Why save for retirement?

As the season draws to a close, it is possible that you will have a bit more spare time to deal with all the “life admin” that gets put to the bottom of the agenda at the beginning of April. One of the issues that is relevant for everyone is putting money away for the time when you stop earning, and have to live off the money you made as a member of the working population. For sportsmen, retirement often comes earlier than for others and many of you will be in the best earning years of your life right now.

So it’s worth thinking about what you can do today to provide for the future, and why it’s so important.

The voice of experience

Don’t wait for the benefit of hindsight. In a 2012 survey of American pensioners, when asked the question ‘what one piece of advice would you give younger people’, 39% responded ‘save for the future’. When asked what was the most important piece of financial advice they would give, 93% said ‘start saving early’ and 84% recommended contributing to your employer’s pension plan.

Whilst I hope and expect that some also responded, ‘live for the day’ or ‘you can’t take it with you’, it certainly indicates that given their time again many older people wish they’d been a bit more shrewd in their younger days so they could spend more time in retirement enjoying their money, rather than wishing they had some.

What happens if I don’t save for retirement?

In the UK, if you haven’t made any private pension contributions and have no other pots of money such as ISAs or cash savings to live from in retirement, you will have to survive on the State Pension. Changes are afoot with this and so these figures will shortly be updated (and will increase a bit), but today’s basic state pensioner receives just £113.10 per week. That’s £5,881.20 per year. Compare that to your current salary and think about whether it’ll provide the sort of lifestyle you want in your 60s and 70s.

Also think about when you’d like to retire. Most people don’t fancy working forever; however much they currently enjoy their job, watching the overseas tour live every winter, or a couple of months sailing the Med every summer, are more appealing than being office-bound for 48 weeks of the year. The State Pension age for everyone under 40 today is now 67, and if anything that is likely to go up before you get there. Before this, unless you’re on benefits, you get nothing from the government. Therefore, if you hoped to retire before age 67, you’ll need to make your own arrangements before State support kicks in.

So what can I do?

Again, start early. To give a basic example, if you start saving £150 per month when you are 25, at retirement you could end up with a fund worth £395,000 (assuming annual growth of 7 per cent). But if you leave it another five years and don’t start saving until you are 30, your fund would only be worth £270,000. That is a difference of more than one-third, and illustrates the power of compound interest over time.

In addition to your cricket pension, which you should all be members of, you can make additional pension contributions. The overall maximum is £40,000 per year (possibly more than this if you didn’t make the maximum contribution in the three previous years), but you must earn at least as much as you contribute to a pension in a particular year for it to be tax efficient. Whilst the maximum is an annual £40,000, just an extra £150 per month as noted in the example above could make a big difference. Get some professional advice or visit www.moneyadviceservice.org.uk if you want to explore your options in more detail.

And it’s not just pensions – some say the major disadvantage of private pensions is that you can’t access the money until you are at least 55 (increasing to age 57). Whilst I would say that’s good because you are supposed to be saving for retirement, of course some people have good reasons to require access to their savings before then. So look at ISAs, cash savings, investments etc. if you would prefer the option of access before you’re in your fifties. Read previous articles for more information on these options.

Just a bit of extra saving now will make all the difference towards that retirement of winters in the Caribbean, or summers in Med.

Disclaimer

FF&P Wealth Planning is not providing advice or any type of product recommendation. Saving and investing will not be appropriate for everyone, and you should seek specialist advice where necessary. A good starting point might be the independent financial information website: www.moneyadviceservice.org.uk 

Summer Financial Roundup

Wimbledon, the World Cup and the Commonwealth Games are all over, so there’s now little excuse not to sort out your finances this summer! Just kidding, we know this is your busiest time of year, but just in case you have a few minutes between innings to tidy up your finances, following these financial hints and tips could mean you have a better organised financial situation by the end of the season.

