Top tips for financial planning in 2012

It’s that time of year again when many of us make new year’s resolutions. But along with going to the gym, reading more books and spending time with your family, experts suggest adding some financial goals to your list.

To help consumers get their finances back on track and prepare for the new year, media advisers at Unbiased.co.uk tell Money Matters their top financial tips for 2012.

“The new year should be about looking forward and starting afresh. A complete financial review can help you to get focused and back on track,” said Karen Barrett, chief executive at Unbiased.co.uk.

“Look at your mortgage, look at your pension; are you being tax efficient; where can you consolidate your debts or find a better savings rate? What is your financial plan for 2012?”

1. Annuities

As we enter 2012, pension annuity rates are at an all-time low with little prospect of rising any time in the near future. Individuals about to draw income from their pensions should consider all of the options available to them.

“Alternatives such as drawdown, phased retirement, temporary annuities, investment-backed annuities and the open market option must all be considered before the irrevocable decision to buy an annuity is taken,” said Gordon Bowden at Quainton Hills Financial Planning Ltd. “A poor decision at retirement can affect a lifetime of pension saving.”

2. Don’t be a “rate tart” with credit cards

There are many well-intentioned people who become rate tarts by taking out £5,000 on a credit card and moving it into an interest bearing account while at the same time building up credit card debt. This is usually done with the intention of moving from one 0 per cent deal to another, paying the 2.5 per cent set up fee and trying to get better than that by investing the £5,000 cash.

Dave Penny at Invest Southwest warns, however, that this does not work in 9 out of 10 times. “Savings rates are too poor to make much if any gain from investing the money borrowed and, more importantly, the debt ‘hardens’, the savings get spent for whatever reason and gradually it becomes impossible to repay the debt. The debt builds up, the 0 per cent rates dry up and suddenly people are paying 17 per cent on £20,000 of debt.”

Penny’s advice is to steer well clear as the marginal benefit is heavily outweighed by the likely cost.

3. Time for a financial clear out?

Check any direct debits that are going out each month. Are they benefiting the supplier more than they benefit you? “You could find easy money from combing through your bank statements that could be used to pay down debt or save for the future,” said Mel Kenny, chartered financial planner at Radcliffe & Newlands

4. Risk tolerance for 2012

Consider what you want to get out of 2012 in terms of your investments.

“We are asking clients to think about their risk tolerance for 2012 as we think it will be another challenging 12 months,” said Mike Horseman of Cockburn Lucas Independent Financial Consulting. “We are asking what they’re prepared to lose as opposed to what they’re prepared to make in returns so they can position their assets accordingly. So it’s down to diversification and managing risks.”

5. Shelter existing investments in Individual Savings Account (Isa)

A Bed & Isa transaction allows you to sell your shares or funds and use the proceeds to open, or top up an Isa. You can then immediately buy the same shares or funds back, choose another investment or hold cash.

“Whether you buy your shares back or choose a different investment within an Isa all future gains will be sheltered from tax and there will be no further income tax,” says Danny Cox at Hargreaves Lansdown. “You can shelter up to £10,680 of investments in an Isa before midnight April 5 2012, or £21,360 for a couple.”

A Bed & Isa transaction involves selling the share or fund and then buying back in the tax shelter. This tax year you can sell shares and make a capital gain of up to £10,600 before capital gains tax applies, if this allowance is not used it is lost forever.

Selling shares at a loss will realise the capital loss which, once declared, you can carry forward and offset against any gains in the future, effectively increasing your future capital gains tax allowance.

6. Investment portfolio diversification

Experts say they are seeing a lot of client portfolios at the moment that just aren’t diversified enough. Jaskarn Pawar, a certified financial planner at Investor Profile, says his tip for the new year is to make sure your investments are well spread. “Don’t listen to anyone who tells you they know what’s going on because they most likely don’t. Spread it around in the right way and you’ll be fine.”

7. Reducing debt

For most individuals the biggest priority is to reduce any debt that they have accumulated. This is because most people are probably paying less per month for their mortgages than they did, say, five years ago.

“Take this as the opportunity to pay more and reduce the debt,” says Harry Katz, at Norwest Consultants. “If you are an ‘average’ person there’s not a lot of point saving and getting a return of 5 per cent which is taxed when you are paying interest of anything up to 20 per cent (if it’s a credit card) which comes out of taxed income.” For example, he says, if you make a return of 3 per cent on your cash you are taxed at 20 per cent leaving 2.4 per cent. If you pay out £5 in interest you have to earn £6.25 to cover it.

8. Life expectancy and protection

One thing a lot of people don’t tend to think about is life expectancy, but Jonathan Hill at Milford and Dormor Solicitors says they should. “How many people do you know have parents/relatives in their 70s, 80s or 90s being cared for/supported by a younger generation?” he says. “How much money do you need to fund your retirement and who will care for you?”

Similarly, he recommends that people think about taking out cover to protect them should they be unable to work through either accident or serious illness. “From close personal experience, critical illness cover can be a financial lifesaver,” he says.

9. Protection of assets

If you have assets worth over £325,000 you may have a liability to inheritance tax (IHT) after your death. This liability can be planned for and minimised if the correct advice is taken.

Sharon Pallagi, a solicitor at Clarion Solicitors, says people need to ask themselves whether their estate will receive a lump sum from insurance policies, death-in-service benefits or pension? “Planning for lump sum payments and directing them to the beneficiaries of a pilot trust can mean a saving of 40 per cent inheritance tax on the value of the payment,” she adds.

10. Take action

“My tip is simply to take action,” says Jason Witcombe at Evolve Financial Planning. “The more aspects of your finances that you can put on ‘autopilot’, the more time there is to focus on areas where timely analysis and decision-making are more likely to pay off.”

Setting up investments by direct debit can help. With the example of an Isa, if you put your full allowance – currently £10,680 – into “the markets” in one go, it is easy to tie yourself up in knots worrying about whether now is the right time or not.

“Instead, why not invest £890 per month to take away the market timing decision?” says Witcombe. “Then, when the Isa allowance goes up in April, the decision is a small one – do you increase your direct debit to the new maximum or not?”

Copyright The Financial Times Limited 2011.