The time for setting resolutions for a brand-new year is upon us. And if you’re wishing for a healthier and happier life in 2023, these finance-related resolutions could go a long way.
Let’s face it: for most of us 2022 has not been the kindest year on our wallets. With inflation rising to double digits for the first time in four decades and energy bills skyrocketing, we have all had to get used to a much higher cost of living. Wages have struggled to keep pace, mortgage rates have soared and volatility has reigned in both the equity and gilt markets.
Surely 2023 can only get better? Well, not necessarily. Having been told by one prime minister and chancellor in September that we will pay less tax and our energy bills will be capped for two years, come November the British population were being told quite the opposite by a new prime minister and chancellor. Following the Autumn Statement, we now face the highest tax burden since World War II and energy support will be phased down from April.
“We've had almost 14 years of austerity and now we're told we're going to have another two or three and to pay more tax through another recession,” says Graham Bentley, Chief Investment Officer at Avellemy. “Inflation will remain higher than people have been used to. It’s unlikely to stay at double figures but it could settle at 4% or 5% for the foreseeable future. For those used to low inflation and interest rates, it's a drastic change in conditions.”
At times such as these it’s more important than ever to have an astute, robust financial plan which will not only see you through the short-term challenges over the next couple of years but also stand you in good stead for the longer-term. So rather than setting the usual hollow promises for the New Year to purchase a gym membership or drink less wine, these finance-related resolutions could prove far more impactful for living the life you want.
Make use of your capital gains exemption and dividend allowance
The chancellor announced in his Autumn Statement that the capital gains tax annual exempt amount, which has already been frozen for several years, will reduce from £12,300 to £6,000 in April 2023 and then just 3,000 from April 2024. Meanwhile, the tax-free allowance for dividend income, which was cut from £5,000 to £2,000 in 2018, will be reduced once again to £1,000 in April 2023. Then in April 2024 it will go down to just £500.
This double whammy raid will see hundreds of thousands of people, including retirees who rely on their general investment accounts to top up their pensions, liable for higher tax. Therefore, it’s wise to maximise use of the current tax-free exemptions before they reduce.
“Not only are people going to pay more tax, but many are going to find themselves having to file tax returns with HMRC, which is an added burden or, if you don't feel equipped to do it yourself, an extra cost to get someone to do it for you,” says Gill Philpott, tax and trusts specialist at Ascot Lloyd. “Roll your gains or move the money over as much as you can into tax-free wrappers such as ISAs, for which you have a £20,000 annual allowance to use.”
Increase your pension contributions
The pensions triple lock survived the public spending cull in the Autumn Budget, which is no doubt welcome news for pensioners who will enjoy a double digit increase in their state pension next year. Those of a working age are likely less cheerful, given it’s reasonable to suspect that the triple lock will not survive until they reach their own retirement age, while the freeze on their pension lifetime allowance (£1,073,100) has been extended until 2028.
More positive for them, however, was the government’s decision to resist tinkering with tax relief on pension contributions. This very favourable tax relief is pegged at your income tax band: 20% for basic-rate taxpayers, 40% for higher rate and 45% for additional rate. The fact that millions of workers will be dragged into either the higher rate or additional rate income tax bands due to the personal allowance freeze until 2028 will come as a blow to those affected, but it does present an extra incentive to increase your pension contributions.
Start thinking about inheritance tax
Remarkably, the inheritance tax nil rate band of £325,000 hasn’t changed since 2009, though a £125,000 top-up for homeowners was introduced in 2017. Following the Autumn Statement, both of these bands will remain frozen until 2028. Traditionally viewed as a tax on the very wealthy, a combination of these prolonged freezes and property price growth will mean inheritance tax is something that millions of people will need to be thinking about.
Fortunately, there are plenty of ways to reduce the inheritance tax liability that falls onto the loved ones you leave your legacy to after you die, but they require careful planning. The sooner you begin this planning, the more options that’ll be available to you and your family, so a New Year's resolution to begin that conversation in 2023 would be highly worthwhile.
Get the best mortgage deal
A large majority of mortgage holders are on fixed-rate deals and over a quarter of these will end in 2023, according to the UK Mortgage Holders Consumer Research Report 2022. If you are one of these millions of people whose current mortgage deal will be maturing in 2023, you are sure to have been relieved to observe the steadying of mortgage rates following some anxious weeks after the doomed mini-Budget where markets were predicting the Bank of England would increase its interest rate to 6% or more next year.
Yet while average mortgage rates are now highly unlikely to reach the lofty heights that some experts were forecasting just a month ago, they are already much higher than they were this time last year and are likely to remain at this level for the foreseeable future. This means mortgage holders whose deal is maturing in 2023 must be braced for a hike in their monthly repayments, but they can limit the pain by enlisting a trusted, whole-of-market mortgage adviser to look beyond what your current lender is offering and find the best deal.
Reassess your investment strategy
Though 2022 has been sluggish for many markets and, in the midst of a recession, 2023 will be challenging too, through every economic period there are opportunities. A point comes in a recession when a market hits its bottom and, while it is unwise to try to time an investment, your Ascot Lloyd adviser will be able to identify investment opportunities, matched to your risk profile, which are more likely to grow in the coming few years.
“We've lived through periods of higher interest rates and inflation before and markets have done reasonably well,” says Graham Bentley, Chief Investment Officer at Avellemy. “There are going to be areas that will benefit. At the end of the day, people want to buy shares in companies that make good profits because they make quality goods that people want to buy. That stays the same whatever the background issues. Your investment adviser can help create a strategy to meet your goals.”
If you would like to speak with one of the trusted Independent Financial Advisers at Ascot Lloyd about getting your finances into the best shape possible in 2023, please request a call back.