Exchange Rate – boost your holiday money

Hopefully this one will last until October when no doubt you will be heading off for a few well- earned weeks rest on a sunny beach. You may have read in the paper or heard on the news that the British Pound is currently strong against most major currencies. This means that, as things stand, you should get more Euro, Dollars or Malaysian Ringgits for your money when you head abroad this year.

There are many reasons why the Pound is strong at the moment, but one of the main ones is because the UK is generally in better economic shape than many other countries, so this is seen as a good place to hold currency over many other countries. Make the most of it and use a currency exchange comparison tool before you go to get the best deal on your holiday money.

ISAs – save tax on your savings and investments

Our last article outlined the New ISA rules, which came into effect on 1st July. You can now save £15,000 per adult in either cash or stocks and shares in an ISA. This is a significant increase, particularly in respect of Cash ISAs where the previous maximum was £5,760. Income and gains made in ISAs are tax free, potentially delivering big benefits if you can get the maximum in each year. Depending on your circumstances, ISAs can be a great first step into the world of saving and investing for your future, especially if you combine it with maximising your pension contributions (see below).

Also, if you have kids, you can also now put in £4,000 per year to their Child Trust Fund or Junior ISA. From April 2015 you should also be able to transfer any Child Trust Funds into Junior ISAs, which should mean greater flexibility and more investment options for your children’s savings. Remember this could be a handy pot to put towards university fees or their first car or flat. It is never too early to start saving!

Pension contributions

The summer can be a good time to review your pension situation and consider whether you are saving the most you can afford. Your cricket pension requires you to pay at least 5% of your salary in, but you will get tax relief from the government on any contributions you make. This can mean an extra 20%, 40% or even 45% of the contribution is added on your behalf, depending on how much you earn. This really is free money, and the more you pay in the more tax relief you could get so it’s worth maximising your payments if you have some spare cash at the end of the month.

Most of you will be able to access your pension from age 55 (possibly going up to 57 or 58), so it’s a long term plan, but potentially a valuable one when planning for life after cricket.

Mortgages and credit cards

At the moment mortgage rates are historically low. Take some time to check your deal and make sure it is competitive. There is some talk that rates will start to go up later this year or next year as the economy grows, so if you are in a position to, you could consider locking in to a deal now whilst rates are low. Always speak to a mortgage adviser first to check that any deal is suitable for you, and that there aren’t penalties if you leave your current mortgage early.

It goes without saying that, other than your mortgage, debt is not the best position to be in. Try and pay off any personal loans or credit cards as quickly as possible, and in general this should take priority over adding to savings and investments. Credit cards are notoriously expensive when the 0% interest deals end, so either pay it off as you go or if necessary make sure you switch to another 0% deal when it ends to avoid paying unnecessary interest charges. Don’t use credit cards as a way of making your monthly salary go further, it will come back to haunt you in the end.

Insurance

Review your insurance contracts on your car, home, contents and anything else to make sure they’re competitive. The PCA has deals with brokers who can help if you think you aren’t getting value for money in these areas – head to the PCA website as a first port of call for more information.

Disclaimer

FF&P Wealth Planning is not providing advice or any type of product recommendation. Saving and investing will not be appropriate for everyone, and you should seek specialist advice where necessary. A good starting point might be the independent financial information website: www.moneyadviceservice.org.uk 

 

 


 

ISA Changes

In January this year we wrote to you about saving into ISAs, and how this is often a good idea if you have spare cash to save at the end of the month. In the Chancellor’s Budget in March he announced wide-ranging changes to ISA saving and these come in to effect in July 2014, so get ready!

Individual Savings Account (ISA)

As a reminder, an ISA (which stands for an Individual Savings Account) is a Savings Account for either cash or investments that does not charge tax on the income you earn inside the ISA, nor on the capital growth of your investments.

Main changes

Those of you who use your ISA allowances regularly, or remember our article from January, will recall that at present your ISA allowance is split between what you can save in cash and what you can invest, usually in stocks and shares. From July 2014, you will be free to invest all of your ISA allowance, which has been increased to a whopping £15,000 per person per year (up from £11,520 in 2013/14), in either cash or investments, or a mixture of both.

