 due to the Covid outbreak and subsequent national lockdowns. As businesses across the country were unable to operate normally, many assets fell in value, and this worried investors.

While the UK’s economy bounced back with healthy growth in 2021, the sudden shock had a psychological impact on many people. After going through such a highly uncertain and stressful period, it’s understandable that many people have become more cautious.

This is especially true for younger people, who have less experience of market downturns. According to a study published in FTAdviser, more than half of 18-to-24-year-olds are more risk-averse when investing than they were before the pandemic.

While a sense of caution can sometimes help you, being too risk-averse can mean that you may not be able to invest in the most effective way. And this can mean that your wealth isn’t able to grow enough for you to reach your financial goals in the time you have.

This is where working with a financial planner can help you. Seeking professional advice can help you make informed decisions with your wealth, meaning that you are able to grow it effectively without exposing yourself to more risk than is necessary.

A financial planner can help you to build a resilient and diversified portfolio

While seeking professional advice can help you to understand your risk tolerance, another way that a planner can help you is by ensuring that your portfolio is sufficiently diversified. This means that when a financial shock happens, your wealth won’t be as badly affected.

Diversification is essentially about not putting all your eggs in one basket. If your investments are concentrated in a particular economic sector or geographical region, they could fall in value rapidly if an unexpected problem arises.

This can be a particular problem if you receive company shares as part of your workplace benefits scheme. If you hold an uneven balance of shares in the company you work for, you run the risk of being overweighted in the IT sector. This could make you potentially more vulnerable to the effects of a sudden market downturn.

A well-balanced portfolio typically contains a variety of investments from a range of asset classes, as well as economic sectors and geographical areas. For example, it may contain stocks and shares, corporate and government bonds, as well as real estate holdings.

Diversifying your investments can help to give you greater confidence when investing, as you can rest assured that even if market volatility does occur, only a portion of your wealth will be affected.

Using cashflow modelling can help you to see your progress towards your goals

While understanding your risk tolerance and building a diverse portfolio are both useful ways to gain more financial peace of mind, one of the best ways that a financial planner can help you is with cashflow modelling.

Essentially, this helps you to get an accurate picture of what your financial situation will look like over time. This can help you to see if you’re on track to reach your goals and enables you to do something about it if not.

For example, you may want to enjoy an early retirement. If this is the case, your planner can assess the value of the assets that you hold and look at how much they will need to grow by to provide you with a comfortable and sustainable lifestyle when you want to give up work.

If the modelling shows that you may not have enough, you can reassess your investing strategy or consider increasing your pension contributions. This can give you much greater confidence to know that no matter what disruptions you might experience, you’re on track to reach your goals.

Get in touch

If you want to gain more peace of mind that you’ll be able to achieve your financial goals, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469 to find out more.

Please note:

The value of your investments (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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The Financial Conduct Authority does not regulate cash flow planning.

3 issues that might affect your personal finances this year and what you can do to protect yourself

A man calculating his bills at his desk

After several long and stressful months, you may be wondering what 2022 will hold. While you’re probably hoping for the best, there are some economic issues that you need to be aware of, as they could disrupt your progress towards your financial goals.

There are three main issues that are likely to affect your finances in the coming months, so read on to find out what they are and how you can avoid them.

1. The recent rise in the rate of inflation could damage your wealth in real terms

One major threat to your finances in 2022 is the recent spike in inflation. According to figures from the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose to 5.4% in the 12 months to December 2021.

While the Bank of England predicts that inflation will peak at around 7% in Q1 of 2022 and start to fall after that, there are some concerns that it may last longer. Part of this worry stems from the continuing issues caused by disruptions in global supply chains.

Rising inflation can pose a significant risk, as it erodes the buying power of your money over time. This can be a serious problem, especially if you keep a large portion of your wealth in cash.

What you can do about rising inflation

If you’re concerned about the impact of inflation on your money, you may want to consider keeping a smaller reserve of cash and investing more of your money. This is because equities typically generate much stronger returns and so are more likely to keep pace with inflation.

Alternatively, if you already hold investments, you may want to speak to a financial planner about reassessing your investment strategy. Taking greater risks with your wealth can lead to stronger returns, but it’s important to ensure you aren’t exposing yourself to more risk than you are comfortable with.

2. Potential interest rate rises could make borrowing more expensive

As a response to the recent increase in the rate of inflation, the Bank of England has raised their bank rate to 0.5%. For several months, it has sat at a historic low of only 0.1%, though was raised to 0.25% in December.

If the high rate of inflation continues, it is likely that the Bank may be forced to raise rates even further. If this happens, you may have to pay larger interest payments on your loans, which can pose a problem if you have a large mortgage and you’re not on a fixed rate.

What you can do about the interest rate rise

If rates are set to rise, remaining on your mortgage provider’s standard variable rate will prove to be more expensive. This is why you may want to lock in a fixed-term mortgage and take advantage of current low interest rates.

