You can listen to this episode on YouTube.
Retirement is a dream shared by many of us, but achieving it requires careful planning and early action. In this article, we’ll delve into the world of retirement savings and reveal exactly how much you need to save each month to retire comfortably. So, if you're aiming for financial independence but are possibly thinking it’s a pipe dream, buckle up and discover the key to retiring early!
Understanding the two pension types – DC and DB pensions Before we jump into the numbers, let's familiarize ourselves with the two primary types of pensions: Nowadays, most people have "defined contribution" (or DC) pensions, where the amount you and your employer contribute determines your retirement income. The risk lies with you, because your return, i.e. the pot of cash you’ll have at retirement, depends on the performance of the stock market. Previously, "defined benefit" (or DB) pensions were more common, guaranteeing a pension until death based on your final or average salary and the years of service. However, DB schemes have mostly been phased out and won’t be covered in this article. If you have a DC pension, if the stock market performs poorly you’ll either have to work longer or plan for a leaner retirement. Defined contribution schemes are sometimes called ‘money purchase’ schemes or self-invested personal pensions (SIPPs). They are similar to what Americans call 401K plans. How do you calculate your retirement "pot"? To estimate the size of the retirement fund you'll need, we can employ a simple rule of thumb. Multiply your desired annual retirement income by 25, and voila! You have worked out roughly how much you should aim to accumulate. But why 25? This is based on the ‘4% rule’ – a widely accepted guideline that suggests that withdrawing 4% of your invested pot annually, ensures your money lasts. Research has shown that even after three decades, your investments tend to grow due to average growth rates of a diversified investment fund surpassing the 4% withdrawal rate. {If the nerd in you wants to get into the maths: 4% = 4/100 and 100/4 = 25; … you don’t need to understand the maths, though, just use the rule} Estimating your retirement expenses – how much will you need to spend in retirement? Now, let's discuss the various lifestyle options and corresponding expenses you might encounter during retirement: according to research conducted by Loughborough University and the Pensions and Lifetime Savings Association, we can categorise retirement lifestyles into three levels: minimum living standard, moderate lifestyle, and comfortable lifestyle. To account for inflation experienced since these studies were done, I’ve increased the figures by 20%. To maintain a minimum living standard, a single retiree requires an annual income of £12,240, while a couple would need £18,840. For a moderate lifestyle, the figures rise to £24,240 for a single person and £34,920 for a couple. Lastly, to enjoy a comfortable retirement, aim for an income of £39,600 if you're single or £57,000 for a couple.
(source: moneyfacts.co.uk; and increased by 20%)
What are these different lifestyles assuming? A minimum living standard assumes a single retiree spends £46 per week on a food shop, has a one-week holiday and a long weekend in the UK each year, does not own a car and spends £555 a year on clothing and footwear. With a moderate lifestyle, our single retiree spends £55 on food each week, enjoys two weeks in Europe and a long weekend in the UK each year, and spends £900 on clothing and footwear each year. With a comfortable lifestyle, the single retiree spends £67 per week on their food shop, enjoys three weeks in Europe every year and spends £1,200-£1,800 on clothing and footwear each year. Calculating your investment targets Using the 4% rule and these lifestyle figures, we can estimate the amount you need to save for retirement. Here's a breakdown based on your desired lifestyle and whether you're single or part of a couple:
I know that these numbers look huge. But keep listening, I’ll show you that you can achieve them much more easily than you think.
Getting started: how much to save each month Now, let's explore the exciting part—how much you need to save each month to reach your retirement goals. Assuming you're a basic rate taxpayer, investing in a global passive fund with an average annual growth rate of 7% (we’ll discuss whether this is a reasonable assumption in a future post), aiming for the ‘comfortable’ lifestyle (i.e. £990k if single; £1.425m for couples) and ignoring the state pension (I’ll explain why in the next article) and employer contributions these are the monthly amounts you need to put into a pension account based on your starting age (rounded to the nearest 5): Each month until you’re 68 you need to save:
What the table shows is that the younger you start saving and the longer you save for, the less you need to set aside each month.
Factors that can offset the numbers Don't worry if these saving targets seem daunting because there are several factors that can actually work in your favour, offsetting even the larger amounts you need to save if you start late. Let's take a look at these positive factors:
In conclusion, securing a comfortable retirement requires forward thinking. If you didn't have this information when you started working, don't worry—now you do! There's no time like the present to start saving for your future. And here's a bonus: you can share this valuable knowledge with your children, ensuring they don't make the same mistake that many others do—starting too late. With the right strategies and a proactive approach, you can pave the way for a financially secure and fulfilling retirement. Your future is in your hands. References What Is the 4% Rule for Withdrawals in Retirement and How Much Can You Spend? Q&A: How much do I need to save for a comfortable retirement? Pensioners need a £33,000 a year income to enjoy a comfortable retirement Fidelity Retirement calculator How to get the £260,000 pension pot needed for a comfortable retirement - and why it might not be as hard as it sounds Dave Ramsey investment calculator (ignore the $sign) Fidelity.co.uk retirement calculator
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I receive a lot of questions about “how to start investing” and this month alone I’ve fielded more questions than ever before, so, as a belated birthday present to myself I decided to get this all out into a simple blog.
