Personally I have been using Microsoft Money for over a decade to manage my personal finances, which, together with my personal spreadsheets which have developed over the years, seem to serve me pretty well!

Unfortunately it would appear that the MS Money software has been discontinued in the UK but the version I used is still available from Amazon.

It would however appear that these services are now moving online – which is a natural progression since most of our personal financial activity seems to occur online these days – online banking, managing our ISA/Unit Trust/Sipp portfolios as well as managing our credit cards and various other financial commitments.

Anyway – be sure to check out Rob’s article – the first in a series.

It’s simple really.

Most people have a limited income yet infinite needs and wants. They earn a fixed amount, or the household has a fixed monthly income, they spend, spend, spend first and save what is left over. I will be the first to admit that I used to “waste” money each and every month – bottled water (!), pre-packed sandwiches, not shopping around for more competitive insurance/utilities etc….

Result = there is rarely anything left over at the end of each month – “which runs out first, the month or the pay packet?”

It has been quoted many times (such as in The Richest Man in Babylon – a great book and worth the £3.46 price tag!) that those who build lasting wealth are those who SAVE first and then SPEND what is left.

By taking something off the top of each pay packet you can set this aside, firstly to build a “rainy day fund”, and then to consider medium and long-term investments.

It will be difficult at first as the decrease in monthly income can be noticeable, but over time, your spending patterns will be altered to match your new “lower” income level and quite quickly you will notice the increase in your personal wealth.

How Noticeable Will This Be?

If you set aside just £50 per month, and invest it to receive a net return of 5% per annum (which should be achievable) over a ten year period this will grow to £7,764.

If you could achieve 7% net per annum, this would amount to £8,654; which if continued for a further 10 years would £26,046.

The more you save, the quicker it will grow.

My Experience

I am fortunate in that I earn a decent income and am able to set aside £700 per month. If I continue this level of investment, I am currently on course to achieve full financial independence by the time I am 50.

It’s hard at first, but after a while your lifestyle adapts to the “pay cut” you choose – I find I now plan purchases ahead – I got rid of my credit cards – it’s addictive (although I do still enjoy life to the maximum – I just don’t waste money any longer!).

Where Should You Start?

Simple really – just keep a track of what/where your money goes on a regular basis for the next month or so – then analyse and be strict with yourself -

• Do I really need to spend money on this item?
• Is there a more cost-effective alternative?
• What changes can I make in my lifestyle now to build the future I want rather than the future I currently have in-store?

Let me know you’re successes in “taking a pay cut” below.

Here’s a quick rundown of the main areas for consideration – hopefully this list may jog your memory or form the basis for you to have a meaningful conversation with your financial adviser, solicitor or accountant!

ISA’s

Under current rules, over 50′s can invest up to £10,200 in a Stocks and Shares ISA before 5th April 2010. Of this £10,200, up to £5,100 can be invested in a Cash ISA.

Under 50′s are currently limited to £7,200 in a Stocks and Shares ISA, of which up to £3,600 can be placed in a Cash ISA.

More articles on ISA’s

Pensions – Retiring Early

The minimum age for taking benefits from a personal pension plan (PPP) increases to 55 from 6th April 2010. Until then it is possible to take your personal pension plan from age 50. So if you’re in that window of people who are aged over 50 but under 54 before the end of the tax year and you wish to take your pension benefits early you need to talk to your financial adviser or pension provider pretty smartish!!

I wrote a more in depth article on this topic here – change in retirement age from 50 to 55 for pensions.

Pension Contributions

Generally everyone can contribute up to 100% of salary/income to a personal pension plan, or up to £3,600 gross if your a non-earner (housewife/husband, children etc…).

Pension plans are available for anyone under the age of 75. Pensions have a number of tax benefits. You generally receive tax relief on the money you invest – and this is provided at basic rate up front e.g. invest £80 and you actually have £100 credited to your pension plan. Non-taxpayers also get this tax relief – money for nothing from the Inland Revenue – surely this can’t be true!!

Pension funds grow in a tax-efficient manner and, under current rules, you can take 25% of the fund as a tax-free lump sum at retirement (ages 55 to 75 from 6th April 2010) with the remainder of the fund used to provide an income, in one form or other, for the remainder of your retirement. This income from your pension is generally taxed as income.

A pension plan is a long-term commitment so seek independent financial advice before investing.