The ISAs will be rebranded as “New ISAs”, or NISAs, and will open up a great deal more flexibility for savers and investors. They will also allow you to make more of your savings tax efficient, because you can save more into them.

For example, if you were to save the full £15,000 in cash in your NISA, and managed to find a 2.5% annual interest rate, as a basic rate taxpayer you would now save £75 in tax. Until April 2014, you were only allowed to save £5,760 in cash in your ISA, the maximum tax you could have saved was £28.80 based on a 2.5% interest rate. This is a big jump.

If you are a higher rate tax payer, the numbers are even more impressive; from July you would save £150 in tax on the above example, compared to a £57.60 saving until April 2014.

From July you will also be allowed to transfer old Cash ISAs into Investment ISAs and vice versa, something that was previously restricted.

This all points to the government’s desire to make saving more attractive and to give you the freedom to use your tax allowances as you wish. It should help make saving for your house, car, TV or new cricket kit all the easier, and we urge you to consider making the most of the allowances available if you are debt-free and have money available to save or invest.

Some things have stayed the same…

It is important to note that this year’s full ISA contribution of £15,000 can be made from July 2014 but must be used by April 5th 2015. Any unused allowance still cannot be carried over to future years.

If you make a withdrawal from your ISA during the year it is not possible to replace this part of the contribution later, so think carefully before making withdrawals just to top up general expenditure.

ISAs remain a great way to save or invest tax efficiently. Your ISA holdings do not need to be included on your tax return. ISAs are also extremely flexible, most accounts (unless you have chosen a fixed rate cash ISA) allow you to get access to your money whenever you want without penalties. This makes them a good option for people looking to grow their money, but who want to be able to make a withdrawal when necessary.

Junior ISAs

A quick word for those of you starting a 1st XI of your own… from July the Junior ISA allowance will increase to £4,000 per year, and this can be a great way to start a nest egg or university pot for your little ones in a tax efficient way. Anyone can contribute – so encourage grandparents, aunts, uncles and wealthy cousins to make tax efficient birthday or Christmas gifts. You’ll thank them for it when university fees come round!

Disclaimer

FF&P Wealth Planning is not providing advice or any type of product recommendation. ISA investing will not be appropriate for everyone and you should seek specialist advice where necessary. A good starting point might be the Independent financial information website www.moneyadviceservice.org.uk


Risk appetite

When deciding whether or not to go for a six, you may well be considering the risk and potential return. On the upside you could get six runs, however, you might be more likely to get out!

Saving and investing also involves a variety of risks and returns, for example the risk your money will not keep up with rising prices (inflation risk),the risk that comes with share prices going up and down (market risk), the risk that the person or company that you invested your money with will fail (default risk) and the risk that you could have earned better returns elsewhere. 

    

 When deciding how to invest and save it’s important to strike a balance between these different risks and the potential rewards. The factors to consider when getting that balance right for you will depend on:

  • Capacity for loss – how much you can afford to lose
  • Investment goals and objectives – time frame and need for returns
  • Attitude to risk 

Taken together these make up what’s called your ‘risk appetite’. 

Capacity for loss

What would happen if you lost some or all of the money you’re putting into investments?  Or, what if stock markets have fallen and the time you need the money is not a good time to sell? The answer to these will depend on your circumstances and how much of your money you’re investing.

To help develop your answer, it’s important to think about the people who depend on you financially and any other important financial commitments you need to be sure of meeting.  There is often little advantage in investing for the long term, only to have to borrow to then meet short term needs.

Investment goals and objectives

Your saving and investing choices will depend on your financial goals and timescales – the bigger your goal in relation to the assets or income you wish to invest, the greater the rate of return required to meet your goal. Taking no risk at all may make your goals impossible to achieve; or taking too much risk may lose all your investment.

As discussed below in the ‘Investing and Savings’ article, short-term goals (under five years) such as a car or a house deposit are best saved for in cash; whilst with longer-term goals, it might be more suitable to invest your money to give a better chance of greater returns.

