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The Financial Mistakes Series (part #6)

by Mar 29, 2020

This is the 6th instalment of my little ‘Financial Mistakes Series’ (you can check out the full series here). I am listing – in no particular order – all the financial mistakes I believe could damage any early retirement plan.

Of course, the standard disclaimer still applies: these are just my personal opinions; please consult a financial advisor if you are in doubt.

Now, without further ado: the mistake we’re talking about today is…

Paying too much tax

“In this world nothing can be said to be certain, except death and taxes”, wrote Benjamin Franklin in 1789.

He was right. Especially on the latter. I’m sure the human race has got at least a chance to escape death, one day. It sounds a bit sci-fi, but at least there is a glimmer of hope. But taxes? No chance. There will always be a taxman, somewhere, who will come after you, trying to get a slice of what you have. Your task will always be the same: to minimise that slice (in a legal way, of course!).

Many countries offer tax efficient ways to save money, for example by investing in tax sheltered or tax deferred accounts, or children’s savings accounts, etc. Often these aren’t well known, and you may miss opportunities because of that.

For example, I’m always shocked by how many people ignore (or fail to use) the Capital Gain Tax Allowance: in the UK, the first £11k of capital gain in any given year are tax free – but you have to remember to sell some of your assets to crystallise the benefit. Otherwise you lose it.

It is well worth spending some time and money to talk to a tax specialist about this. Their fee will be paid back in a very short time by the increased efficiency you can get. 

The Family’s Perspective

Every year we make sure to use the Capital Gain Allowance, and to maximise our contributions to our ISAs. We have contributed to our pensions in the past (especially when our employers would match that). However, we have decided not to contribute to children’s savings accounts, despite being tax-free, as we want to retain the ability to decide if/when to give them the money.

Are we going to make this mistake?

I’m not sure how to answer this.

We have made decisions which sounded right at the time (and still feel right). For example, I am convinced the decision to not contribute into any children’s savings account was the right one, despite the loss of the fiscal benefit.

I do not like the idea that kids will automatically receive all the money when they are 18, just because they are 18. What if they are not ready for that? So in order to retain that control over when to give the money, we are forced to use less tax-efficient ways. When they turn 18, I hope to discover they are perfectly capable of managing the money. Will it have been a mistake then? I don’t think so. And anyway, one can only make decisions based on the information they have at the time.

…More money mistakes?

Check out the full series here.



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