The end of another tax year has just passed and with this came the usual last minute pension and ISA contributions. There are reasons as to why these contributions are left so late, these include individuals not knowing their earnings for pension contributions (if you have income over £110,000 this may impact on the amount you can contribute) and cash flow.
Whilst ‘better late than never’ is sometimes the best route to take, and as stated there can be reasons for this, looking to invest as early as possible in the new tax year has its advantages.
If the funds are in a taxed environment the sooner they are moved to an ISA the better, thus benefitting from tax free growth early in the tax year as opposed to later on. In addition, if you know you are going to make a pension contribution why not split it? Make a smaller contribution at the beginning of the year and then top up later on if relevant. This also spreads the risk in terms of market movements and investing at the right time.
Another consideration is the possible taxation on the encashment of the funds that you may be looking to move. If a fund has had a whole extra tax year to grow this will increase the gain and therefore any potential tax liability. Whilst any growth is positive if this is in a tax free environment this is even better!
Why not consider a making a regular contribution? Lump sum investments seem to me to be the main contribution type but regular contributions help mitigate stock market movement and would apply any investments evenly across the tax year.
The above is all an important part of financial planning and would be included within any financial review we would undertake. In terms of when funds need to be accessed, this is where cash flow planning can help. By modelling your income, expenditure, investments and savings we are able to estimate when funds will need to be accessed and plan accordingly.
In my view any investments which have a form of equity exposure should not be made if you wish to access these funds within the next 2 or 3 years, this would not provide sufficient recovery time if markets are in the decline. This would be a short term investment and it is possible cash would be a more viable alternative. A sufficient cash reserve should be maintained to cover any unexpected expenses and also to possibly take an income from when markets are down. Cash flow planning will help plan for these circumstances and assist in deciding when certain funds should be accessed.
In summary, there are reasons for things to be left until the last minute but why not look to avoid this? A good financial plan could mean you will potentially benefit from greater tax free growth and ensures you are invested in a risk profile that is suitable whilst taking in to account your cash reserves. Cash flow planning is core to how we build a financial plan, please contact us should you wish to find out more.