Independent Financial Advisors for IT Contractors
Published on 2nd February 2009
After a tumultuous 2008, we are all looking forward to a fresh start this new year. To kick start 2009 Contractor can make financial resolutions to prepare for whatever the next 12 months and beyond may bring.
After the excesses of Christmas, its time to strip out unnecessary costs to make way for important future planning. With the New Year comes a renewed commitment to saving and investments, an area where Contractors can really exploit tax breaks to make the most of the effort that they make.
Unlike the obligatory gym membership that we all rush to take out in January and then never use again past February, steps that you take to put your finances in order whilst you are a Contractor could make a very significant difference to your financial health over your entire life.
First Resolution: Kick start savings with a tax efficient ISA
With investment markets looking very undervalued, your first resolution should be to kick start your savings to take advantage of a future upturn. Don't forget that equities pre-empt the economy and so will bounce back ahead of the end of the recession.
Start by ensuring that you maximise your allowance to invest in a tax efficient Individual Savings Account or ISA. Working well either on its own or alongside a pension, equity or cash based ISA's offer an effective alternative for retirement planning and benefit from tax free breaks on up to £7,200 each tax year.
Unlike a pension fund which has substantial upfront tax breaks but then can't be accessed until you are 50/55, an ISA can be encashed at any time, offering you flexibility from your investment as well as tax savings on growth within the account. You can invest in monthly installments or in a lump sum. You may be better off drip-feeding your investment in order to avoid the added risks associated with putting all of your money into an investment on a single trading day and this also avoids the end of tax year rush that, as IFAs, we see every year.
Cash ISAs allow you to access your money in the short-term which may be useful for Contractors as the funds could be used as income in a period when you are between contracts. Many high-street providers will offer higher interest rates on their cash ISA than a normal savings account as traditionally customers will leave money in an ISA for longer. They also benefit from being free from short term fluctuations in the stock market.
Some providers offer a protected equity ISA which tracks the stock market but carries less risk as the underlying value of the fund is protected against loss. You could also diversify into other areas such as property and government bonds using an ISA.
Second Resolution: Invest for retirement with a Contractor pension
A strong second resolution would be to invest for retirement with a Contractor pension. Pensions provide Contractors with one of the few non-contentious tax breaks left and since the pension's simplification rules were introduced, you can invest virtually 100% of your annual contract income with no deduction of tax or NI.
In a post MSC, IR35 and income sharing world it could be argued that pension investment represents one of the few remaining areas of tax planning actually encouraged by the authorities. It's not just Ltd company set-ups, which typically operate outside IR35, who can benefit. Contractors who use a PAYE umbrella company may also be able to take advantage of a salary sacrifice arrangement to reduce their tax bill.savings up to 48% deductions.
As a contractor you need a pension that can be as flexible as you are, with the ability to adapt payment schedules and contributions to match your contracts and level of income on a monthly basis. You should also choose carefully when deciding on your pension provider, choosing a firm that has a good reputation and is a big player in the pensions market should minimise the risk of takeovers and mergers and ensure that you get the long-term commitment needed for your investment.
Third Resolution: Remortgage and benefit from lower interest rates
Having sorted out your investments with the first two resolutions, the third should focus on how to make the most of current low mortgage rates.
As with any debt, it is important to regularly review whether you are getting the best deal available. With interest rates dropping every month we are seeing tracker rates fall considerably so it makes sense to shop around.
When you enquire about a remortgage we will look at what's offered by your present lender and then compare this with the rest of the mortgage market to ensure you get a good rate. If we find a better deal with a lender other than your current provider we will aim for the lender to pay towards costs if possible.
Switching to another lender could save you money on your monthly repayments and if your home has increased in value then you may also want to raise capital from your home to pay towards the consolidation of other debts, a business venture or a deposit on another property, perhaps as an investment at current depressed prices.
Assuming that the new cheaper remortgage scheme or perhaps a pre-existing variable rate scheme that you are currently on leaves you with excess cash compared to last years mortgage repayments, now is the time to start using those reduced outgoings for long term benefit.
Earmark part of the saving for the ISA and pension planning that we covered above and then overpay on your mortgage to reduce capital.
Even though it may seem that, whilst mortgage debt is so cheap, all of your effort should go towards investments with potentially greater returns, by repaying debt you help avoid negative equity and ensure that you can benefit from the very best terms available on any future remortgage. Lenders are increasingly reserving their best rates for those with substantial equity left in their property and capital repayments help you in this respect.
Most lenders offer a 5% or 10% overpayment facility and flexible mortgages are even more generous.
If you do have a flexible mortgage any overpayments can be withdrawn at a later stage as your circumstances dictate but all the time you can have the funds paid off your debt you will be saving interest.
ContractorFinancials - the financial nutritionist
Whilst we won't promise to know the latest macrobiotic drink or the nutritional content of a bacon sarnie, we can offer independent financial advice tailored to helping Contractors make the most of their hard earned money. For many of our clients, the New Year offers the perfect opportunity to make some lasting changes to their financial health, knowing that they will reap the rewards in the months to come.
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