Pension Contributions, Investment Bonds and Higher Rate Taxpayers

Also, if you’ve made a chargeable gain on disposal of an investment bond and you are a higher rate taxpayer it may be able to offset the additional 20% tax liability by making a contribution to a personal pension plan – the contribution has the effect of extending the basic rate tax bracket and therefore, through careful planning, if may be possible to avoid paying this additional tax on surrender after carrying out a “top slicing” calculation.

See a technically-competent financial adviser!

Capital Gains Tax (CGT)

Each person has a capital gains tax allowance (£10,100 for the current tax year) which means you can make gains on the sale or disposal of certain taxable assets of up to £10,100 before 5th April and pay no tax. Any gain over and above this are currently taxed at 18% – although this could change.

I normally think of the CGT allowance as the “unused allowance” as many people are not aware it is there but it can be a useful tool for planning your tax affairs if you have such investments as shares held directly in a limited company, etc.

 Naturally you should consult a tax expert before making any disposals to ensure that the allowance can be used properly – phone your accountant as soon as possible!

Bed and ISA – using your CGT allowance wisely

This CGT allowance lends itself ideally for anyone holding unit trusts as it generally allows a person to surrender unit trust and reinvest in an ISA tax wrapper before the end of the year without any tax to pay now, or on any future gains under the ISA wrapper.

Make Tax-Free Gifts to Reduce Inheritance Tax

This subject is generally beyond the scope of this article (I am trying to get this article published as soon as possible as I have been away on holiday!). HMRC (The Inland Revenue) have detailed information on allowances, reliefs and gifts to reduce your IHT liability here.

Transfer of Income Producing Assets

Both husband and wife have their own personal allowances for income tax and often it is the case that one or other partner has all the income-producing assets in their own name. The HMRC website gives details of personal income tax allowances for the 2009/2010 tax year – moving funds between husband and wife can sometimes reduce your tax burden.

Finally…….Tax Year End falls on a Bank Holiday – act soon and avoid disappointment!

Don’t forget – 5th April 2010 this year falls on Easter Monday – so with Friday 2nd April being Good Friday (both days being Bank Holidays remember!) it would be prudent to ensure all planning, ISA’s etc are completed well in advance of say 1st April!!!! Don’t leave it too late!

Remember, this site doesn’t give financial adviser – make sure your consult a suitably qualified independent financial adviser or accountant before taking any end of tax year financial planning actions which you are not sure about.

The current issue of £20 notes has the image of Adam Smith on the rear and will continue in use.

The old “Elgar” notes will continue in circulation until end of June 2010 and will then be accepted by most banks and buildings societies for a few months after that date. Old notes can always be exchanged at the Bank of England.

It would be shrewd to check any cash you may have now to ensure you have none of the old “Elgar” notes now – it may save a trip to the bank or building society at the end of June, or even to the Bank of England after the banks and building societies no longer accept them.

Don’t forget to also mention this to elderly relatives who may be holding cash at home.

For more information check out the Bank of England website.

Click here for music by Edward Elgar or to buy a copy of the “Wealth of Nations” by Adam Smith visit Amazon.

Rob over at Money Watch has also blogged about this.

What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient form of investment. It is tax-efficient in terms of there being no liability to income tax on any income received or capital gains tax on any gains you make.

An ISA will be included in calculating your Estate value for probate and inheritance tax purposes.

What different types of ISA are there?

There are two types of ISA:

1. Cash ISA – this is a savings/deposit account on which interest is paid tax-free.

2. Stocks and Shares ISA – this is an ISA which invests in a fund(s) which themselves invest in stocks and shares.

There are thousands of funds to choose from. Self-select ISA’s allow you to choose your own investment funds. An ISA through an IFA or other adviser can also be invested in if you are not happy to choose your own investment funds.

How much can I invest?

This depends on your age – if you’re going to be 50 or over before 5th April 2010 then you can invest:

1. Up to £10,200 in a Stocks and Shares ISA.
2. Of this £10,200 limit, up to £5,100 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA). E.g. if you put £4,000 into a Cash ISA you can put £6,200 into a Stocks and Shares ISA.

If you’re aged below 50 then you can invest the following:

1. Up to £7,200 in a Stocks and Shares ISA.
2. Of this £7,200 limit, up to £3,600 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA).

After 6th April 2010 everyone can invest up to the £10,200 limit.