3. National Insurance and Dividend Tax increase could reduce your take-home earnings

In a speech in September, the Prime Minister announced an increase in both National Insurance contributions (NICs) and Dividend Tax. These changes are set to be implemented from April 2022 and will go towards funding the NHS and covering the cost of later-life care.

As of this change, the NICs of both employers and employees will rise by 1.25 percentage points. While this may not sound like a lot, it can quickly add up, especially if you’re earning a larger salary.

For example, let’s assume that you’re a higher-rate taxpayer who earns the median higher-rate taxpayer’s income of £67,100 a year. According to figures published in MoneySavingExpert, this tax increase will cost you an extra £715 annually.

What you can do about this tax increase

If you’re concerned about the prospect of more taxes eating into your wealth, one option you could consider is salary sacrifice. Essentially, this is when you take a voluntary reduction in take-home income in exchange for more work benefits, such as increased pension contributions.

Since your income is lower, this move could reduce your NICs while helping you to save more for retirement.

It’s important to bear in mind, however, that salary sacrifice isn’t for everyone. This is why you may benefit from seeking professional advice if you’re considering it, so you can make a properly informed decision.

Get in touch

If you’re concerned about any of these issues affecting your financial wellbeing in 2022, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469 to find out more.

Please note:

The value of your investments (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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Bowmore Asset Management Ltd is not regulated to provide tax advice or advice on mortgages.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

What is diversification and why does it matter for my investment portfolio?

Businessman dressed in suit and tie puts one golden egg into three separate baskets.

Diversification is jargon for “don’t put all of your eggs in one basket”.

Holding a well-diversified portfolio can help you minimise your risks whilst at the same time maximising long-term growth potential.

Most investment managers agree that whilst a well-diversified portfolio doesn’t give you guaranteed downside protection it is indeed one of the most important aspects that will help you meet your long-term investment objectives.

Variety can pay over the long term

In essence, a well-diversified portfolio aims to reduce the volatility of your investment portfolio.

Investing all your money in a small number of companies (single stock) carries an extremely high level of risk because one bit of bad news (e.g. lower than expected sales, regulatory changes, natural disaster, change in trends) in relation to a particular company can cause its share price to tumble.

Investing your money across a range of different investments means that if one performs badly, others may do well, which significantly improves your chances of increasing the value of your investments over time.

How to diversify your portfolio

To create a well-diversified portfolio, you need to spread your money across a range of different assets. Retail investors typically have three asset classes available to them for investment: Equities, Fixed Interest and Alternatives.*

It is widely accepted that asset allocation is responsible for between 80 and 90% of investment returns, so getting this bit right is a key factor to a successful investment strategy. Part and parcel of this is diversification within these different asset classes.

For example, within the equity space you can diversify across specific regions, sectors, themes and even company size:

  • Geographical regions – US, UK, Europe, Asia, Japan and so on
  • Sectors – Finance, energy, transport, consumer discretionary etc.
  • Themes – Technology, healthcare, renewable energy
  • Size – smaller companies (small cap) or larger companies (large cap).

However, diversification doesn’t stop there.

To ensure you optimise the diversifications of your investment portfolio you can then use investment funds to actually diversify within the specific regions, sectors and themes.

To give you some perspective, a Balanced Bowmore investment portfolio investing across the three major asset classes and underlying regions/sectors/themes has exposure to approximately 1,700 underlying companies and holdings.

January 2022 proves the importance of holding a well-diversified portfolio

During the month of January, US markets, US tech markets, UK smaller companies (FTSE 250) and Japanese markets among others, entered correction territory (down -10% peak to trough). In fact, January 2022 was the worst January on record for over a decade.

Tech-heavy portfolios took a bit of a thrashing

If you had a technology heavy portfolio during the month of January, you would have experienced a painful shock. During the month, the US tech index (Nasdaq) was at times, down more than 15%.

Companies such as Netflix plunged when the TV streaming service reported lower than projected subscriber additions for the last quarter of 2021, falling nearly 20% in a single day. Since early November 2021, Netflix stock has dropped by almost 45%. This is just one example of numerous tech casualties during the January sell offs.

Returning to the theme of diversification, holding purely tech has offered little downside protection over recent months. But many other sectors have fared much better, and some are even in positive territory (commodities as a good example).

Diversification not only helps you achieve more consistent investment outcomes, but also irons out the bumps in the road that often cause setbacks that can wipe out years of positive returns.

As illustrated in the chart below, world equity markets were significantly lower at the end of January than they were at the beginning of the year. However, by holding a well-diversified portfolio you would not have participated in the majority of the downside that some of the individual markets experienced.

 

 

 

Get in touch

Bowmore Asset Management specialise in building and managing investment portfolios for private clients, trusts and charities. We invest across all major asset classes, including equities, fixed interest, hedge funds, commodities and property funds.

Our primary aim is to help you achieve your investment goals.

If you want to ensure that your investment portfolio is well-diversified and balanced according to your financial goals and appetite for risk, get in touch.

Email enquiries@bowmoream.com or call us on 0203 617 9206.

