April 2018: 2 Big Updates in Personal Finance

Hello everyone, and welcome to the first audio on Wee Scot Finance; I would love to get your thoughts and feedback on this recording. I'm also on the lookout for good audio software, so if you have any feedback on that, please leave comments below. 

I appreciate most of you are super busy and don't have time to read the blogs so I thought, for the most important content, I would create an audio which you can listen to on the go.  Enjoy.

Transcript

So without further ado, it's April, and it's sunny. Hurrah. Welcome back to my life, Pimms. 

This isn't a super long post, but there are two big finance changes in April I want you all to be aware of. 

Firstly, it's the new tax year. I know what you're thinking. Yawn, tax, please stop talking. I get that...I really do but please bear with me. The tax year starts every year on the 6th of April, and runs until the 5th of April in the following year. We are now in tax year 2018 to 2019, which lasts from the 6th of April 2018 to the 5th of April 2019. 

With this new tax year comes a reset on your ISA allowance.

What does this mean?

Every tax year since 1999, the government provides a tax free saving scheme called an ISA (individual savings account). This allows you to earn interest on your savings without them being subject to tax. There are two types of ISAs, being:

  • Cash ISAs, and
  • Stocks and Shares ISAs

Cash ISAs allow you to put cash in a savings account, denominated by a financial institution as an ISA. The interest you earn on this ISA is not subject to tax. I.e it's all yours. 

Cash ISAs can either be easy access, where you can put the money in and withdraw it at any point, or fixed term ISAs, where you have to put the money in for a specified period of time without being able to access it. Typically if you access it you will incur a penalty. 

As I mentioned in my post in November when the Bank of England announced increased interest rates, interest rates have mostly only increased on borrowings (i.e your mortgage, credit card or car loan). They have generally not increased on savings accounts yet. The best interest rate I could find for an easy access ISA was 1.3% for a Nationwide account, which is pitiful. The interest rates on fixed term ISAs are higher as you are tying your money up for longer, however, they are still not great. 

Alternatively, or in conjunction with a cash ISA, there are stocks and shares ISA. This involves purchasing shares in companies; the gains you make on the shares are tax free. There are two things to bear in mind with stocks and shares:

  • Firstly,
    • you can either pick individual stocks and shares, or
    • you can pick a portfolio of shares

I've covered it in my investments basics blog, but a diversified portfolio mitigates risk as you have a number of shares held, whereas picking individual stocks and shares has more risk associated as you are not only biased in your choices (for example you may pick companies you like versus companies doing well) but you are picking specific shares and that company may perform badly. 

  • Secondly, you need to understand the fees associated with the platform you go through. You can pick the shares yourself, through your current, or a new financial institution, such as a bank or you can go through a broker. In both cases you need to know how much the fees are associated with the stocks and shares. You can get this information on Martin's Money Saving Expert which is a fantastic financial comparison site. 

You should ideally leave stocks and shares over a long period of time as that tends to show the best upward trends. 

This covers ISAs. Yes, £20,000 is a lot of money and you may be wondering how on earth anyone saves £20,000 a year. Don't worry; just save as much as you can across ISAs, emergency cash funds, pensions, stocks and anything else that floats your boat. 

Next up we have pensions. Great....another stimulating conversation. 

Lets cast our attention to auto-enrolment. I discussed it here on my blog on workplace pensions but as a quick recap:

  • auto-enrolment applies to workplace pensions rather than person and private pensions
  • it was introduced by the government who:
    • are concerned we are not saving enough for the future, and
    • do not have enough money to afford our generation retiring 
  • the pension scheme is chosen by your employer. They have to put a % of your salary into your pension, and you have to put a certain % of your salary into your pension. 

The big April news is that this % the employer contributes, and the % you contribute went up in April.

Before April 2018, your employer had to contribute 1%, and you had to contribute 1% (a total of 2% of your salary is being contributed). As of April, your employer has to contribute 2% and you have to contribute 3% (a total of 5% is being contributed). 

The wonderful thing, however, about pensions is that; 

  1. They are tax free; you pay the contribution BEFORE your salary is taxed. This means that your salary is lowered by the contribution and then taxed, rather than being taxed, and then contributed. 
  2. Your employer has to pay in to the scheme, which is then free money to you. 

Hurrah on both fronts.

Not everyone can afford this, however. Don't worry, you can always "opt out", where you choose not to contribute your money into the pension scheme, and your employer does not have to contribute either. Pensions are great tools for tax efficient savings for the future. Your employer will make the necessary changes; you don't have to do anything, unless you want to opt out, in which case your employer should provide you with instructions on how to do so. 

So, there have been two big changes for April; if you have any questions on either subject matter, please leave me a comment below or email me at weescotfinance@gmail.com

Finally, I am not providing financial advice in this blog. If you need financial advice, please speak to a financial advisor. 

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