Can I Transfer from one ISA provider to another?

Yes – approach the company to whom you wish to transfer to arrange this. Under no circumstances surrender the ISA – you will lose the tax-efficient benefits!

The ISA must be transferred between the providers.

If I transfer an “old” ISA does this use my current years ISA allowance?

No

Can a husband and wife have their own ISA’s?

Yes, everyone aged over 18 has there own personal ISA allowance.

If I take out a Cash ISA and a Stocks and Shares ISA do they have to be with the same provider?

No. You can have a Cash ISA with your bank or building society AND a Stocks and Shares ISA with a separate investment house.

Is there any risk involved?

Cash ISA – generally no – if the bank or building society were to go into “default” then you should be covered by the Financial Services Compensation Scheme (FSCS). In terms of returns, there is no volatility involved as this is purely a deposit/bank account.

Stocks and Shares ISA – these do carry risk – the level of risk will depend on the fund you invest in – some funds are riskier than others. With Stocks and Shares ISA’s you should ideally be investing for the medium to long term (minimum 5 years, preferably 10+). The value of the underlying shares can fall as well as rise, as has been seen over the last few years in the UK and world stock markets.

More information on the compensation schemes can be found at FSCS - please note you cannot claim on the FSCS if your plan falls in value!!!

If you have any comments or questions please let me know in the comments section below.

Remember though – we don’t give financial advice on this site!

There is, however, a time when a falling stock market is a GOOD thing – that’s when you’re actually putting money into the market (as I have been doing over the last couple of years).

Now I’m not saying now is the right time for YOU to invest in the stock market – we all have our own reasons for investing (or not, as the case may be). My investment strategy, time horizons, attitude to investment risk etc will probably be different to almost everyone else’s so the actions I take may not be the actions which you should take!

The stock market performed a fantastic turnaround in 2009, with the FTSE100 rising from 4,434.20 at close of trading on 31st December 2008 to 5,412.9 at close of trading on 31st December 2009 – an increase in the FTSE100 of 22.1% during 2009.

Who knows where it will go next?!

Well, anyway, as part of my broader portfolio, I bought some shares in December in Tullow Oil (TLW.L) which is an oil drilling and exploration  company with interests in the African continent as well as other geographical areas. At the time I bought them, their shares stood at £12.99 per share. I had £1,000.00 to invest and therefore was able to purchase 76 shares back in December.

There has been a certain amount of volatility in the stock market recently and today I noticed that their share price had in fact dropped to £11.62 per share – a fall of £1.37 per share or 10.55% compared to what I paid for my shares back in December.

Now many people would be unhappy about this – not me! I saw it as a buying opportunity. I therefore decided to purchase another £1,000 worth this morning.

I am in this for the long run and will possibly hold these shares for in excess of 5-10 years so I took advantage of the recent fall in price to add more shares to my portfolio and benefit from pound cost averaging.

So what does all this mean? Well, I was able today to buy these shares at £1.37 per share less than I paid for them in December. I have drawn up a spreadsheet to demonstrate the benefit to me of this course of action.

I have included the dealing costs and stamp duty (0.5% on purchases) to take full account of the trading situation. You can see from row 1 that the total cost of my purchase of 76 shares in December was £1,007.28 giving a total acquisition cost per share of £13.25. Today I bought 86 shares at £11.63 and row 2 shows the total acquisition cost of £1,019.12 or £11.85 per share. So my purchase today cost me £1.40 per share less than in December.

Now here’s the interesting bit!!!

The second half of the spreadsheet answers the question “at what price per share do I have to sell to get my money back and break-even?”

Row 1 shows that had I not bought those shares today then to recoup the £1,007.28 outlaid in December, together with the £14.95 dealing charge to sell, I would need the Tullow Oil share price to hit £13.45 (last column) – this is the break-even price for my holding as it stood prior to today’s purchase.

Now consider the next row down - because I was able to reduce the average buying cost of my two lots of shares in Tullow down to £12.51 i have “pound cost averaged” down the cost of this holding in my portfolio.

The second row shows that to recover £2,026.40 (total cost of both the purchases in December and today) together with dealing charges of £19.95 (next tier of dealing charges) I would need to sell the shares for a minimum of £12.63 per share.

So in summary, had I only bought the December shares I would need Tullow Oil share price to hit £13.45 to break even.

