5 scary financial mistakes you could be making and how to avoid them

Category: Planning

5 scary financial mistakes you could be making and how to avoid them

It’s that time of the year when the nights are getting darker and spooky films start to appear on the TV. Pumpkins are carved, apples are bobbed for, and trick or treating abounds! While the sight of ghosts, vampires, and more could frighten you, tackling your finances can be just as scary, especially if you’re making one of these five financial mistakes. Read on for more about financial mistakes and how to avoid them.

3 carved Halloween pumpkins against a dark background, illustrating the scary financial mistakes one could be making


1. Failing to claim all the pension tax relief you’re entitled to

Tax relief is one of the reasons why saving into a pension makes financial sense for many. It means the government adds some of the tax you’ve paid into your pension pot to provide a welcome boost. But are you getting everything you’re entitled to?

Tax relief is usually paid at your nominal Income Tax rate. While your pension provider will usually claim tax relief for you, this isn’t always the case. If you’re a higher- or additional-rate taxpayer, you’ll also need to complete a self-assessment tax form to receive your full entitlement. It can seem like an extra chore, but it’s well worth it.

Take some time to review what’s going into your pension. Most workers should have three sums going into their pension each month: their own contribution, their employer’s contribution, and tax relief.


2. Paying tax on your savings when you’ve not used your ISA subscription

The Personal Savings Allowance means most workers don’t have to pay tax on the interest they earn on savings. However, if you have significant sums saved in cash or are an additional- or higher-rate taxpayer, you may pay tax on interest.

The Personal Savings Allowance means basic-rate taxpayers can earn up to £1,000 in interest each tax year before tax is due. This falls to £500 if you’re a higher-rate taxpayer, and additional-rate taxpayers don’t benefit from the allowance at all. If you exceed the allowance, you may need to pay additional Income Tax.

In some cases, paying tax is unavoidable but if you’re not making full use of your ISA annual subscription, you could be paying more than you need to.

For the 2021/22 tax year, you can add up to £20,000 to an ISA. You don’t pay tax on interest earned if you’re money is an ISA, helping it to go further.


3. Missing out on allowances that could reduce your tax bill

Are you making full use of allowances that could cut your tax bill? The rules around allowances can be complex and may depend on your situation so it can be difficult to understand which ones apply to you.

The Marriage Allowance is one example of this. It allows spouses and civil partners to transfer some of their unused Personal Allowance, the amount of income you can earn tax-free, to their partner. For the 2021/22 tax year, the Personal Allowance is £12,570 and you can transfer up to £1,260 to a partner. It can reduce your tax bill by up to £252.

Despite this, it’s likely that many couples are missing out on the tax break. If you’ve overlooked this, good news! You can backdate this transfer by up to four years.

If you’d like to discuss what allowances you can make use of to reduce your tax bill, please contact us.


4. Avoiding investment risk by holding your money in cash

As well as ensuring you’re not paying unnecessary tax on interest earned on cash savings, it’s important to ask if cash is the right choice for you.

Holding all your money in a savings account, rather than investing, can seem like the “safe” option. In reality, your money is likely to be losing value in real terms. The interest rate you earn on savings is likely to be lower than the rate of inflation. This means your spending power will decrease over time.

While all investments carry some risk, and the value can rise as well as fall, it can help you grow your wealth over the long term. If you’re saving for a goal that is more than five years away, it’s worth considering if investing could be the right option for you. And cash can still be a feature of investing! It can provide important liquidity and dampening of volatility to an investment portfolio.


5. Putting off estate and Inheritance Tax planning

How carefully have you considered what you’d like to happen to your assets when you pass away? It’s something that many people put off. Just half of adults in the UK have written a will, according to Will Aid.

Without an estate plan in place, it can be difficult to understand what you’ll pass on to loved ones and these wishes may not be carried out without a will. An estate plan can also give you confidence. It can, for example, help you understand how you’d pay for care if you need support in the future.

If your estate could be liable for Inheritance Tax (IHT), taking a proactive approach is also important. There are often things you can do to reduce an IHT bill, but you must take these steps before you pass away. If you’re worried about IHT, please contact us.

Even a small financial mistake or missed opportunity could have a significant impact on your finances in the long run. Effective financial planning that considers the long term can help you get the most out of your money. Please contact us to talk to one of our team.


Our Thoughts

We hope that reading about these financial mistakes has been the equivalent of a Jack O’Lantern in the evening dusk…illuminating! If you are an existing client of ours, we are confident that we are already helping you to avoid these financial mistakes. However, we are always here to discuss any of your concerns, and, if there is somebody you feel could benefit from our assistance, please feel free to share our contact details.


Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate will writing.

Chambers Smith is authorised and regulated by the Financial Conduct Authority. You can find Chambers Smith on the FCA register by clicking here. Under reference 488279. Registered in England & Wales. Company number: 06674780. Registered Office: 2 Cheapside, Derby, England, DE1 1BR.

The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details can be found by clicking here.

The guidance and/or advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK. The FCA does not regulate tax or estate planning.