Spring is well and truly upon us, its arrival marks the perfect time to tackle a financial spring clean and make lasting changes to your future. With plans in place to ease COVID-19 restrictions and a warmer climate on the horizon, you could be tempted to spend your hard-earned funds in a post-lockdown world.
For now, while we are still spending more time at home, why not dedicate some time to get your finances in order? If you were lucky enough to not be financially impacted by the pandemic, you could still benefit from a spring spruce of your funds.
Creating a plan can set you up for long term financial success and prepare you for the unexpected. We have compiled a list with our top tips to help you get started.
Could you save money by remortgaging?
While most homebuyers will be familiar with the term ‘remortgage’, many might not be fully aware of what the process entails or whether it is a viable option for them. Put simply, a remortgage is where you take out a new mortgage on a property you already own – to replace your existing mortgage or borrow money against your property.
The most common mortgage deals are fixed-rates lasting two to five years that allow you to repay the same amount on a monthly basis, however, once the introductory rate comes to an end (and you don’t remortgage), you will automatically be enrolled onto your lender’s Standard Variable Rate (SVR).
How could I save?
It is worth finding out when your mortgage is due to end and allowing yourself enough time to shop around for the best offers available on the market at that time, so that you can save.
In addition to saving money, remortgaging can help you unlock the money you have accumulated over the years by releasing equity. The Stamp Duty Holiday saw a rise in house prices throughout 2020 and with the latest announcement by Chancellor Rishi Sunak of its extension to June 2021, we can expect this trend to continue for the first half of the year.
Raise additional funds
If you have been working on your home improvement plans during lockdown, remortgaging can give you access to additional funds to green-light your home improvement project. Whether you want to reduce your monthly repayments, raise funds for a home improvement, or a well-earned holiday, now is the perfect time to consider your options.
Time to get protected
Mortgage and protection go hand in hand, yet a 2019 study carried out by insurance company Aviva revealed that just 58% of mortgage holders have life insurance, 28% critical illness cover and 12% income protection insurance.
Why is it important to have protection options in place?
Quite simply, this protects you and your family if you are unable to work or the unexpected happens. If you haven’t already taken out a protection policy and you are a homeowner, it might be time to consider your options.
What are my options?
Income protection insurance is a policy designed to pay you a regular tax-free income to support you if you are unable to work due to illness. This is a particularly important cover for contractors as you won’t expect to get paid if you are off work due to accident or injury.
Critical Illness Insurance pays out a lump sum if you are diagnosed with a critical illness. There are no limitations on what you choose to use this money for which means you can put it towards medical costs or pay off your mortgage.
Relevant Life Cover is set up through your limited company and something you should consider if your family depends on your income. This cover is a tax-efficient way for a contractor to provide for their family in the event of death or diagnosis of a terminal illness.
How much will this cost?
There are no standard quotes for these covers as costs are based on your individual circumstances, however, as an example, the average monthly premium for a life insurance policy ranges from £11.01-£32.34*. It is good to establish whether this serves as a priority for you –swapping non-essentials throughout the month such as dining out, clothes or gadgets means you don’t need to spend more from your monthly pay.
Start a pension pot
Your pension contributions are essentially a long-term savings plan you can access when you retire with tax relief. Although it is often delayed as many think there is plenty of time to think about it, it is actually never too early to start building it up if you want to maintain your lifestyle during retirement.
Why should I consider this now?
With the new legislative changes to IR35, effective from the 6th April, coinciding with this tax year end, contractors could potentially boost their pensions. Companies will be required to assess whether or not their contractors are deemed employees or whether they can continue as contractors.
A higher tax bill is not your only possibility with the IR35 reforms. Regardless of how you’re currently working as a contractor, you can make personal pension contributions to reduce your personal tax liability. This means you can avoid some of your income being taxed while diverting funds into your pension pot for retirement. It’s a win-win.
However, if you are a contractor working under an umbrella company it is likely that as your employer, they will offer you the option to make contributions into an existing pension scheme or set one up for you. This can vary by umbrella company, but these contributions are likely to reduce your gross pay and your PAYE and National Insurance, making it very tax efficient. However, it is advisable to establish whether this is the right plan for your future. Studies indicate that you could boost your pension wealth by £30,991 by receiving financial advice.
Put your money to work
Ever heard of the term “make your money work for you”? The pandemic has undoubtedly changed the world since its outbreak including the way we work, learn and interact but it has also left thousands unemployed and forced to dip into their savings earlier than anticipated. It is natural to be thinking about re-loading your savings account or pursuing an investment opportunity to help you manage your finances long term.
The value of your investment and any income you receive will go down as well as up and you could get back less than what you originally invested.
To save or to invest?
Today, we are presented with an array of savings accounts and investment opportunities to suit every individual which can be overwhelming if you are a newcomer.
If at the end of the tax year, you find yourself with unused tax allowance, this could be an indicator that you are spending more money on tax which can be put to good use in a savings account.
The government states that each adult is entitled to a yearly ISA allowance of £20,000 of tax-free saving, however, you can only fund one ISA a year so researching is advisable to ensure you find the best account to suit your goals – whether they are short, medium or long term.
Cash ISAs work similarly to traditional savings accounts, except you do not pay tax on the interest you earn.
Stocks and shares ISAs might be a viable option for you if you are looking for an investment opportunity in stock market shares within a tax efficient environment. You are also not required to pay UK tax on any returns you make and can be tailored to your investment risk appetite.
Lifetime ISAs (LISAs) are the newest type of ISAs and come with a government bonus worth 25% of what you pay in. The maximum amount you can pay in is £4,000 which, along with your bonus can bring your total up to £5,000.
Is now the right time for property investment?
If you have been thinking about stepping onto the property ladder, this might be the right time for you with the Chancellor’s recent announcement of the Stamp Duty Holiday extension up to June.
As a homebuyer, you can save between £12,500 and £15,000 on a property purchase of up to £500,000. So your savings can either be added towards the equity in your property or transferred into your ISA account for a rainy day. If you want to take advantage of this though, you should find out how much you can borrow as a contractor before house hunting and complete by the end of June.
*Prices from Confused.com data, they are dependent upon age brackets and are averaged across sales of all policy types and lengths for cover of less than or equal to £350,000 in 2020. This contains 84% of Confused.com customers and is correct as of October 2020.
Our partner CMME specialises in providing mortgage advice for independent professionals, with access to some of the most competitive rates on the market. So however you choose to work, CMME will fight your corner and ensure the right mortgage deal is available to you.
CMME’s sister company Contractor Wealth can give bespoke financial advice and support to self-employed professionals. When you are ready to make the most of your money – Speak to Contractor Wealth on 01420 592 667 or arrange a callback.
Your property may be repossessed if you do not keep up repayments on your mortgage.