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

*Alternatives

Exposure to the following types of investment:

  • Hedge Funds – funds of funds or individual hedge funds listed and regulated in the UK
  • Commodities – exposure to gold, oil and other commodities, either via a collective fund or a fund that tracks the price of an individual commodity or basket of commodities
  • Property – mainly via collective investments that are listed in the UK and have exposure to both UK and Global Property
  • Multi-asset class – exposure via collective investment funds that will invest in many different types of asset including all of those listed above and possibly others
  • Structured products – these are investments that are linked to a particular stock market and offer the potential, but not a guarantee, of some capital protection depending on how the investment is set up

Equities

Exposure to UK and global stock market investments, ranging from UK companies to Far East and Emerging Market companies.

Fixed Interest

Exposure to government debt (Gilts), both inflation-linked and paying fixed annual payments (yield). As well as exposure to corporate bonds (debt) issued by companies, both in the UK and globally.

January 2022 proved to be a wild ride for investors. This is why

Riding a roller coaster on a clear blue-sky day

You may have read about the areas investors will be watching closely in 2022 in our article last month. If so, you probably also noticed that January did indeed turn out to be a bumpy start to the year.

Here’s what happened, and why.

The stock market’s fear gauge soared to new highs

Wall Street, in particular, found itself in choppy waters at the start of 2022.

As of 25 January 2022, US stocks recorded three consecutive weeks in decline. This was caused by concerns of how the Federal Reserve (Fed) may tighten monetary policy, with investors having to factor in more aggressive approach than originally planned due to persistent higher levels of inflation.

This uncertainty sent the market’s fear gauge, the Cboe Volatility Index, up nearly 100% year-to-date.

A brief overview of the Cboe Volatility Index

The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index.

Derived from the prices of the S&P 500 index options with near-term expiration dates, the VIX generates a 30-day projection of expected volatility.

Volatility is often seen as a useful way to gauge market sentiment and the degree of fear among investors.

UK and US inflation jumped to their highest annual rate for 30 and 40 years, respectively

With inflation at its highest level in decades, interest rate hikes are now being priced into markets. Such high levels of inflation tend to affect the valuations of growing businesses.

Currently, investors are weighing the longer-term impact of higher borrowing costs and higher prices on the earnings potential of growth-based businesses. This means that tech and growth stocks have suffered a number of setbacks since the turn of the year.

Meanwhile, the opposite is true for value stocks, which will typically outperform when inflation is high and interest rates are increasing. Accordingly, value stocks, like banks and energy firms, performed well over the first few weeks of 2022.

The Fed gets heavy-handed

As mentioned in last month’s article, while it was already apparent that central banks would need to maintain a “careful balance between keeping inflation expectations under control while allowing support for economic growth,” US stocks and bond prices dropped even lower in late January when the Fed’s Jay Powell set out intentions to increase US interest rates in March.

This rate rise will mark the first increase in US interest rates since 2018.

In January, the Fed’s policymakers released projections that implied there would be three interest rate rises in 2022. In early February, this projection was revised up. It’s quite possible that we should now expect five rate rises during the year. A pretty drastic change to expectations in a very short space of time shows how important it will be for the Fed to get inflation back under control.

Markets moved considerably lower off the back of such news and shows how there is still a degree of nervousness around monetary policy and further evidence of why policymakers must tread carefully.

Consumers globally are facing higher prices in general. You will have noticed it when filling up your car or shopping in the supermarket (within the last 12 months, the price of milk has risen by more than 8% according to the ONS).

Higher interest rates could ease some of that pain. However, rate rises are a double-edged sword that can also limit economic activity, which in turn can have a knock-on effect for investment

Protecting the downside as pockets of volatility persist

Inflation and rising interest rates and the anticipated monetary policy changes will be a topic of conversation for the remainder of the year. Certainly, in the short-term markets will remain volatile as investors adjust to a new higher rate environment.

However, with changes comes opportunity and as markets work their way through this transitional period, we believe Bowmore’s investment portfolios are positioned to benefit from the economic environment moving forward.

Portfolios have avoided a significant part of the recent equity drawdowns due to weightings in alternative assets, such as property, hedge funds and commodities. Such alternative investments are designed to diversify returns and help protect funds in times of stress.

Portfolios also currently have significant exposure to the UK and more cyclical firms, which have outperformed on a relative basis.

Get in touch

Bowmore Asset Management specialise in building and managing investment portfolios for private clients, trusts and charities. Our primary aim is to help you achieve your investment goals.

If you want to ensure that your investment portfolio is ready to perform against unpredictable volatility while aligning with your financial goals and appetite for risk, get in touch.

Email enquiries@bowmoream.com or call us on 0203 617 9206.

 

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

Want to retire sooner? Here are 5 practical planning tips to help you retire early

Three golden eggs in a nest

Ever since the government implemented Pension Freedoms in 2015, many people have dreamt of retiring early. It’s not hard to see why, as this chapter of your life can be a great time to relax and enjoy the rewards of your lifetime of hard work.

