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May 28, 2021

What can you do with your accidental Covid savings?

Travel restrictions. Banned public gatherings. And a banished social life. Undeniably, the coronavirus is a period of our lives that many of us would like to forget!

But if there’s one silver lining that we can take from the pandemic it is this – an estimated six million people in the UK have become accidental savers.

Many of us now have more money at our disposal than before (perhaps reminding us of just how expensive our social life could be). After all, if we can’t spend our money in bars, restaurants and on weekend excursions, we’re bound to have a substantial amount of savings left over. In fact some reports say that by March 2021 Britons had saved as much as £180 billion over the course of the pandemic.

This means many of us are now in the privileged position of having accidental savings to spend. If you’re looking for inspiration on how to put some of this capital to good use, here are some financial planning ideas to think about.

Rainy day money

The pandemic is a stark reminder of just how unpredictable life can be, so the best we can do is prepare with some sort of financial safety net to soften the landing.

A sensible first step is to set aside some of your savings as a contingency fund. Money that can be called upon at short-notice if need be, to meet an unexpected expense.

Without wanting to tempt fate, this might be your boiler packing-in or discovering you have a leaky roof during a typical British “summer”!

The best place for this sort of money is a bank or building society account.

Although interest rates remain low you can access the funds easily and quickly when needed.

Pay off your debts

With savings currently offering little in the way of interest, paying off debts such as outstanding credit card balances is a sensible plan for some of your accidental savings.

The rate of interest charged on most credit cards is generally higher than the return you will be getting on your savings just now.

Even making relatively modest over-payments to an existing mortgage loan can have a significant, cumulative impact.

For example, the average UK mortgage stands at £137,934.

By paying an extra £100 per month into a loan of this size, arranged over 25 years on a repayment basis (and an interest rate of 3.5% pa), you would pay your mortgage off 4 years and 7 months earlier than intended – resulting in a saving of £14,152 in interest payments.

It is certainly a compelling argument – just be sure to check with your lender how much you can overpay your mortgage by each year, without incurring any early repayment charges.

Invest in your future

Lock-down has given us time to think about our futures. From family goals to retirement, many of us have higher ambitions we’d like to achieve. Making the correct investments now will only increase the likelihood of making them a reality.

Perhaps you’d like to tweak your existing financial plan to accommodate new ambitions such as stopping work earlier than originally planned, buying a holiday home, or paying for your grandchildrens’ university or school fees? We can look at your financial plan and make it happen.

Inheritance tax (IHT)

IHT is just as complex as it is important. Having spent most of our lives accumulating our wealth and assets, compounded with the savings made during Covid, it’s only natural for us to want to keep what’s rightfully ours in the family.

But the reality is that when we die or pass on/away up to 40% of our wealth, in excess of allowances, can be taxed by the government. But with some forward planning, it doesn’t have to be this way.

Everyone is entitled to make a £3,000 gift each tax year – referred to as your annual exemption – which is considered immediately outside of your estate for future IHT calculation purposes.

If you haven’t used last year’s annual exemption, you can “carry it forward” to this tax year, meaning you can gift up to £6,000.

A gift in respect of a wedding is also treated in the same way – provided that it is made before or on the wedding day.

Up to £5,000 can be gifted to a child in this way, up to £2,500 for a grandchild and £1,000 to a different relative or friend.

Gifts in excess of these thresholds may be considered as a PET (potentially exempt transfer) and in so doing would be considered outside of your estate for IHT purposes after 7 years – so it makes sense to plan early.

Spend it on what makes you happy

After a pandemic, lock-downs and a non-existent social life, maybe you’d prefer to spend your money on whatever makes you happy? After all, we have a lot of catching up to do! We can now see friends. Visit family. Go to bars, restaurants and even go on holiday (assuming the destination is on the “green” list of course!).

Building a contingency fund, paying off debt and investing for the future are all sensible ideas, but spending some of your covid savings is not only an effective IHT planning strategy, it can be good fun and well-deserved after the year we have had!

Final thoughts

Despite the stress and volatility that the pandemic has inflicted on all of our lives, many of us have actually come out the other end financially stronger. These extra savings have created more opportunities for us to take advantage of, which can be just as perplexing as they can be beneficial.

If you’re unsure of how best to spend your Covid savings then don’t hesitate to get in touch.

May 28, 2021