5 terrifying financial mistakes to avoid this Halloween

As we near the end of October, you may be preparing to celebrate Halloween and embrace all things scary.

You might be planning to spend some money on frightening costumes or spooky decorations this year. If so, you won’t be alone – Finder reports that Brits are estimated to spend over £1 billion on Halloween celebrations in 2023.

While you may enjoy a good fright on Halloween, you don’t want any jump scares when it comes to your financial plan.

Unfortunately, if you’re not careful, you could already be making decisions with spine-chilling consequences.

So, make sure to avoid these five terrifying financial mistakes this Halloween.

1. Holding too much wealth in cash

While you may embrace fear when watching your favourite scary films this Halloween, you likely don’t take the same approach to investing.

Instead, you might let fear discourage you from investing your wealth, especially during a period of market turmoil. As a result, you may decide to hold your wealth in a cash savings account instead because it appears to be the “safer” option.

Additionally, cash savings could seem particularly attractive as interest rates have risen considerably in recent months. Indeed, according to Moneyfacts, the best easy access savings account interest rate was 5.3% on 23 October 2023.

However, the Office for National Statistics (ONS) reports that inflation was 6.7% in the 12 months to September 2023. Consequently, if you leave your wealth in a cash savings account, it could lose value in real terms.

So, while it may be important to keep some of your wealth in cash savings as an emergency fund – typically 3 to 6 months of normal expenditure – you might want to consider investing a portion of your wealth too.

Fortunately, by working with a financial planner and investing with a long-term view, you may be able to achieve growth that outpaces inflation.

2. Failing to update your estate plan

Ghost stories are a big part of Halloween, and the celebration might spark discussions about potentially terrifying happenings after we die.

For your family, an out-of-date estate plan is one of the scariest things you can leave, and it could cause them nightmares.

If you don’t update your estate plan when your circumstances change, your estate may not be distributed in the way that you planned. For instance, if you get married in England, Wales or Northern Ireland, your will is automatically invalidated.

Without a new will, your estate could be divided according to the laws of intestacy, and the decisions about who inherits what may not necessarily align with your own wishes.

As such, it’s wise to create a new will immediately if you separate, divorce, or remarry. You may also need to update your will when you purchase a new home or have children, for example.

Alongside your will, it’s equally important to create a Lasting Power of Attorney (LPA) and appoint somebody to manage your affairs if you are unable to. Without an LPA in place, your family may have to go through the courts before they can make decisions on your behalf. Additionally, your affairs may be managed by somebody who you would not have chosen yourself.

To avoid these issues, it may be useful to review and update your estate plan on a regular basis, particularly in the event of significant changes to your circumstances.

3. Not using your full ISA allowance

An ISA can be an effective way to save or invest your wealth tax-efficiently as you do not pay Capital Gains Tax (CGT), Dividend Tax, or Income Tax on any funds in this tax wrapper.

Conversely, if you purchase stocks and shares outside of an ISA, you may have to pay Dividend Tax on any dividends you receive if you exceed your Dividend Allowance – £1,000 in 2023/2024.

Additionally, you may pay CGT on any profits that exceed your Annual Exempt Amount of £6,000 in 2023/2024 when selling investments. You may pay tax on interest you generate from funds in a cash savings account too.

Fortunately, in the 2023/2024 tax year, you can contribute up to £20,000 across all your ISAs and you will typically want to use the entire allowance if you can.

By putting as much of your wealth as possible in ISAs before investing or saving elsewhere, you may be able to reduce the tax that you pay.

4. Pausing pension contributions during the cost of living crisis

The cost of living crisis has been challenging for everybody and you may have seen an increase in your outgoings as prices rise.

According to Money Marketing, a third of UK workers are considering pausing or reducing their pension contributions to help them cover these additional costs. However, this could be a mistake as it will likely have a significant effect on your pension savings and your quality of life in retirement.

Figures from Money Marketing show that somebody earning £70,000 a year and making an 8% pension contribution, which their employer matches, would see an extra £3,360 a year in take-home pay if they stopped their contributions.

However, each year they would lose £12,192 from their pension pot.

Additionally, if that wealth was invested in their pension, it would likely benefit from compound growth. As a result, pausing pension contributions, even for a short period of time, could significantly reduce the size of your pension pot when you come to retire.

As such, you may want to find extra funds from other sources, such as a cash savings account, before you consider pausing your pension contributions to cover increased living costs.

5. Not planning for Inheritance Tax

Passing wealth on to your family may be an important part of your financial plan. That’s why failing to plan for Inheritance Tax (IHT) is one of the most frightening mistakes you can make.

According to the latest figures from the UK government, they raised £6.1 billion from IHT in the 2021/2022 tax year – an increase of 14% on the previous year.

Unfortunately, IHT receipts are set to continue rising because the IHT “nil-rate bands” – the amount you can pass on without paying IHT – remain frozen.

As house prices increase, and you potentially see growth on your savings and investments, the value of your estate could well go up. This means you may be more likely to exceed the frozen nil-rate bands and your family could lose a portion of your estate to IHT when you die.

The good news is, there are ways to potentially reduce an IHT bill that your family may face following your death. However, it’s a good idea to consider this ahead of time and discuss it with a financial planner so you can put measures in place to help protect your wealth.

Get in touch

These terrifying mistakes could make it more difficult to reach your long-term financial goals, but we are here to help you avoid them.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.