According to a recent study published by This is Money, a quarter of Brits want to give up work at the age of 60.

If you’re one of them, it’s important to ensure that you have enough wealth to support your desired lifestyle when the time comes. With that in mind, here are five practical tips to help you retire early.

1. Consider what lifestyle you want

One of the biggest steps when planning for an early retirement is considering what you want from this chapter of your life. This is important as the kind of lifestyle you desire will play a large part in determining how much wealth you’ll need to support it.

Without having an idea of what you want to do once you’ve finished work it can be hard to estimate how much wealth you will need in the long term.

For example, a retirement spent enjoying long foreign holidays would probably cost significantly more than a quieter one spent mastering hobbies and spending time with family members.

If you want to be able to retire early, it’s important to consider the kind of lifestyle you want, as this knowledge is the bedrock of your long-term planning.

2. Check to see if you have any lost pensions

Throughout your working life, you’ve probably worked a variety of jobs, meaning that you may have several workplace pensions. Because of this, it can be easy to lose track of them, especially if it was from a job that you had a long time ago.

According to the Times, there are more than 1.6 million lost pensions in the UK, with a combined value of more than £19.4 billion. This means that the average lost pot contains around £12,000.

If you want to retire early, your pensions will need to support you for a longer amount of time, which is why it’s important to ensure that they are all working hard for you.

This is why, if you think you may have lost track of an old workplace pension, it can be highly beneficial to get in touch with old employers, who may have records of them. Alternatively, you could get in touch with the pension providers that your company worked with.

Finally, if you’re still struggling then you may be able to use the government’s pension tracing service to try and find any pensions you’ve forgotten about over the years.

Taking the time to track down lost pensions can often be worth it, as you may find wealth that you didn’t realise you had. If this is the case, you may be able to retire sooner than you had originally anticipated.

3. Make sure you’re claiming all your tax relief

When saving for retirement, tax relief can be a valuable way to grow your wealth. So, it’s important to ensure you’re receiving the full amount you’re entitled to.

To put it simply, tax relief is available on your pension contributions at the highest rate of income tax that you pay. This means that:

  • A basic-rate taxpayer, you’ll receive 20% tax relief on your contributions
  • A higher-rate taxpayer, you’ll receive 40% tax relief on your contributions
  • An additional-rate taxpayer, you’ll receive 45% tax relief on your contributions.

However, it’s important to note that only the basic rate of tax relief is added automatically. This means that if you pay the higher or additional rate of tax, you will have to complete a self-assessment to claim your extra 20% or 25% relief.

Typically, you’ll receive this in the form of a tax rebate. It’s also important to be aware that you can claim back tax relief from the previous four tax years (6 April to 5 April).

4. Maximise your allowances

If you want to ensure that you have enough wealth to support an early retirement, you should make sure that you’re making the most of your allowances.

Here are two of the most important ones to think about.

The first is the Annual Allowance, which is the limit on how much you can contribute into your pension in a given tax year and still benefit from tax relief. In the 2021/22 tax year, this stands at £40,000, or 100% of your earnings, whichever is lower.

It’s also important to be aware that once you start to draw flexibly from your pension, the Money Purchase Annual Allowance is triggered. This means that your Annual Allowance will fall to just £4,000.

When it comes to growing your non-pension wealth, the other allowance you may want to bear in mind is your Individual Savings Account (ISA) allowance. An ISA is a tax-efficient savings vehicle, as any interest or returns are paid free from Income Tax and Capital Gains Tax.

Because of this valuable benefit, there is a limit to how much you can save into an ISA in any given tax year. In the 2021/22 tax year, this stands at £20,000 but does not roll over, so if you don’t use it all, you lose it.

Making the most of these allowances can help you to grow your wealth effectively to support your desired lifestyle throughout your retirement.

5. Speak to a financial adviser

When it comes to building your wealth in preparation for retirement, there are several tax pitfalls that you could run into. If you want to avoid this prospect, you could benefit from seeking professional advice.

When you work with a financial planner, they can help you to grow your pension wealth in the most effective way, maximising your allowances and avoiding any potential tax issues.

They can also enable you to make properly informed decisions, giving you greater confidence that you’ll be able to achieve your retirement goals.

Get in touch

If you’re considering retiring early and want to know if you have enough, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note:

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The value of your investment 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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

Bowmore Financial Planning Ltd is not regulated to provide tax advice.

SIPPs or ISAs – which one is best for your retirement savings?

Woman at home with laptop, deep in thought looking out of the window

ISAs (Individual Savings Accounts) and SIPPs (self-invested personal pensions) both offer generous tax benefits to help you make the most of the money you save.

While the tax relief they provide is given at different times, there are several other differences that you’ll need to consider when deciding which tax wrapper is right for you.

Choosing the right savings vehicle for you will depend on your future goals

Of course, as long as you are over 18, depending on your savings goals, your circumstances, and how committed you are to saving for your future, you could have both.

