We talk to Holly MacKay of Boring Money and to explore the options when it comes to pensions and investments.
How much do we want in a pension pot when it comes to retirement?
You need to start with your likely income needs and work backwards. While they aren’t always easy to predict, you can probably make an educated guess about whether you’ll still have a mortgage, what your bills are likely to be, and the sort of retirement you’d like to have – is it long holidays and luxury, or pottering about in the garden?
A good rule of thumb is that you need 20x your desired annual retirement income saved as a lump sum. For example, to achieve a £5000 annual income, you’ll need a pot of £100,000.
Your State Pension
You get a weekly State Pension at the age of retirement; you need to have at least 10 years of National Insurance contributions to even qualify. If you work 35 qualifying years, you’ll receive a full State Pension. If you contribute between 10-35 years, you’ll get a proportion of the State Pension.
You can guesstimate what your State Pension will be by thinking about the number of years you’ve worked, or made National Insurance contributions, and then multiplying it by £4.44. 10 years of kowtowing to a boss? That’s about £44 a week. 20 years? £88, or about another £4,500 a year. You will have to top your State Pension up with any work pensions or private savings. The Government website have a handy pension forecast tool so you can see what your pension may look like when it comes to retirement.
Where should you be putting your money for pensions? What type of opportunities are available?
Check out your workplace pension. From 2018 the law says that every employer has to offer, and pay into a pension. Not only will your employer pay in but the Government chips in a bit too. Bother HR! Ask them what the deal is.
If you are self-employed, or don’t feel that you’re building up enough through your employer scheme, you can top it up with a private pension. These are available from traditional providers such as Aegon or Standard Life. It is also possible to get them through investment platforms such as Fidelity and Hargreaves Lansdown. These will often have lots of guidance to help you choose the right option so don’t be put off – have a squizz online.
High risk vs. low risk, what to look out for
Stock market investment is usually seen as higher risk, while low risk options would be cash or government bonds. In general, how many higher risk investments you hold will depend on your time frame and attitude to risk. If you are holding investments for a long time, you can afford to take more risk because you can ride out shorter term movements of the stock market. However, the stock market bounces around, and if you’re really uncomfortable with that, you may want to stick with lower risk assets.
However, one thing to bear in mind is that cash rates are very low and as a result, your savings may not grow in line with inflation if you keep them in cash.
Research says that over 10 years, you are 90% more likely to do better in shares than in cash. And with interest rates at the lowest ever (0.1%) our natural suspicion of the stock market is arguably hurting a lot of us – I think we’re shooting ourselves in the foot by sticking with our current accounts and turning our backs on the stock market.
Things to avoid doing- what should we absolutely steer clear of when saving?
Doing nothing is probably the worst thing you can do. Little and often will make a big difference over the longer term. However, we also wouldn’t recommend putting all your money in a Latvian mining stock, no matter how much your cabbie/plumber/best friend likes it. Collective funds are a great way to start. The Boring Money website has tips and ideas.
What happens with the money we invest?
If you invest in the stock market, you become a shareholder of a company. For example, you could own a little bit of Easyjet, a slice of BP and a chunk of ITV.
If they do well, you do well. If they tank, you lose money. I think the smartest way to invest for most of us is to buy what we call a fund. That’s a basket of about 50 shares which you get a boffin to pick for you. Spreads the love (and the risk!) around.
What happens when it comes to retirement- how do we access our investments?
When you get to retirement, you have to decide what to do with the pot of money you’ve accumulated. You might choose to buy an annuity, where you exchange your pot for a guaranteed income stream for life, or you might choose to keep your pot invested and go into ‘drawdown’.
For example, an annuity is saying “Here’s my total stash of £100,000 in exchange for a guaranteed annual payment of about £5,000 till the day I die.” (Depends on your health/circumstances etc.) And drawdown is keeping some skin in the game but nothing is guaranteed. “I have £100 grand in the stock market, I hope it’s going to go up, and I’ll take out income chunks every now and then.”
I have other priorities, why should I invest?
If you have a few thousand in your current account, your bank is probably paying you nothing right now. We all need some cash in reserve if possible; for when the car packs up or the boiler breaks. 3 months’ salary at least is considered good practice. But after that consider this: if you don’t save into a pension, the State Pension is a maximum of 8 thousand a year. And that’s only if you’ve worked for 35 years. Many of us, frankly, are going to be a bit stuffed.
You can start saving into an ISA (readily available) or a pension (locked away but you get a government bonus on your stash) from as little as £25 a month. And if things behave as we suspect they will, the odds are that your money will snowball over the long-term. And in 10 years’ time you’ll probably high five yourself.
Don’t be greedy. Don’t trust spivs promising free lunches and guaranteed returns. But consider at least putting a very tentative toe in the water with £25 a month for a year to see what it’s like. I promise it’s not as hard as many of us think.
I don’t have anything in place currently, should I be worried? Can I catch up?
Certainly, the earlier you start saving the better because you get the effect of compound interest. If you don’t have anything in place, don’t panic. Just resolve to do something today. It is always better to do something rather than nothing.
I speak to loads of people in their 40s who have nothing sorted but feel a tug of responsibility. The earlier you get going , the better. And if we’re all going to live to 100, 40 is the new 21, right!?
What can I do to secure my family’s future?
If you have kids make sure you have a will and you have life insurance. This is key and our site gives you ways to make this as quick and as cheap as possible.
Junior ISAs are a tax efficient way to save for your kids’ future. And aside from that, we all have a chunky ISA allowance every year. Saving what we can into that is often the most sensible way to get started.
People in the ‘sandwich generation’ are stuck between ageing parents and ageing and increasingly expensive kids! But as they say on airplanes, I think we need to fit our masks first and secure our own tax efficient savings in order to be useful to them. Lots of parents I speak to worry about setting their kids up on the housing ladder. Sometimes, this may not be the best thing to do if it leaves you high and dry.
We hope this article has provided food for thought and good grounding to help you get started or thinking more about your pension and financial future. If you’re looking for more advice when it comes to money matters, check out our related reads below.