Why you need a financial MOT

Just like your car, your finances need regular maintenance to ensure optimum performance. Even if you have a solid financial plan in place, it still needs to be updated from time to time to ensure it reflects any life changes.

Here are just some of the reasons why a financial MOT is important.

1. To rebalance your portfolio

A lot can happen in 12 months. If your portfolio isn’t closely monitored, your investments may need to be revisited. Some investments might be underperforming, while others might be doing so well that it could be time to take profits; it is usually wise not to become over-exposed in a particular company or sector. Overall, however, it is a matter of making sure your portfolio still reflects your attitude to risk, your time horizon, and your goals. This can be complicated and is generally best left to the experts.

2. To protect what matters most

You might have insurance policies in place to help you and your family cope with the financial upheaval that illness or death can bring. This may include income protection, life insurance and critical illness cover.

Reviewing these policies regularly is important. If you’ve had a pay rise, for example, you might need to increase the amount of income you’re insuring. And if you’ve increased your mortgage or made overpayments, you might need to increase or decrease your life insurance cover accordingly. Reviewing your protection will help to ensure your family is protected should the worst happen to you, and that you’re not overpaying for any types of cover.

3. To check your retirement savings are on track

A financial MOT will help you understand whether you’re on track for a comfortable and fulfilling retirement. If it looks like you’re facing a shortfall in your savings, this could be a good time to top up your pension. Using your pension annual allowance each year will help you maximise the amount of pension tax relief available to you. The combination of tax relief and compounded investment returns over time could make a big difference to the size of your pension at retirement.

Reviewing your pensions will also help you understand whether you’re at risk of breaching the lifetime allowance, which is currently set at £1,073,100. If you access pension benefits in excess of the lifetime allowance, the excess will be subject to a tax charge of up to 55%. A financial adviser can help you understand whether you’re nearing the lifetime allowance and, if so, what steps to take.

4. To invest more tax efficiently

There are a whole host of other tax reliefs and allowances that could help you invest more tax efficiently. For example, you can invest up to a maximum of £20,000 a year in ISAs to benefit from tax-efficient income and growth. Meanwhile, Junior ISAs let you invest up to a maximum of £9,000 a year per child; this could grow into a significant pot of money over time, perhaps helping your child pay for university or a deposit on their first home. Other allowances include the capital gains tax exemption, dividend allowance and personal savings allowance.

A financial adviser can help you use your tax allowances effectively so that more of your money goes towards your future.

5. To juggle competing financial goals

Whether it’s school fees planning, helping your kids with a house deposit, or saving enough for your own retirement, it’s all a drain on the family finances. At the same time, you might find yourself caring for elderly relatives whose health may be deteriorating. Even if you have a relatively high income, juggling all these competing financial priorities can be difficult. Having a robust financial plan that adapts to your needs over time is critical.

Next steps

Understanding how to rebalance your portfolio, invest tax efficiently and build a resilient retirement pot isn’t easy on your own – and that’s where getting some smart advice can help. A financial adviser can build a robust financial plan that is tailored to your individual circumstances, and review it regularly to make sure it still suits your needs and goals.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.