If you’re an employee and thinking about taking out a SIPP, you may first want to consider whether you might be better off increasing contributions to your workplace pension scheme. A financial planner can help you understand whether contributing to a SIPP it the right option for you.

You may find that your employer will match your increased contribution. In effect, this may give you “free money” that you may decide to take advantage of instead of investing elsewhere.

Once you’ve settled on this decision, read on to learn more about the other criteria you should consider when weighing up whether a SIPP or ISA is best for you.

Using a SIPP for your retirement savings

Saving for your retirement through a SIPP offers tax relief advantages. You can also be selective about where your money is invested.

The freedom to choose your own investments gives you control over where and how you invest. This means you can tailor your SIPP savings to align with your financial goals and values.

You can hold a variety of assets in a SIPP. Along with cash, some of the most popular assets you can hold include investment funds, shares, and commercial property. Additionally, you can choose to hold funds in currencies other than pound sterling, including euros, US dollars and Australian dollars.

You can also make flexible contributions to suit your circumstances. This can be helpful if you’re self-employed, particularly if your income varies throughout the year.

In terms of tax benefits, you’ll get the same relief as you would with other pensions. For any contribution you make, the government will add a 20% boost in tax relief. This tax relief is added automatically, even if you don’t pay tax.

Usually, you can save up to £40,000 and you’ll receive tax relief on contributions up to this sum, but you can’t pay in more than you earn. If you happen to be a non-earner or earn below £3,600, you can contribute up to £2,880 and you’ll get tax relief on top, even if you don’t pay Income Tax.

As with other pension arrangements, if you’re a higher- or additional-rate taxpayer, you can claim an extra 20% to 25% through your tax return.

The money you save in a pension will also grow free from UK Income Tax and Capital Gains Tax (CGT).

When you save into a SIPP, as with any pension, your fund is intended for your retirement, so you shouldn’t expect to be able to take your money out again until you reach age 55 (this age limit is due to rise to 57 from 2028).

Once you reach retirement age and want to access your savings, you can typically take up to 25% of the fund in tax-free cash. All other payments from your SIPP will be subject to Income Tax.

Using a Stocks and Shares ISA may require more discipline

A Stocks and Shares ISA is another tax-efficient way to save for your retirement. As with a SIPP, you have the freedom to choose the investments that make up your ISA, allowing you to match your investments with your timescale, goals and appetite for risk.

In many ways, saving into an ISA can be less complicated since the tax benefits aren’t tied up with having to claim on your tax return. However, you’ll also miss out on the automatic 20% tax relief that the government adds to your contributions.

When you invest into an ISA your money will grow free from UK Income Tax and CGT. Plus, unlike a pension, everything you take out of an ISA is tax-free.

Unlike with a SIPP, you are limited to investing only £20,000 (in the 2021/2022 tax year). You can save the full £20,000 in one type of account or split the allowance across other types of ISA. For example, you may have a cash ISA and want to funnel some money into that account too. If you’re paying into different types of ISA, it’s important that you take care not to exceed the £20,000 annual limit.

A Stocks and Shares ISA provides great flexibility. Unlike a pension, you can make tax-free withdrawals whenever you like. However, if you’re saving into an ISA for your retirement, it is wise to keep your money invested until you need to draw on it for income when you retire.

SIPP vs ISA – going head-to-head


If you know you may be tempted to withdraw money, if given the opportunity, you may be wiser to remove the temptation and open a SIPP instead.Your personal circumstances and attitude toward long-term saving will play a large part in whether an ISA or a SIPP is more appropriate for you.

Alternatively, if you are keen to find a tax-free income stream when you retire, then an ISA is perhaps a better way to save for your future.

Of course, as mentioned earlier, there is absolutely nothing stopping you from saving into both an ISA and a SIPP and taking full advantage of all the flexibility and tax efficiency they offer.

Get in touch

If you would like expert help in saving for your retirement and would like to discuss your options, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

A Year In Review

It is often assumed that in a “bullish” year for equities most, if not all, markets will rise, with the acceptance that there may be some small divergence between the performance of the major markets, but that they will all generally perform well.  Equities behaved in this way through 2019 but then that correlation fell apart during 2020 and 2021.   Over the course of 2020, the FTSE was down 14.3% compared to the S&P 500 which increased 16.26%, a staggering 30% difference.  Then during 2021, the S&P again led the way, up 26.8%, but the Hang Seng Index this time (China) fell 14.1%, a 40% difference in performance.

It would be oversimplifying to blame inconsistent governmental Covid response alone for these major anomalies, although there can be no denying that the global pandemic has had the most significant part to play of any of the factors that have led to heightened volatility over the last 24 months. In reality though, the dispersion in returns between major world regions is more a function of idiosyncratic factors affecting individual stock-markets, some of which we will explore in this round-up of the year just gone.

January 2021 started well for equities, with a continuation of the rally in ‘value’ companies that started in November of 2020, after the election of Joe Biden and the announcement from Pfizer of a viable vaccine. The FTSE 100 started particularly well, outperforming the US and other major markets over the first few days of the year. The January 6th US Capitol insurrection and associated fallout then unsettled the markets until the end of the month, before a major market uplift started in February.

