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Time for a year end review?

Published: 25 November 2016

When it comes to keeping your future on track, putting a little time aside to review your finances is a worthwhile investment.

Staying on top of changes to legislation affecting savers, investors and pension scheme members can help you make the most of tax breaks and avoid any tax penalties.

A big change from 2015 was the introduction of the pension freedoms. The past year may not have seen anything quite as seismic but, if anything, the pace of change has accelerated. A series of changes has taken effect in recent months and more have been set in motion to come into force over the coming year.

Events such as the EU referendum, US election and changes to your own personal and family circumstances over the year can also have a bearing. In fact, regular portfolio reviews are of crucial importance.

The end of the year is a natural time to review your savings and investments, to ensure you’re still on track, and making the most of your allowances. Below are some things you may want to think about.

Are you saving enough to meet your goals?

Remind yourself why you are saving. Are you on track to meet the goals you’ve set yourself? Have your circumstances changed in 2016, meaning your goals have changed too? Do you need to, and can you afford to, increase your savings in 2017?

You can use Alliance Trust Savings’ interactive tools to check. If you don’t already, you might also consider getting into a regular saving habit through your Alliance Trust Savings Account. This way you can potentially benefit from pound cost averaging and trading fees of just £1.50 a deal.

Should you be putting more into stocks and shares?

According to a survey we completed in September, cash is still king for many ISA investors. But with interest rates currently at an all-time low, a question for those with a significant investment in cash is whether to take more risk with their money in the hope of achieving better returns.

Past performance is not a guide to future performance. History does show that stock market-based investments outperform other main asset classes over the longer term.

UK equities returned 2.3% in the 10 years to 2015 and 3.7% over 20 years, according to the Barclays Equity Gilt Study 2016. In contrast, cash was down 1.1% over 10 years and up just 0.9% over 20, which means cash savings will have lost value to inflation over those periods.

Based on this, investing some or all of your ISA allowance in stocks and shares may be a serious consideration for those who are able to put their money away for at least five years, especially as the annual ISA allowance is due to rise from £15,240 to £20,000 in April 2017.

Investing always involves risk but you can manage this in different ways. For example by spreading your money across different investments with different levels of risk and by making regular investments over time rather than committing all your money in one go.

Are you making the most of your pension allowances?

Pensions offer valuable tax breaks, so with the end of the tax year still some way off it’s also worth checking you’re making the best of your pension allowances. Read our guide to Getting the most from your pension savings for the details.

For some people that will involve checking you’re not in danger of breaching your allowances.

The lifetime allowance for pension savings fell in April from £1.25 million to £1 million. This puts more investors than ever before at risk of tax penalties when they come to access their savings. For example, 55% tax is charged on lump sum withdrawals above the £1 million (except where transitional protection is in place). The annual allowance changed as well. It is now tapered by £1 for every £2 of income above £150,000, leaving those with income of £210,000 and above with a reduced annual allowance of £10,000.

Do you need to pay any tax on your savings interest?

The 2016 tax year in April brought the new £1,000 personal savings allowance (reducing to £500 for higher rate taxpayers and nothing for those on the additional rate).

It means that all but a tiny handful of savers no longer have to pay tax on their savings interest, including that received from savings, bank and credit union accounts, corporate and government bonds and peer-to-peer (P2P) products.

But if you do receive more than £1,000 of savings interest (outside of a tax advantaged product like an ISA or a pension) tax must now be paid on it either through PAYE or through self-assessment, because interest is no longer taxed at source.

Do you need to pay any tax on dividends?

If you do hold investments outside of a tax advantaged product like an ISA or pension – for example in an Alliance Trust Savings Investment Dealing Account - there's another reason for giving your portfolio the once over was the change to dividend tax credit in April.

The previous 10 per cent tax credit on dividends has been replaced by a new £5,000 tax-free dividend allowance, above which dividends are charged at 7.5, 32.5 and 38.1 per cent (for basic, higher and additional rate taxpayers respectively).

Income tax wasn’t previously charged on dividend income for basic rate taxpayers, but those receiving dividends of more than £5,000 in the tax year now face a tax charge that has to be paid through the self-assessment system.

Could you benefit from consolidating your investments?

Taking time to review your various pensions and investments can clearly be very worthwhile. The sheer amount of changes to keep up with also makes it essential to do it regularly and effectively. Consolidating into one pot or fewer pots makes it easier to review your investments, identify any problems, spot high charges and make amendments, giving you peace of mind that you’re still on track, whatever lies in store over the coming year.

Morals and money

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in November 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

How much could you save?

At Alliance Trust Savings we charge you flat account fees rather than fees based on a percentage of the value of your investment.

As your investments grow, your account fees won’t. So if you consolidate your investments from elsewhere you might be surprised just how much you could save.

PENSION CONSOLIDATION        ISA CONSOLIDATION

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Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.