The new tax year – WAIT come back! Your quick lowdown

Iona Bain

IT’S THE NEW TAX YEAR, WOO HOO, LET’S CELEBRATE, WHAT AN AMAZING OPPORTUNITY TO DO LOTS OF MAGICAL WONDERFUL COOL AWESOME THINGS WITH OUR MONEY!

Said no-one ever.

The financial media loves to find a hook, and when the so-called new tax year rolls around on 6 April, they want to pretend that we’re all as interested in it as they are.

In truth (and I think I speak for all except accountants, financial advisers and Martin Lewis here)…we couldn’t really give a monkeys.

Sure, the new tax year technically gives us a new tax-free allowance to work with (up to 20 grand). But is there any young person who has 20 grand to put into savings each year (who doesn’t wear red chinos and holiday in Mustique, that is?)

Furthermore, the raising of the personal tax-free allowance to a pretty generous £11,500 arguably makes the Isa null and void for many young savers. So why the hell should we care about this?

Well, simply put, it’s a new opportunity to remind yourself to a) save if you aren’t doing so already and b) refine your savings/investments strategy to ensure that you’ve got all bases covered.

What do I mean by that? Well, you’ve got your crisis pot – three months of wages should do nicely (obviously not saved up all in one go! Give yourself a while to build it up!)

This is the money you can produce at short notice from an emergency (read instant access) savings account in case your boiler goes kaput, so you can avoid going cap in hand to a rip-off payday lender or your bank, which will present a credit card and/or overdraft like they’re doing YOU a favour when in truth, it’s very much the other way round.

Then there are the savings for more short-term japes, be it large expenses like holidays, travelling at Christmas or a new sound system.

Beyond that…saving ain’t going to get you much in the way of real, tangible returns in the long run. That’s because inflation is squeezing the real value of our money, and since interest rates remain dismal, you’re actually losing your dough in the long run.

Here on the Young Money Blog, we’ve been talking in greater depth about investments as a way to amplify your cash over a longer period of time, but this should only be considered if you have money (however small) that you can afford to lock up and possibly even lose if markets don’t go your way. History shows that stocks do better than shares in the long run, but there are no guarantees with investing.

A good halfway option might be peer-to-peer lending, but that’s not without its risks either, and you would have to keep that money *tight* on a platform for at least a few years before you saw any return.

So if you are already busting a gut to save whatever you can beyond your emergency pot – 10 per cent is better than nothin’ – than your best bet is a solid longer term savings product. Which, ironically, is very unlikely to be a tax-efficient Isa at this moment in time.

D’OH!

So okay, there ain’t much to celebrate when it comes to the so-called “Happy New Financial Year” (yes, I have seen it described as thus by other bloggers. No, I don’t think it works either.)

But there is a silver lining. Saving cash is still necessary to save your ass when it comes to emergencies and avoiding expensive credit. Putting anything beyond basic savings into cash accounts over the long-term is not the worse idea in the world, and certainly better than squandering it on needless tat, but it all depends on your desire for risk and whether you can say tatty-bye to that cash for a while.

A celebratory party is also entirely optional, but any excuse for cake, right?

So here are the saving options available to you.

Regular Savings

Depending on who you bank with, you may be offered access to a regular savings account, with a high rate of interest. You will have to pay in a regular monthly amount, but that’s not a bad idea anyway. The catch is that it will only last 12 months, then you will be switched into a low-interest account. That’s the time to have another look at your options. You’ve got to move it, move it, you’ve got to…MOVE IT!

Quick Access

For money you want to work for you, but still be available for unexpected needs, an ‘easy access’ account is essential. A Cash Isa (Individual Savings Account ) will ensure you are paid a gross, tax-free interest rate. That means you won’t have to deal with the taxman in order to claim the new Personal Savings Allowance of £1000 of tax-free interest a year.  If possible, choose an Isa where you are allowed to withdraw and replace amounts without it affecting your overall annual Isa savings limit (currently £15,240 per annum). Many banks will not let you do this (grrrr).

Medium-Term

For cash you want to leave untouched for at least a year, there are savings bonds, or lending bonds. Savings bonds from one up to five years should pay more than easy access accounts, and are available as tax-free Isa bonds. Lending bonds are part of the alternative finance revolution, where you lend your money to an individual or a business for a fixed period, via a ‘peer-to-peer’ online platform such as Zopa, Ratesetter, Funding Circle or Landbay. They will pay a higher rate than savings bonds, and you are not protected by the Financial Services Compensation Scheme. But the bigger platforms all have sound risk policies and their own safety net funds. You can use your Isa allowance for this option too, through the Innovative Finance Isa, though not all platforms yet have final approval to offer it.

Homebuying

If you are saving for a deposit, the the Lifetime Isa would be a no-brainer EXCEPT that only the stocks and shares version of this product is currently available, and I would argue that S&S (no, not S&M!) probably isn’t suitable for those saving up for a place (you want to get on the property ladder within the next five – ten years I imagine, and you probably wouldn’t be best pleased if markets plummeted just as you needed the cash, right?) Skipton Building Society will offer a cash version from June, and others are probably going to follow. For every £4 you save the government will actually give you £1. You have to use the cash for a deposit (it goes direct to a solicitor) and there is a contribution limit of £4000 a year up the age of 40.

Longer-term

If you know you can afford to put a little aside for the longer-term at least five years and preferably more, then a Stocks and Shares Isa could be the answer.  You can find a menu of ready-picked investment funds, with differing degrees of risk, on do-it-yourself websites where you do not need to take any advice.  Make sure you can wrap the fund inside an Isa.  The contribution limit is the same as the Cash Isa (20 grand) and you can mix and match with cash up to this annual limit, but bear in mind if you use your Lifetime Isa allowance, that will form part of your overall Isa allowance. The longer you are invested, the better placed you are to ride the ups and downs in the market. So if you are confident of, say, a 10-year horizon, don’t be over-cautious, as higher risk can bring a significantly higher reward. He (or she) who dares, wins…well, it’s not guaranteed actually, because naturally higher risk can bring higher losses and past performance is no guarantee of future returns. Keep repeating those mantras!

DIY long-term

Many investment trust companies offer regular savings plans, enabling you to drip feed your cash into the stock market. Some have one investment trust, others offer a choice, but the advantage is they are well-spread investments, with low costs, and they are typically focused on global growth which ought to bring long-term returns. You should be able to wrap one of these in an Isa too.

Another helpful way to save money is to become home-savvy! As the cost of living rises while our salaries don’t budge an inch, getting switched-on about the savings that can be made in the home is a must. Utilties, broadband, groceries…all are ripe for a Spring review, and why don’t you pop the savings made into your account of choice? No? You want to blow it on a life-size statue of Nicolas Cage? Then I cannot help you, my friend.

Pension

If you are in full-time work, you will be automatically enrolled into a pension scheme by your employer. It makes sense not to opt out of this, as you will always benefit from an employer contribution. It won’t be much at first, but it does rise over time. The important thing to know is that it can only be one element of your long-term saving, as the amounts being put away are not enough to create a big enough fund for your later life. If your firm still runs an above-average scheme, with more generous employer contributions and an option for you to pay in above the minimum, it could be worthwhile to do so.

Top takeaway

It’s often hard to save anything out of your pay-check. So if you have, you’ve done well and you’ll want to be able to maximise that saving. The next step is to decide what you want from your extra cash, whether it be a deposit for your first home or saving for your retirement. Once you’ve decided, find the best place to save that cash where it will garner maximum interest while still giving you the financial flexibility you need. Now that’s something to toast!

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