However, as a long-term goal moves closer, your risk balance might need to change. For example, you may want to start moving into less risky assets a few years before the goal date, to start ‘locking in’ gains, and to protect your investment against events like market falls.

Risk attitude

Personal attitude to risk is hard to measure and can be changeable, what feels comfortable one day may not the next.

Risk attitude is subjective and is likely to be influenced by current events or recent experiences which can make it tricky to look long term. When stock markets are rising, people often feel comfortable with market risk; however, they tend not to when they are falling. Unfortunately, this natural tendency means that people often make bad investment decisions. Most people are not comfortable with the idea of losing money. On the other hand, they may regret it if they’ve been very cautious and their long term investments don’t produce the returns that others receive.

Summary

You should always assess your risk appetite and circumstances before making any investment decisions and understand the risks you are taking.

Investment advisers and financial advisers must assess your risk appetite before making any investment recommendations. Some use risk-attitude questionnaires, but remember your capacity for loss and the nature of your investment goals are also essential in determining a good balance of risk for you.

You can also manage your risk by not putting all your eggs in one basket and spreading your money across a range of different types of investments. As in cricket, perhaps it makes more sense to go for four!

Disclaimer

FF&P Wealth Planning is not providing advice or an investment recommendation. The value of investments can go up as well as down and you may not get back the full amount invested. This article should be used for general information only.

 

SAVING CASH V INVESTING

From a young age, you’ve probably heard your parents say “don’t spend it all at once”, but if you do decide to save your money, you have to think about what to do with it.                              

Goals and Objectives

In today’s world it can be hard to find any spare money from your pay cheque to save, but it is really important to work out how much you can afford to save from your monthly budget, if it’s possible. Once you manage to start saving money, either on a regular basis or if a lump sum comes in (hopefully a bonus for some silverware success), you then have to decide what to do with it.

Saving Money – Short Term

There are many things you will want to buy in the next five years – some things will be small, like a television, and others might be much larger, such as a house. Having your savings in a bank account or building society account means, that when it comes to paying, you can transfer your money across. For this reason, it’s really important to have money in your bank or building society account, in excess of what you need as an ‘emergency fund’. It is important to use your savings for this, rather than using a credit card because this can be a very expensive way to buy things. 

Investing Money – Long Term

There are also things that you may plan to buy in the long term. It may well still be a house, but you may want to buy it in longer than five years’ time. If you put your savings into a bank account, you will only earn interest, which has been very low over the last few years (perhaps around 2%). This is why many people look to investing. Investing means putting money into shares, bonds, property or other financial schemes, with the purpose of earning a profit. Over a longer period, returns are usually greater than bank interest rates; however, it’s worth bearing in mind that the value can drop to lower than the original investment value.

As this chart below shows, the value of investing (the blue line) goes up and down a lot more than putting the money in the bank (the black line). So, if you wanted to use the money in the short term (less than five years), you might not want to risk investing it and having less than you started with. However, if you want to use the money over the longer term (over five years), investing should make your money work harder and could lead to bigger returns. 

 

Summary

It is worth pointing out that there are many more complicated ways of investing than highlighted above and that it is important not to put ‘all your eggs in one basket’ when investing. Before implementing your saving and investment strategy, you should look to get advice from the relevant financial services professional. However, once you have a strategy for saving cash for the short-term and investing for the long-term, it can help you to achieve your financial goals and objectives. This should free up more time to focus on your goals and objectives at the crease.

 

USING YOUR ANNUAL ISA ALLOWANCE

As Benjamin Franklin once said, "In this world, nothing can be said to be certain, except death and taxes” . However, using your ISA allowance for savings or investment purposes is one of the few times that the government has provided an easy (and legal) way to reduce your 
tax bill – but you need to act before 5 April 2014.

Individual Savings Account (ISA)

What's special about an ISA (which stands for an Individual Savings Account) is that you will not be charged tax on the interest you earn, nor on the capital growth of your investments.