The structural rally in European and US equities was driven mainly by market expectations that the Covid pandemic would be brought under control with the rollout of vaccine programmes worldwide. As confidence grew in the unloved, Covid sensitive sectors of the previous year, (hotels, airlines, energy, financials), European, UK and US equities commenced a slow and measured rise. This positive economic outlook meant that volatility in the US markets subsided in 2021, with the S&P 500 posting just seven sessions where the index gained or lost over 2%. That compares to 44 sessions in 2020.

This positive economic outlook meant that volatility in the US markets subsided in 2021, with the S&P 500 posting just seven sessions where the index gained or lost over 2%. That compares to 44 sessions in 2020.

The main theme for the year, as lockdowns were lifted and the world awoke to a new “post-Covid” normal, was talk of escalating inflationary pressure.  A combination of extreme pent-up demand from frustrated consumers who couldn’t spend during 2020, supply shocks caused by pandemic disruption (not helped by the container ship Ever Given blocking the Suez Canal – you really couldn’t script it!) and continuing quantitative easing (QE) in the US until November 2021 all contributed to rising inflation around the world.  By year end, US inflation stood at a staggering 6.8% whilst in the UK, CPI was 5.1%.

Stock-market volatility fell dramatically in 2021

 

 

 

 

 

 

 

 

 

Source: Refinitiv

Inevitably, all eyes turned to the central banks to determine what these new aggressive inflation numbers would mean for interest rates.  There was a great deal of debate as to whether this new inflation was mainly transitory, caused by short-term supply shocks that would disappear soon enough, or structural, caused by increasing demand as the world re-opened.  The former, which was the stance of central banks for most of the year, should lead to no action on interest rates now whilst the latter would certainly call for higher interest rates now to cool inflation and to keep growth under control.

US inflation spiked to 6.8% by the end of 2021

 

 

 

 

 

 

 

 

 

Source: Refinitiv

The UK’s Monetary Policy Committee met on the 15th December and voted to increase interest rates by 0.15% to 0.25%, the first increase since July 2018. Yet during the same meeting the committee decided to also continue with their bond buying (QE) programme, softening the blow of hiking rates and signalling some uncertainty/caution as to whether they felt the recovery was sustainable.

The Federal Reserve (Fed) and The European Central Bank both elected to keep rates on hold in their December 2021 meetings.  The US economy is approaching full employment and considering the expectation that jobs numbers will improve further over the months ahead it was perhaps surprising that they did not act now to raise rates.  However, the Fed did halt new asset purchases (QE!) in November, a sign that they were preparing the market for rate hikes in 2022.

It would be dangerous to call the bottom of the interest rate cycle because Omicron could derail growth very quickly and therefore the major central banks are treading cautiously. However, it is now widely accepted that recent inflationary pressure has been driven by demand rather than supply, and markets now expect that US rates will be raised in two months’ time, for the first time since December 2018, and then twice more as we move through the year.

Until now, investors have taken all of this in their stride, which we found surprising because in the short-term markets don’t usually like talk of rising interest rates. This either means that there will be a short-term market drop when rates are finally raised in the US, or that there has been so much build-up to global rate rises that investors have already predicted this and factored it in.  We hope that the latter holds true!  Either way, inflation and the consequences for interest rates is the hottest topic as we enter 2022.

 

 

 

 

 

 

 

 

 

Source: Bloomberg

So, with inflation running high in developed market economies and stock-markets creeping steadily higher, why were these gains not mirrored in Asia, and particularly in China, which suffered double-digit declines in value over the course of the year?

As the world’s global manufacturing hub, Chinese GDP understandably suffered from the Covid related slide in global demand and was duly impacted more than many other economies.  By year-end GDP growth had slumped to 2.1%, having never fallen below 6% for the previous 30 years.

It was a miserable year for Chinese markets, lagging world markets by the biggest margin since 1998

Whilst Covid was a major contributor to this market decline, the wheels really came off over the summer, starting in late July, when the Chinese government announced a series of new regulations affecting various sectors.  The first of these was a ban on companies making profit from the education technology (‘EdTech’) sector.  Other reforms followed shortly afterwards, including (in order of date introduced) increased welfare for food industry delivery drivers, greater regulation of “pop-up” ads on apps, a crack-down on speculation in the computer chip industry, “unfair competition” legislation regarding the internet, tougher rules on the use of customer data and limits to children’s use of computer games, amongst many others. It felt like a sweeping range of reforms that had been planned for months as part of Xi Jinping’s new wave of societal ‘purification’.

