New Year Tax Nudging

New Tax Year – Nudging yourself in the right direction

The new tax year started 6th April and brought you fresh new annual allowances to use in your ISA and pension, but are you wondering if it is a good time to invest?  Maybe it is better to wait until things are more certain?

Be rid of wafty thinking caused by fake news and bogeymen gremlins

We (human beings) are prone to wafty thinking. Our heads are literally out to get us on occasions with fake news alerts and bogeymen gremlins from the past.

The fake news our minds feed us, is often down to what is known as “availability heuristic” in behavioural economic terms.  This is the ease at which an example or a story comes to mind. For example, if you had your mobile phone stolen recently you would be prone to believe that phone thefts are more prevalent than is statistically true.  Get caught by a red traffic light and it is easy to believe you are persecuted by the damn thing rather than having an equal chance of being caught in the change to green, but somehow the frustration of having to stop makes the persecution story more visceral.  The same thing plays out around stock market crashes – if you have heard about stock market crashes or worse, lost money in one, you are more ready to believe they are frequent and dramatic.  There is always a media frenzy around a stock market crash, but because good news doesn’t sell, we hear less about the stock market rallies that make investors more than they ever lost and thus we are left with the wrong impression.

This bad feeling caused by biased media coverage can be a damaging influence in our lives because it has a significant impact on decision making. Going back to those fancy terms from the world of behavioural economics it is called “affect heuristic”.  This is an over reliance on whether something feels good or bad.  Our gut instinct. It can be very powerful, but lacks statistical validity, relying on emotion rather than a reflective analysis.

If you look at the graphic of global stock market values over the last 50 odd years you can clearly see it is higher in the later years than it was in early years – it went up over the long term.  And yet look at the annotations -oil crisis, Black Monday, bubble burst, financial crisis, pandemic. All the news is about the falls, not the fact that IT WENT UP!

MSCI World Price Index

Set yourself up for success – nudges in the right direction

Systematic investing

One of the best ways to avoid wafty decision making is to invest systematically. For example, rather than do a £20,000 investment into a stocks & shares ISA once a year, set up a standing order to transfer £1,666 per month (or whatever you can afford toward using your ISA allowance).  This avoids having to think about whether the market is high or low – just buy units automatically.  Sometimes you pick up a bargain and sometimes you will pay full price, but overtime it averages out.  Statistically it is proven that the benefits of “pound cost averaging”, which is the technical term for this, outweigh any efforts to try and time peaks and troughs in the market.

Human v Spreadsheet

It is worth noting that statistically the markets* are higher month on month more often (64%) than they are lower (36%) so there is a statistical argument to get invested sooner rather than later.

*Morningstar. Stock market represented by the FTSE All-World Index in total return, GBP terms from 31 December 1993 to 31 May 2021

Add to this the fact that inflation is running at about 6.6% in the year to end of February 2022 and rising, while interest rates on instant access cash is 1.5% at best, so your cash is going backwards at 4.7% a year. This compares to inflation of 2.5% and interest rates of 0.25% over recent times which was a much more tolerable – 1.75%. The only money you should have on cash deposit is that which makes up your emergency fund or that is earmarked for spending within 5 years, anything above this needs to be invested to stop you getting poorer over time. Download the Emergency fund calculator

So if your head is telling you:

“I would rather drip it into the investment overtime than pay in a lump sum when there is so much market uncertainty”  or

“I need to keep the cash because who knows what will happen next”

A get rich quicker scheme I can recommend to you is set up a spreadsheet and do the sums – your human thinking is out to get you!

Save more tomorrow

If you think about it, our pensions tend to be funded in this systematic way. Each month a bit of our salary gets diverted into our pension pot and because we get used to our take-home pay figure, we don’t really think much more about it. 

Another effective method of painlessly increasing how much we contribute to our pensions is when we choose to have a portion of future pay rise and bonuses added to our pension rather than receiving it as salary. Behavioural economic term #3 is “present bias” which is our human inclination to overweight the value of something now, compared to the greater value of receiving it later. Example: If I offer you £10 now or £15 next year which is most appealing?

It doesn’t hurt us as much to give up part of an increase in pay as it does to take a cut resulting from upping our pension contribution.   The fancy behavioural economic term for this one is “mental accounting”.  If we get a £6,000 pay rise, our spending is likely to go up, but if we had made a standing election to have 50% of pay rises directed to pension, then our spending is likely to increase by £3,000 and our pension by £3,000 and we would never miss the spending we didn’t get to do.

It is possible to apply this theory to more than just our pay packet of course. We might get a windfall and put some away “before we spend it” but sacrificing salary to pensions is particularly rewarding because it comes with Tax and National Insurance savings as well.

3 New Tax Year Tips

Human being are not naturally good statisticians – we rely on fake news and bogeymen gremlins to guide investment and finance decisions when we need a more analytical and systematic approach to nudge us in the right direction and improve our outcomes. Here are my 3 top tips to start the new tax year:

  • Use your annual investment allowances early in the tax year where you can so that you shelter gains from tax as soon as possible.
  • Set up systematic investment and savings mechanisms to escape wafty human thinking and feelings that threaten our economic effectiveness.
  • Make good use of the tools and resources available from for 6 months to level up knowledge and calculate how to get the most out of your money with our How to Start Investing course, Emergency Fund Calculator and much more.

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