Holly's Blog: Free Money and the Biden Bonanza
22 Jan, 2021
Let's ignore the discussion of lockdown extending and instead talk about something fun: pensions!
Hi everyone. Is it really and truly still only the third week in January?
I am resolutely ignoring discussion of lockdown extending till summer because I will turn into a rabid dribbling monster if I even consider the continuation of home schooling for much longer……. Let’s talk about something fun instead. Pensions. Yayyyyyy!
Now pensions ARE actually fun because they are one of the only ways to get free money which doesn’t result in a prison sentence. If you are a higher rate taxpayer rushing to file your tax return before the end of January, don’t forget any pension contributions. If you forget about it, you are effectively donating money to HMRC.
Let’s take an example. If you are a basic rate taxpayer and you pay £80 into a pension, the pension company will do some fiddling behind the scenes and – lo and behold – that £80 you paid in will result in £100 being allocated to your pension account. Because the money you pay into a pension has already been taxed, the Government effectively gives you that tax amount back (for being a good citizen less likely to turn up at their digital door with your hand out for a crust of bread when you get old).
The benefits are bigger for higher-rate tax payers. You get the magic wand of the extra £20 on your £80 too, automatically done when you pay it into the account. But when it comes to filling in your annual tax return, you can claim another £20. Basically the pension contribution has the effect of lowering your taxable income and is much more powerful than relying on 153 receipts from Rymans for paperclips and biros. So your £100 in a pension only cost you £60 to put it there.
Here's the thing though. Higher rate taxpayers must remember to claim it or you miss out. So if you paid anything into a pension between April 2019 and April 2020, get on the case.
As always there is small print with pensions. The rules/amounts are a wee bit different in Scotland. There’s a limit of £40,000 each year (but you can carry this forward for 3 years in case you’re a Trust Fund Kid with a lump of cash and haven’t paid into a pension for years). And there is a maximum lifetime allowance – currently £1.07m – above which you get clobbered with tax. You can read up on all things pensions on our Pension Planner (https://www.boringmoney.co.uk/pension-planners/) pages.
Look out for Nasty Mister Budget
A closing thought on pensions. The Budget is creeping up on 3rd March and there could well be changes to tax and pensions. It is worth thinking about whether you can pay anything into a pension this tax year, on the basis that anything could happen to diminish this savers’ perk. Our pensions Best Buys tables (https://www.boringmoney.co.uk/pensions/pensions/) will help you sense-check your options.
The Biden Bonanza
In other news, over the Atlantic, Joe Biden has promised to spend money. An additional $1.9 trillion to be precise. A lot of this money will trickle into household bank accounts. Of course, he is not the only one spending.
Money is a bit like caffeine. The more of it you stick into an economy’s gob, the faster and more frenetic it becomes. We buy stuff, we hire staff, we open businesses. As well as stimulating stock markets, this also introduces a character to our financial play who has sat out the last few Acts. Inflation.
If you believe that inflation is inevitable at some point then older readers in particular should just keep an eye on how much they have in bonds or ‘safer, cash-like’ assets over the course of this year. Bonds hate inflation. More on this in coming weeks – and no rush as we’re not there yet!
As for the tech firms which have kept things marching north, the Nasdaq is now up by 4% in 2021 alone. We saw better than expected numbers from Netflix earlier in the week ( I attribute this all to Bridgerton’s drop-dead gorgeous Duke of Hastings) and markets have high hopes for players like Apple, Microsoft and Facebook which report next Tuesday and Wednesday. As we move into the later stages of 2021, the combined efforts of Biden and potential looming inflation have the potential to rain on this silicon parade. Drip drop drip drop?
Over and out for this week folks. Have a lovely weekend.