Chinese GDP growth fell to 2.1% in 2021, having been consistently above 7%

 

 

 

 

 

 

 

 

 

 

 

 

Source: World Bank

These new laws feel idealistic and aspirational, and the speed and wide-ranging nature of the changes has been the envy of many western governments, however equity markets have been badly rocked by the news.  Whilst good for consumers and society, new regulation is seldom good news for investors and the severity of the changes and the autonomy that the Chinese government demonstrated with these announcements left the Chinese equity market badly affected.  The tech sector in particular took a hammering and led to a bear market in China (a fall of 20% or more) by the 20thAugust. In fact, from the February peak, Chinese equites had fallen by 40% by the end of August.

Then, to compound the problem, Chinese listed property company Evergrande, saddled with 570bn Yuan of debt, missed various debt payment deadlines, and cancelled a special dividend, citing liquidity issues.  All the while ratings agencies were steadily downgrading the company to junk status with talk rife of a “probable default” and unpaid salaries at various divisions of the conglomerate.  It was the last thing that the Chinese markets needed, the inference being that other property companies would follow Evergrande into the mire shortly and that there would be contagion into other sectors.

We wrote in detail about these issues in our August overview and do not wish to labour the point that China has experienced a catalogue of relatively unconnected woes that have directly impacted the Chinese equity markets this year, at a time when other equity markets have been performing well.

Japan (reflected by the Nikkei below) was the other market that performed relatively poorly in 2021. Japan had outperformed in 2020 due to Covid containment, but the Delta variant took hold last year and with at the time less than 5% of the Japanese population fully vaccinated (compared to over half the population in the US and UK already double jabbed), Japan struggled.

Initially, Japan’s vaccination rates severely lagged the other developed markets

 

 

 

 

 

 

 

 

 

 

 

 

Source: CLSA, John Hopkins University, IMF

As a result of these low vaccination rates the Government introduced a state of emergency in Japan in April, and this was not lifted across the predominance of the country until September. Under the state of emergency economic growth slowed markedly, as people were urged to refrain from non-essential outings and to avoid going to crowded places, while restaurants and bars were asked to close by 8 p.m. and were unable to serve alcohol.

This coupled with criticism of the handling of the situation in the run up to the Olympics led to some major political changes, most notably the resignation of Yoshihide Suga, the Prime Minister who had replaced Shinzo Abe just a year previously.

Japanese markets were down 2% by mid-August when developed markets were up an average of 15%.  Since then, the Japanese market has kept pace with most developed market peers, due in part to the appointment of Fumio Kishida to replace Suga as Prime Minister and a rapid rollout of the vaccine, with nearly 80% of the population now double jabbed.

China and Japan were the only two (admittedly large) blots on an otherwise immaculate copy book, dragging down the average return from equities considerably.  In general, however the strong performance from UK, US and European equities meant that equity markets as a whole performed well during 2021.

BUT WHAT ABOUT OTHER ASSET CLASSES?

Bonds had their worst year since 1999.  The Barclays Global Aggregate bond index, which is a basket of corporate and government debt worth $68tn, fell by 4.8% over the year, driven by major declines in US Treasuries and other government bonds.  The 10-Year US Treasury yield rose from 1.1% to 1.5% over the year as investors sold bonds aggressively, with the prospect of higher inflation and rising interest rates driving the declines over the period.

It was the worst year for bonds since 1999

 

 

 

 

 

 

 

 

 

Source: Bloomberg

Rising inflation is usually a bad sign for bond markets and cash, due to the fear of real capital erosion caused by rising prices.  Whilst it may be too early to call the end of the 40-year bull market in bonds with absolute certainty, if inflation persists conventional bonds will continue to struggle in 2022.

Commodities typically perform well during periods of high inflation and last year was no exception.  Lithium, crude oil, coffee and copper all had a stellar year, rallying hard in 2021 as the world economy opened-up again in March triggering aggressive demand for raw materials. The so called ‘reflation trade’ where investors aggressively buy cyclical sectors that recover well after a period of economic shock certainly helped commodities steal the show in 2021. However, gold had a miserable year, falling 4% as investors flocked to risk assets like equities and away from perceived safe havens.  Concern remains about the oil price, which rose by 50% over the course of the year and which, at $80 a barrel, represents a risk of higher inflation still for those economies such as India that are large net importers of oil.

The UK commercial property sector saw growth of 3.8% in Q3 of 2021, the highest quarterly growth rate since Q1 2010. The recovery in the sector was, like commodities, triggered by ‘reflation’ as the pandemic abated.  Challenges remain around the structural shift in the office sector as a result of flexible working but generally the outlook is now far more promising, even with the Omicron variant sparking short-term concern about possible lockdowns in 2022.

Other points of interest during the year included the David vs Goliath battle for Gamestop, where retail investors’ posts on the Reddit online forum resulted in the share price rising by 700%, wounding many big hedge funds which had shorted the stock.  Also, Cryptomania continued with the combined value of Bitcoin, Ethereum and Solano reaching $3tn over the summer.  It was also a record year for mergers, with M&A activity jumping 63% to $5.3tn over the year.  Global food prices hit 10-year highs and big tech became even bigger, with Apple, Google, Microsoft, Nvidia and Tesla accounting for more than a third of the S&P 500’s total return.

