The importance of marginal gains

The first step to successful planning is nailing down your future goals and objectives. Like sports professionals, it’s important to dream big. Does this involve taking early retirement? Or do you want to leave a substantial legacy? Think about what you want your future to look like over the longer term.

Footballer Jude Bellingham probably always aimed to be England’s star player in a major tournament but he did not achieve this overnight and without taking a number of small steps to get there. The same goes for your finances. Your financial planner will help you to cement your money goals and establish a plan. In executing this plan, that you regularly review, you’ll take small incremental steps to achieve your aims.

There are several small actions that could improve your long-term financial performance.

Use your ISA allowance

Several clients come to us believing that there is little value in using their annual ISA allowance, which currently stands at £20,000. The main benefit of ISAs is their tax-efficiency, which overall will lead to far less tax leakages within your portfolio. ISAs are exempt from:

• Income tax
• Dividend tax
• Capital gains tax

Additionally, it’s important to bear in mind that making regular contributions to the value of your ISA annual allowance adds up. In fact, it’s possible to become an ISA millionaire. Having over £1 million in a portfolio that you don’t pay tax on is valuable to anyone.

That being said, it is important to remember that an ISA is a form of investment and you could get back less than you pay in.

Maximise your pension

The current pension rules are designed to incentivise people to provide for their retirement. Since April 2023, the tax advantages of paying into a pension have improved following the abolition of the pension lifetime allowance regime and increase in the pension annual allowance. The pension annual allowance is the amount that you can pay into a pension and enjoy tax relief. This is currently set at £60,000 or 100% of your relevant UK earnings (whichever figure is lower).

It is this generosity of tax incentives that has led successive Chancellors to limit benefits for higher earners, which in turn results in layered and complex pension rules.

When the UK goes to the polls on 4 July 2024, it looks likely that we will have a Labour government for the first time since 2010. At present, their view on the tax advantages of pensions is unclear. Moving forward, we suspect that a comprehensive review will be announced. Whatever the outcome, we still expect pensions to remain the most attractive and tax-efficient method of long-term saving. With your financial planner’s help, making use of your pension allowances could help you to achieve your financial goals.

Carefully think about how much cash you are holding

Keeping enough money aside as an emergency fund is essential but checking that you do not hold too much in cash is equally as important. It’s a common misconception that cash is risk-free. The biggest risk to cash is inflation, which often outstrips its spending power. Essentially, if you are holding too much money in cash, it can erode in real terms.

For example, you have £100,000 in a current account that is paying no interest. Inflation stays at a relatively benign rate of 3% for five years. Over that period, you would lose £14,000 in real terms.

Your financial planner will work with you to calculate how much money you need to set aside as a reserve and how much you can afford to invest for the future to fund your plans.

Look at your total income

Tax is the single biggest charge on growing your wealth. On income between £100,000 and £125,140, an effective rate of 60% income tax becomes chargeable. This can eat away at your portfolio and impact your overall financial plan.

Interest received on cash and investments has resulted in many people unwittingly slipping into this invidious band. It is possible to reduce your income, and therefore your marginal rate of income tax, by making further pension contributions or a charitable donation using gift aid.

Consider your retirement income

The main financial objective in retirement for many people is to withdraw funds from their savings at the lowest possible rate of tax.

This not only involves considering your tax position but also the impact on future generations, as pensions on death are outside of your estate for inheritance tax purposes. The reduction in capital gains tax allowances to £3,000 and dividend allowance to £500 in recent years makes this a bigger challenge. Building up portfolios in a myriad of investment structures outlined by your financial planner can help you when executing your goals.

Further marginal gains - how we can contribute to your long-term wealth growth

Although athletes have a coach to help them train, the onus to perform ultimately lies on the athlete themselves.

As a client of Evelyn Partners, while your financial planner acts as a financial 'coach' too, they carry out much of the work for you. They regularly review your personal and financial circumstances and make the necessary minor changes that could lead to significant improvements over the next few decades. The substantial work they carry out behind the scenes is all part of our ongoing service in your financial journey. If you would like to know more, speak to your usual Evelyn Partners contact.