Cash ISA

The annual limit for cash contributions into your Cash ISA for tax year 13/14 is £5,760. This cash will not be subject to income tax, as it would have been in a regular bank account. This means that higher-rate taxpayers save income tax at 40% on any savings interest (additional rate tax payers save 45%), while for savers in the basic-rate tax band, it provides a saving of 20% on interest.

Benefits of Cash ISAs

To show the power of this tax saving, since ISAs were introduced in 1999, a comparison between a basic-rate tax payer who opened a Cash ISA when they were first launched and contributed the maximum each year, shows that they could have over £5,000 more than someone who used a basic (non-ISA) savings account, earning the same interest rate.

Stocks and Shares ISA

The annual limit for contributions to your Stocks and Shares ISA for tax year 13/14 is £11,520, although any contribution to a Cash ISA for the year will be deducted from the Stocks and Shares ISA limit.

Benefits of Stocks and Shares ISAs

If you use the stocks and shares part of your ISA, you will not have to pay Capital Gains Tax on your profits (potentially saving up to 28% tax). When it comes to Income Tax, ISAs help reduce the tax on dividends too.

Whether or not you should take out a Stocks and Shares ISA will depend very much on your attitude to risk. You should always seek professional independent financial advice first – for many, it’s the easiest way to start investing.

Summary

It is important to note that this year’s ISA contribution must be made by 5 April 2014 and any unused allowance cannot be carried over to future years. If you make a withdrawal from your ISA during the year, it is not possible to replace this part of the contribution later. You can also transfer existing ISAs to a new ISA. You can only put money into one cash ISA and one Stocks and Shares ISA per year.

ISAs are a great way to save or invest tax-efficiently. Any ISA holdings do not need to be included on your tax return. ISAs are also extremely flexible – most accounts (unless you have chosen a fixed rate ISA) allow you to get access to your money whenever you want. This makes them a good option for people looking for decent returns, but who want to be able to make a withdrawal when necessary.

Hopefully by using your ISA allowance limits, you won’t feel the desire to bowl a rib-breaking bouncer at the tax man!

 

CHRISTMAS TIPS 

Christmas is a season of joy and goodwill. It’s also the busiest sales season for department stores and online retailers. 

Christmas is a busy time for credit card companies and pay day lenders too. Cards are used to facilitate spending, which is entirely sensible, although the trouble with credit cards is that many of us are persuaded to spend a little more at Christmas than we actually have in our bank account or our next pay cheque. For those who are careful and pay their credit cards off over a couple of months, that may be natural. However, the problem for most of us is that it’s too easy to go for the minimum payment on our credit card on direct debit and let the balance roll on. With UK bank rates at their lowest levels ever, this strategy might look alright, but the interest rate on credit cards might still be about 20%, which is an average rate these days.

Interest rates can be worse on some credit cards and are not far short of ‘daylight robbery’ from pay day lenders. 

Some credit card companies play to our human nature and offer an incredibly low monthly repayment, as low as 2% of the outstanding balance. If you overspend by £1,000 this Christmas and repay a minimum balance of just 2%, it could take you almost 4 years to settle the bill. 

So here are a few top tips to think about in the run up to Christmas:

  • Work out an affordable budget for Christmas, which includes presents or partying and try to stick to it.
  • Have a look at the last credit card statement you received, and make sure you understand what your card will cost you in charges if you don’t pay it off in full. It’s best to know that before you start using it.
  • If you have more than one credit card, check whether you are being charged an annual renewal fee. Reducing the number of cards you have may reduce fees being paid for something you don’t need.
  • If you have to go to a pay day lender or dip into an unauthorised overdraft this December, then you probably can’t afford to give your family more than a Christmas card. So just be honest with them and yourself!

Remember, just because it isn’t going well ‘down under’, that doesn’t give us an excuse to drown our sorrows and pay for it later… but if you do, make sure it’s not Australian wine!

Advice supplied by FF&P Wealth Planning. For more information on finance and wealth planning, please visit www.ffandp.com.