Five financial resolutions for 2012
1. Tackling inflation
A basic-rate taxpayer needs to get an interest rate of about 6% to ensure their money maintains its buying power – and those rates just aren't available. So to combat the effects of inflation:
Make sure you have used your cash ISA allowance, as its tax-free status helps to close the gap between the interest rate earned and the inflation impact.
Also consider investing longer-term in a tax-efficient stocks and shares ISA, which has the potential to produce higher returns. You can invest for growth or income, depending on your needs. Of course, you should ensure you are comfortable with the increased risk associated with stocks and shares compared to cash.
What creates disappointment for savers is an opportunity for borrowers. It's still quite tricky for first-time buyers to get a sensible rate without a 10% plus deposit required. But if you're already a homeowner with 20% or more equity in your property, you could save money by remortgaging.
This may help to offset other living costs which have been escalating, or you could use the savings to overpay into your mortgage - thereby paying off your mortgage debt sooner.
3. Diverse investing
With ongoing concerns about the euro, market volatility may continue so it's worth checking how any investments you have are performing, including your pension. Bear in mind that investing in a well-diversified mix of underlying investments can help to combat the impact of market volatility.
Risk managed funds, for example, are a straightforward way of investing in different asset classes and balancing risk and reward. Also ask yourself the question, do your investments still match your risk appetite?
If you are approaching retirement and have built up pensions investments, it's time to start thinking about what kind of annuity you are going to purchase to provide your retirement income. There are many to choose from and it's important to give careful thought to the shape of your annuity, to ensure you get the best value for money in retirement.
Whether or not you should inflation-proof your retirement income is a key consideration. If you don't, then the real value of your income could fall year-on-year and you may find it increasingly difficult to meet your overheads.
So don't just focus on the short term, think about the longer term - an annuity that increases in line with the Retail Prices Index or at a fixed rate each year can help you meet any increases in the cost of living as you grow older.
Pension planning is vital and the earlier you start, the better. With a pension, you benefit from tax efficiencies that mean for every £1 invested you receive at least 25p in tax relief. You also see a compounding effect with savings in a pension fund that increases the longer you save and means you get a return on your investment return rather than just on what you have saved.
Julie Russell is the head of Standard Life Direct
This article was written for our sister website Money Observer
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.