Now with today’s “cheaper” shares I have reduced this break-even share price down to £12.63 per share – 82 pence per share lower. In effect, each and every penny that the Tullow Oil price rises over and above £12.63 is profit to me!

This therefore gives me scope for larger gains at a later date when I ultimately sell this holding.

If the price drops even further I will consider whether to invest further funds to reduce my break-even price even further.

Warning!

This is not a recommendation to buy shares in Tullow Oil or indeed that share ownership is suitable for YOU! The value of shares and the income from them can fall as well as rise and if the company went bust I could lose all my money. Do not act on this article without first taking suitable advice from a qualified stockbroker or financial adviser. You have been warned!!

I am currently working on a “Best of 2010 2009″ (error spotted by Rob over at moneywatch!) post – will get it posted before the end of the year!

In the meantime, start as you mean to go on by downloading my free 2010 year planner

Seasons Greetings!

Simon

One of the key questions facing the Chancellor, and indeed the Government, will be how to balance the books – ensuring there is enough money coming in to match the amount of money going out.

The country and business community wait with bated breath to hear what the Chancellor has in store.

There are concerns in the pensions industry that he could make further changes to personal pension taxation and in particular with reference to higher rate income tax relief.

If you are fortunate enough to fall in this category it might be a shrewd move to consider discussing any pension contribution planning with your financial adviser and, possibly, taking action to make any pension contribution ahead of the announcements on December 9th.

For a list of local Independent Financial Advisers visit IFA Promotion

When does the change come into effect?

This change comes into effect on 6th April 2010. You may need to take action before that date if you’re aged between 50 and 55 and wish to take pension benefits BEFORE you reach age 55.

Failure to act could mean that you are prevented from taking your pension benefits from your personal pension until you reach 55 – which could have a serious impact on any change in lifestyle you are planning on making in the next 5 years.

Newspaper article highlights opportunity to move t Income Drawdown

This article in the Daily Mail talks about this change in legislation maybe affecting up to 3 million people.

The article highlights the case of a gentleman who will be 50 on 5th April – the day before the change in retirement age comes into effect!

It mentions the option of moving to an “income drawdown” arrangement.

With an “income drawdown” arrangement your existing pension fund is moved into a new contract, tax-free cash (now known as “pension commencement lump sum”) of 25% of the fund value may be taken and the remaining pension fund remains invested and an income may be drawn from it.

This income is limited by the Government Actuaries Department and depends on a number of variables – a financial adviser can provide guidance on this should you decide to take your benefits through this route.

You don’t have to take income immediately from the income drawdown plan and most pension providers have flexible contracts.

You also have the opportunity to move from an income drawdown arrangement to an annuity at any time after commencement (known as vesting – see my article on maximising pension income in year one)

The one downside is that once you move into “income drawdown” the remaining pot will be subject to tax on death, whereas in the “prevested” personal pension plan, the fund might be held outside your Estate through a trust arrangement – you need to check with your specific pension provider to see if your personal pension with them benefits from this kind of trust arrangement.

Alternative Options

You could consider taking your pension benefits by purchasing an annuity. An annuity is an income for life – in exchange for your pension pot (after you have taken your tax-free cash – why wouldn’t you?!) the life company will provide you with an income for life.

This route offers lower risk – once the annuity commences the life office is carrying the risk that you die before the money runs out.

However, annuities are generally inflexible but do suit many people.

It is important to take advice before making any decision.

Alternatively, like most people, you could simply do nothing – many people are not in the fortunate position to be able to benefit from taking their pensions before age 55 – but that’s a topic for another day!

Action needed

If you will be aged 50 or over before the end of this tax year on 5th April 2009 AND you wish to take your pension benefits BEFORE age 55 that you contact an Independent Financial Adviser to ensure that you don’t miss out.

Act quickly as well – don’t leave it until the last minute – with postal strikes, increasing amounts of work in respect of ISA’s etc before tax year end and the generally slow speed at which pension funds move between companies you need to ensure that your IFA has a suitable time in which to understand your position, advise on the most appropriate course of action and to actually physically move the money into the new arrangement!

The whole process can take a few months – even longer depending on the pension provider.

Managing your Finances and Preparing for the Worse over at moneywell.co.uk

The article talks about the need for us all to bolster our reserves and tighten our belts when the world is having a financial crisis. There is a lot of common-sense in this article and I recommend you take a look at it.