SO, WHAT’S IN STORE FOR INVESTORS OVER 2022?

Covid is of course still relevant, and the human impact remains devastating, yet the markets have ultimately shrugged off Omicron and have treated the virus as yesterday’s news. It would take a big negative shift in sentiment for the pandemic to have a material impact on markets this year.  Of far more importance to markets today is inflation and the pace of rising interest rates, and this will doubtless be the primary driver of volatility over the year ahead.

Over the last few years, investors have largely ignored traditional valuation metrics such as price to earnings ratios (P/Es), that have been used for decades to assess how expensive a company is relative to the market.  Yet with P/E ratios at record levels across many sectors, investors have still been piling into equities at increasing rates.  Why?  Partly due to the escalating interest in the tech sector – typically businesses which are very expensive when considering their current earnings – but which promise massive future earnings tomorrow, rendering their valuations today irrelevant. But this huge momentum with equities is also a function of fixed interest investments (bonds) looking increasingly bad value (and risky) in an environment of rising inflation.

Neither are good reasons to support increasing equity allocations strategically, but it is hard to argue with the weight of market sentiment in the short-term – equities remain one of the best means to beat inflation over the years ahead.

Whilst we remain positive about the outlook for equities generally, one trend to watch out for within equities is a strategic move away from ‘growth’ sectors like tech and towards ‘value’ sectors like energy and financials. If concern over the Omicron variant wanes further and interest rate rise expectations are brought forward, this will probably facilitate a greater move to ‘value’ companies at the expense of ‘growth’. Again, we have written about this concept at length in several past overviews and indeed, at the time of writing, we have started to see this trend developing already in 2022.  In any case, positioning portfolios to be more inflation-proofed in the current environment is definitely prudent.

Bowmore Asset Management Ltd is registered in England. Registered number 0905 1799. Authorised and regulated by the Financial Conduct Authority.

 

Duncan Harvey, Paraplanner gives insight into his role at Bowmore

I enjoy working in a countryside setting with the availability of scenic  walks available over a lunchtime, we have a farm shop and café within walking distance and a Parsons Bakery a stones throw away in Long Ashton.

I like to cycle to work to blow away the cobwebs in the morning, access via a cycle path is available for the commute, if you do come by car it’s a fairly quiet as the majority of traffic is headed into Bristol.

As a small team of paraplanners we share all of our work and are not allocated to an individual adviser – this is agreed and planned amongst the team during our meetings.

I feel that this collaborative approach helps each Paraplanner work to their strengths, but also allows for gradual exposure to products and services where they would like to gain greater knowledge and develop.

You can expect to work with both the Company Directors and their HNW client bank, as well as our Advisers providing them with the support they need to deliver solutions for clients with complex needs.

As a company we work in an environment of continuous improvement,  and you will be expected to put forward ideas for improvement in areas such as compliance, work flow, report writing and proposition. You will be given the opportunity to implement identified improvement projects and see them through to completion.

If you are seeking a role where you will be listened to, and given the time, tools and support to push yourself forward in your career this could be the place for you.

No more Mr Nice Guy

After a turbulent start to the year, US Stocks and bond prices dropped even lower on Wednesday afternoon after the chair of the Federal Reserve (Fed), Jay Powell, made it clear that the first increase to US interest rates since 2018 will be implemented at the Fed’s next meeting in March.  During the month of December, the annual pace of US consumer price inflation reached 7%. Powell had always said that if inflation got out of control, the Fed would be willing to bring in heavy weapons to knock prices down.

Last month, the Fed’s policymakers released projections that implied there would be three interest rate rises in 2022. In just one month this projection has been revised up, with potentially five rate rises this year now on the cards! In fairness, Jay Powell refused to rule out a more aggressive approach during 2022, adding that there was space to tighten monetary policy without harming the labour market.

In response to the hawkish speech from Powell on Wednesday, global equity markets went into risk-off mode. Having rallied ahead of the meeting, the S&P 500 closed marginally lower on the day, the US yield curve flattened and the Volatility Index spiked to its highest level since February 2021.

As Covid appears to be shifting towards a more endemic existence and supply chain bottlenecks look to be easing globally, we may well see inflation moderate. However, with US President Biden warning Ukraine of a possible invasion next month, escalating tensions at the Russia-Ukraine border could put pressure on already high commodity prices and keep inflation well above the Fed’s target.

As shown in the above chart, world equity markets are significantly lower today than they were at the beginning of the year and the familiar spectres of inflation, interest rates and Covid are likely to keep investors honest, with pockets of heightened volatility in the short term at least.

We believe portfolios are well equipped for this transitional period. They have avoided a significant part of the recent equity drawdowns due to positions in alternative assets (e.g., property, hedge funds, commodities) which are designed to diversify returns and help protect in times of stress, as well as significant exposure to the UK and more cyclical firms, which have outperformed on a relative basis. We continue to assess the markets and look to identify entry points for attractive opportunities, which can often present themselves during periods of volatility.