A couple of housekeeping points first: Any tax rates and thresholds mentioned in this post will be correct as at the time of writing but tax is something that gets tinkered with all the time so this could get dated pretty quickly but using figures will help you to understand how it all currently works, in principle. Everything I share here is information not advice. Once you decide to actually start investing you would be well advised to: a) do some further research yourself; and b) speak to a fee-only all-of-market independent financial advisor. Fee only means they don’t charge you a percentage of what you have to invest (that is, they charge a fixed fee) and all-of-market means they can offer products from a range of institutions.. Ideally, you should only invest money that you will not need for at least 5 years. This is because share market prices move up and down a lot and if you need that money before five years is up, there is more chance that you might have to sell at a loss. Investing is a long-term game, the longer the time you can wait, the higher the probability of being up. Over a 20 year period, the S&P500 (which is the 500 largest listed companies in the USA) has returned a positive return 100% of the time. While the future may turn out to be different, you are generally well advised to leave money invested for as long as possible. While my aim is to make this discussion as simple and as unintimidating as possible, at times it will feel really complex not because investing is hard but because we invest within the context of a very complicated and convoluted tax system. But you have to get to grips with our tax system to get ahead with investing…anyhow,…I’ll divide this into four parts to keep it clear:
PART 1 – What sort of investment account should you put your money in
You can think of your 'investment account' or ‘investment vehicle’ as the “house” where your money is kept. There are three different types of vehicles:
1. A pension be it a workplace place pension or personal pension (aka a Self Invested Personal Pension) allows you to invest money before it is taxed; 2. A “stocks and shares” individual savings account or ISA allows you to invest money after it’s been taxed but all dividends and capitals gains are tax free; 3. A taxable brokerage account – means you invest money after it’s been taxed and any capital gains and dividends are also taxable. Any business that offers the services to buy or sell shares and investment funds will typically offer all three vehicles, i.e. they will usually offer pension accounts, ISA accounts, and taxable trading accounts. There are different pros and cons of investing in each of these three. I will highlight the main pros and cons. PENSIONS I am only going to cover defined contribution pension schemes in this post, which is what most people have nowadays. I won’t cover defined benefit pension schemes in which the employer commits to pay you a specific amount from a pre-defined retirement date until death. The rules are much the same between the two but if you’re responsible for your own retirement income as is the case if you have a DC scheme you’re likely to be more aggressive with building that pension pot. I’ll cover the difference between DC and DB pensions in a future post. Pros of investing through a pension
Cons of investing through a pension
Rules on how much you can invest in a pension… There are limits on how much you can invest via pension each year and over your whole lifetime. Firstly, the annual allowance is the maximum you can put into your pension each year and still get a tax benefit. This is currently £40,000 gross (i.e. before tax) or your full annual income, whichever is lower. So, if you earn £30,000 a year the maximum you can put into a pension is £30,000. I am sorry that this is getting complicated already but the UK tax system is mad – so a little detail is essential. A key thing to note is that not all income qualifies towards this pension contribution limit. Earnings from property aren’t allowed. So if all your earnings are from a buy-to-let property portfolio that is in your name, the maximum you can put into a pension is £2,880 and with the government tax benefit this is grossed up to £3,600. So, you’d only invest £2,880 into the pension and it would be grossed up to £3,600. If your BTL properties are in a company, then you could pay yourself a salary (and you’d need to follow rules on national insurance contributions too) and whatever your salary is – up to the £40k annual allowance limit – would be the maximum you could pay into a pension and still get a tax benefit. The second limit is the pension lifetime allowance which is just over £1m at the moment. This may sound like a high limit but it includes capital gains not just contributions so you can easily breach the limit. For instance, if you had £250k in your pension at the age of 35, a 7% growth rate in your portfolio would mean the money doubles every 10 years, so even if you didn’t invest anything else, that £250k would grow to £1m by the age of 55. Ideally, the lifetime pension allowance should grow with inflation but it’s frequently frozen and was even slashed from £1.8m in 2012 to £1m in 2017. This post is not about pensions but they are one of the primary vehicles you can invest through so hopefully what I’ve said so far will help you understand whether is this is the best vehicle for you. Depending on how much money you have to invest, I would look at putting some money in both a pension and an ISA and if you have more besides then you can put some into a taxable investment account. ISAs I love ISAs because once the money goes in, you don’t have to think about making tax declarations any more – it’s all tax free from that point. Pros of investing through a stocks and shares ISA I won’t cover cash ISAs here as this post is specifically on getting started with investing in stocks and shares.
