The seven DOs and DON'Ts of tax year end
At this time of the year, there are plenty of things you can do to improve your financial prospects - and a number of things to avoid.
This is especially true in the current low interest rate, low return environment, where savers and investors need to make even more of an effort to ensure they maximise investment opportunities and minimise fees to generate the best outcome for their future wealth.
DO: APPRECIATE THE VALUE OF TAX-EFFICIENT ACCOUNTS
While it may be true that the benefits of an Isa are relatively limited over a single year, it is the compound effect of multiple years' contributions combined with growth that demonstrates its true value.
Being able to convert a six-figure Isa into a non-declarable, tax-free income stream or lump sum just when you need it is a great option for later in life.
The new interest and dividend allowances potentially call into question the advantages of using an Isa, but many investors will generate high levels of dividend income over the long term, and when interest rates eventually rise, having your savings wrapped in an Isa is likely to be a significant benefit.
Considering the tax implications alone, Sipps tend to come out on top with marginal tax relief on contributions up to 25 per cent tax free cash on retirement, and the fact that pension contributions reduce taxable income.
But for those who may need to access funds before retirement, the flexibility of Isas tends to appeal.
DON'T: TAKE TOO LITTLE RISK
While it is vital to be able to sleep well at night, taking too little risk can be as much of a threat to your wealth as taking too much, assuming your investment horizon is sufficiently long.
Many investors view risk as a bad thing, but it is actually your saviour over the long haul, as simply holding all your assets in cash is highly detrimental to your long-term wealth, in particular in the current low interest rate environment.
Perhaps the biggest mistake that experienced investors make is to invest heavily in a single stock or sector. Such a high risk, high reward strategy can be successful over the short term, though for most investors a more balanced approach is likely to be a better strategy.
The significant difference in stock and sector returns seen over the last 24 months demonstrates how risky a lack of diversification can be, so having a spread of assets across different geographic regions and sectors protects against downside risk.
DON'T: UNDERESTIMATE THE VALUE OF REINVESTED INCOME
The FTSE 100 currently has a dividend yield of over 4 per cent. An investment of £10,000, generating and reinvesting 4 per cent net returns for a period of 10 years, will be worth £14,859 based on half-yearly dividends.
Invested for 25 years, it would be worth £26,916 and for 40 years £48,754. Hopefully you'll also achieve some capital growth to further boost your returns, but the key message is that compound interest and the reinvestment of dividend income is the path to financial success!
DO: CHOOSE (OR TRANSFER TO) THE RIGHT PROVIDER FOR YOU
The choice of investment provider can make a huge difference to an investor's long-term wealth, particularly in a low interest rate, low return environment where fees eat up a significant part of your annual returns.
Whether you're a fund or share investor; how often you're going to trade; the value of your investments - these are all crucial factors in determining whether you would be better off with a percentage-based or flat fee provider.
Platforms with a flat fee structure tend to suit investors with large existing portfolios, while percentage charges are better for those relatively new to investing.
Bear in mind that a provider who may be suitable for you initially may - over time - no longer meet your needs, so an annual check to see if you're paying too much in fees is a sensible strategy.
DON'T: ASSUME THAT YOU HAVE TO INVEST ALL YOUR ALLOWANCE IN ONE GO
At this time of the year the critical point is to secure your allowance - up to £15,240 in an Isa or £40,000 in a Sipp.
You do not have to invest all your allowance straight away and can choose to hold it in cash in the short term, or choose to regularly invest it across a number of months. However, do remember to invest it at some point!
DO: TAKE ADVANTAGE OF THE HELP ON HAND FOR CHOOSING THE RIGHT INVESTMENTS
Many people assume that investing is difficult and that it is only for experienced investors, but we all have to start somewhere. If you really can't decide then taking advice may be the right thing to do, but there is also plenty of help on hand for DIY investors.
This article was written for our sister website Interactive Investor.