6 financial mistakes to avoid in 2022

Avoid these financial fouls for a more prosperous New Year

Don’t stress – do a little homework on savings (PA)

We all make financial mistakes but some can be more expensive than others.

Research from Hargreaves Lansdown shows that we’re kicking ourselves for failing to save enough for the future.

The biggest financial regret, mentioned by one person in six, was not having started saving earlier.

Meanwhile, almost one in 10, says their biggest financial mistake was not having started a pension sooner and more than one in 20 regrets not putting more into their pension.

Here are six financial mistakes that could cost you dearly and how you can avoid them:

1 Passing up free pension cash

Consider increasing your pension contributions or you could miss out on what is essentially free money from your employer, as they will add to your pension fund on your behalf. You wouldn’t turn down a Christmas bonus, so don’t pass up free pension contributions.

2 Being silly with savings

Figures from Moneyfacts shows that stocks and shares ISAs, for instance, delivered positive growth in 14 out of 21 tax years since they were introduced in 1999. By investing as much as you can in tax-efficient vehicles such as ISAs, you can avoid tax.

Everyone in the UK over 18 has a £20,000 annual ISA allowance – in other words, you don’t have to pay any tax on any stock market gains you may make.

Experts agree that while putting your money into a stocks and shares ISA is great for long-term savings goals, such as retirement, if you want to use that money a little sooner, it is wise to keep it in a cash savings account, like a fixed or flexible cash ISA.

What’s more, it’s useful to have access to funds for emergencies and to avoid relying on credit.

You will not pay any income tax on the interest or dividends you receive from an ISA and any profits from investments are free of capital gains tax.

3 Ignoring tax relief

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, for instance, means that spouses and civil partners can transfer some of their unused personal allowance, the amount of income you can earn tax-free, to their partner.

For this 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.

If it’s something you’ve overlooked, the good news is that it can be backdated by up to four years.

Find out what you can claim at https://www.gov.uk/income-tax-reliefs

4 Playing it safe with savings

Holding 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 – currently 4.6 per cent.

This means your spending power will decrease over time.

According to a study by Barclays that uses data going back to 1899, the probability that shares outperformed cash savings was 75 per cent over five years, increasing to 90 per cent over 10 years and 99 per cent over 18 years.

While figures from Moneyfacts show that the average stocks and shares ISAs, for instance, delivered positive growth in 11 out of 18 tax years since they were introduced in 1999.

While all investments carry some risk and the value can rise as well as fall, they can help your wealth grow 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.

5 Not writing a will

It may seem obvious but anyone with assets such as a house, savings or even a workplace life insurance scheme should have a will.

But the sad fact is that about half of us die without one.

Dying intestate means the state gets to decide who will inherit your possessions and a huge chunk will be scooped up by the taxman.

If you are in a relationship but not married, you need a will as the law doesn’t recognise “common-law marriage” so you could wind up with nothing if your partner died.

Those who are divorced may want to stipulate what happens to their assets if an ex-partner remarries.

Also, if you have a small business and you die without naming executors in your will, nobody can authorise payments (or wages) so your business could collapse and your staff could go unpaid.

6 Overlooking financial protection

Figures from employee benefits provider Unum UK show that one in 10 of us is likely to need to take over six months off work due to ill health.

What’s more, we are three times more likely to go on long-term sick leave than we are to die during our working life.

But you can protect your income should you develop health problems and it’s easier – and more affordable – than you might think.

Income protection insurance is designed to cover you in times of hardship and you’ll receive 50-70 per cent of your salary in regular payments for as long as you need them to keep food on your table and a roof over your head should you be too ill to work.

Like any insurance, always shop around before you purchase a policy, or do what I did, and use a protection broker such as LifeSearch to do the hard work.