Each January, millions of Britons make a new year’s resolution to become more prudent, less spendthrift and generally more fiscally aware. By late February, many are struggling to achieve these aims.
If you have previously failed to become the adept financial manager of your dreams, Times Money is here to help. We believe that information is power and the route to better money management. Here are the ten things you need to know to improve your finances in 2016.
1. The good news is that the tax allowance is changing. In 2016 you will be able to earn £1,000 from savings tax-free — or £500 if you are a higher-rate taxpayer, with earnings up to £150,000.
This change takes effect in April; from then banks and building societies will cease to deduct 20 per cent income tax from interest payments. Use this new perk and the Individual Savings Account (Isa) allowance of £15,240 and you can escape tax on all or most of your savings.
2. Are all your savings left in the care of a single bank because this is the least complicated approach? After all, it takes time and energy to be a “rate tart”, the saver who constantly chases the best returns.
If so, you will need to change your strategy if you have amassed more than £75,000. This is the new Financial Services Compensation Scheme (FSCS) maximum payout; any cash above this limit will not be covered.
If you have a joint account, you are protected up to £150,000. The previous ceiling on claims in the event of the collapse of an institution was £85,000.
3. The change in the FSCS limit should be the spur to check what rate your savings are earning — on a regular basis. It pays to be suspicious even of high street names that constantly claim that the customer “is at the heart of everything we do”, or something equally meaningless.
The FCA, the industry watchdog, compels banks to inform customers when the rate on their accounts drops by more than 0.25 of a percentage point. However, last month the rates on dozens of accounts were trimmed by 0.25 per cent, meaning that the banks were not forced to disclose the cuts. The culprits included Halifax and Lloyds.
This sneaky conduct means that you should not assume that, if the Bank of England orders a bank base-rate rise this year, it will bring improved returns for savers. It seems that the link between base-rate moves and returns for savers has been severed — perhaps permanently.
4. Despite the niggardly returns on some deposit accounts, Help to Buy Isas offer rates of up to 4 per cent — which is why opening one of these accounts if you are saving for a house of your own is considered a no-brainer. You can save up to £1,200 in the first month and £200 a month thereafter over a five-year period and the government will top it up by 25 per cent, up to a maximum of £3,000.
If you deposit £1,200 this month and £200 every month until Christmas, your bonus will be £850. If you are in your twenties, you should expect this year to be regularly advised of the benefits of Help to Buy Isas.
There are more than a dozen institutions that offer Help to Buy Isas — Halifax is leading the league with a rate of 4 per cent.
5. It is more worthwhile than ever this year to develop an acquaintance with the acronyms that the financial services industry holds so dear. Take, for example, SVR, which stands for Standard Variable Rate — the rate you pay when a discounted mortgage deal runs out.
If you have chosen to stay on this rate, assuming that it represents reasonable value, it may make sense to investigate the possibility of switching to another deal with your existing lender or a competitor. Why go to the trouble? The answer is that the savings can be considerable.
If you pay an SVR of 4.28 per cent on a 20-year mortgage of £350,000, your repayment will be about £2,275 a month. If you were able to switch to a two-year fixed-rate deal, the rate would fall to 2.56 per cent (the average for this type of deal), reducing your repayments to £1,865, a saving of £410 a month, or £4,920 a year. That’s not a bad pay rise.
6. In 2016, mortgage lenders will be doing their utmost to retain customers, or so it is claimed. Some may even alert you to the availability of competitive deals several months before the expiry of your present fixed offer. Metro Bank, for example, has a raft of customer-retention strategies.
7. Switching to a deal with your existing lender should mean that you avoid some of the strictures of the MMR, another key acronym.
The MMR (Mortgage Market Review) obliges lenders to check whether you can meet your repayments now and in the event of higher interest rates. This involves lots of questions about your pets, your car, your supermarket costs and hairdressing bills — a bit of an obsession with some lenders. School fees can prove a particular sticking point, but mortgage brokers will be familiar with the banks that do not make a problem of this outgoing.
8. If your lender seems reluctant to grant you its best-buy deal and you are minded to go elsewhere, take steps to ensure you can pass the affordability test. Mortgage brokers suggest obtaining a copy of your credit-reference file (a dossier of all your finances, including all borrowings) before you apply, to ensure that your finances appear squeaky clean and that you have a good credit score.
You can obtain your file free at noddle.co.uk. Even if are not remortgaging, it is a good idea to get hold of a copy of your file. It may make revelatory reading.
9. The bad news in 2016, for high earners, is that certain pension tax reliefs will be cut from April. The maximum annual allowance of £40,000 (the total you can contribute each year to a pension scheme) will be reduced by £1 for every £2 of income over £150,000, meaning that it falls to £10,000 for a person with earnings of £210,000-plus.
At the same time, the lifetime allowance (the amount you can build up in a pension pot) will decrease from £1.25 million to £1 million. The message is: make the most of all the reliefs while you can, especially because higher-rate tax relief on contributions is rumoured to be under threat. We will learn more about the chancellor’s plan in the spring budget. Don’t be surprised if he introduces a flat-rate relief of 33 per cent, for example.
10. Whatever the size of your salary, find out what you can expect to receive in old age from the state at gov.uk/state-pensionstatement. If you qualify to collect your state pension from April this year, you will receive the new single-tier state pension of £155.65 a week. The term “single-tier” is somewhat misleading, however, because many people, including thousands of women, will not be eligible for the full amount. Expect there to be more rumpus about this in the spring.
Things could get awkward for the government.
The real costs
Wondering how you will keep to that resolution to spend less in 2016? Inveterate penny-pinchers — individuals who tend to prefer the description “financially prudent” — often calculate how much they need to earn before tax in order to make a purchase or pay a bill. The figures can be sobering. For example, if you are tempted by a new £2,000 Apple MacBook, you should stop to consider the real cost to you of this gadget. This is: £2,500 before tax if you are a basic-rate taxpayer, or £3,333 if you are a higher-rate taxpayer (that is, with earnings above £42,700). This is an excellent way to curb discretionary spending.
The calculations work like this: if you are a higher-rate taxpayer, you should divide the amount of the item by 60 and then multiply by 100 to give the “grossed-up” or before tax figure. If you are a basic-rate taxpayer, divide by 80 and multiply by 100. Once you have learned to do this, it can become addictive. In a café near a school gate, I eavesdropped on a group of parents discussing the finances of a fellow parent with three children at this £6,000-a -term establishment. One of the group used the calculator on his mobile phone to work out that before tax earnings of £90,000 were required to meet the school-bill commitment. “Respect,” he muttered.