Cons of investing in an ISA
Whether you plan to invest in a SIPP or ISA depends on your financial position and future plans, e.g. retirement goals, goals for your children if you have any etc. As tax advisor to my friends and family I recommend different things depending on what I know about the person including their propensity to choose spending over saving or investing, there is no blanket rule. Taxable brokerage account If you have maxed out your £20,000 ISA allowance and your spouse’s £20,000 ISA allowance and your £40,000 pension allowance then the next place you would look to invest is via a taxable brokerage account. If you are saving that much though, you may want to just spend more…better holidays, more life experiences etc. PART 2 – Who i.e. which institution should you invest your money through
So, you’ve figured out whether to put your money in a pension, an ISA or even taxable account, you now need to decide where to open your pension, ISA or taxable account. The way to think about this is, if you had money to save, one of the questions you would want to answer is ‘which bank should I keep my money with’, that’s the decision we are trying to make in part 2.
If you have a workplace defined contribution pension, that decision is usually made for you although in some cases you’re offered limited options. You are allowed to have a personal pension outside your workplace in addition to the work one but I personally I’m happy with the options provided by the provider of my DC pension at work so I don’t contribute more to another SIPP. There are three options open to you when it comes to type of institution:
The key driver of which platform to use is:
Fees – annual management charge Of the platforms I would guide you to research, these are the annual platform fees you can expect to pay as a beginner. In many cases the fee falls as your portfolio grows:
In addition to platform fees, whatever you invest in will have an ongoing annual fee. Ongoing fees usually range from as little as 0.05% to over 1.00% and in some cases as much as 3%. Watch out for the ongoing fees of what you buy as this is what can really harm the growth of your portfolio. There may also be fees for leaving or joining the platform. Look at all chargeable fees before committing to an account – you can always change institutions if you change your mind but it’s better to do your research before you even start. Any institution regulated by the Financial Conduct Authority, FCA, will be transparent about all the fees charged. Don’t invest through any unregulated institutions. As I researched this article I discovered that Junior ISAs at Fidelity are not charged an annual management charge and I immediately transferred all my children’s ISA investments to them from Hargreaves Lansdown. That was £55k in total – their investments of £20k each, have grown well over time so despite the poor stock market returns of 2022, they remain up. If you’re interested in how I invested for my kids see my post, Q&A: How can I save and invest for my children? I won’t spend a lot of time on fees but will link to several articles that discuss fees across a range of platform: PART 3: HOW MUCH TO INVEST
sIf you have a lump sum to kick start your investing, that’s great. You can invest it all in one go, however, some people prefer to spread a large investment into smaller chunks spread over 2 or 3 months. There is no real benefit in this if you are investing for the long-term – in fact, data suggests that lump-sum investing beats drip feeding your investment into the stock market 75% of the time. But if it makes a psychological difference to you, you can split a large lump sum over a few months.
What’s large? That’s for you to define because if I had a large sum to invest, I would invest however much I plan on investing all in one go. Generally, most people don’t have a large sum and the decision is about how much to invest each month. Investing monthly, over a long period of time, is called ‘dollar cost averaging’ into the market as your shares are cheaper in a bear market and more expensive in a bull market so over time you are paying the average price of the market. If I was working with a specific person, I would want to know how much they want to have at the age of 50 or 55, either as an annual income or in total and I would back calculate the amount they need to invest monthly, today, to achieve that goal. You can do this for yourself using an online calculator - I like the investment calculator on Dave Ramsey's website, you can ignore the fact that it has a $ sign and put in your GBP investments - the sign doesn't matter - I assume a gross return of 7% (that's the return before inflation is taken into account - with average inflation of 3% this is a net return of 4%). You can also ignore links to other resources as they are US-centric. PART 4: WHAT TO INVEST IN
Equities / shares
Investing in the shares of companies is called investing in equities. Equities pay dividends if they have money left over after paying all costs including interest on their debt. Some companies, especially fast growing companies, choose not to pay dividends and instead re-invest the money. If you buy the shares in a company, you’re known as a shareholder and you also make a return or loss from any increase or fall in the price of shares. So, if you buy shares for 10 and they grow to 12, that’s a 20% return; if their price falls to 8, that’s a 20% loss (the profit or loss is only realised if you sell, i.e. a loss is only a loss on paper - not a real loss - unless you sell, so, if share prices fall they can be left invested so that they recover in price). Debt / bonds Investing in the debt that companies issue is called investing in bonds. Bonds earn a fixed and known return. There are a few options you can choose from, here I’ll suggest 3 for you to look into: Option 1: 100% stocks in a diversified fund If you’re starting out in investing, you should be satisfied to earn the average stock market return by investing in a low cost diversified index fund. It requires a lot of time to identify specific companies that are undervalued or those with great growth potential and you don't need to do this to do well with investing - in fact, the evidence suggests just putting money in one or two diversified passive funds gives better returns than stock picking yourself and trying to beat the market. I personally prefer stock indices that track the S&P500 (these are the 500 largest companies in the US) – these funds usually cost 0.10% or less. Large US companies usually have global sales and source materials internationally so I feel it is adequate diversification that implicitly includes Europe and exposure to many emerging markets without having to worry about corporate governance issues. The historical average yearly return of the S&P 500 is 9.645% over the last 20 years, as of the end of November 2022. This assumes dividends are reinvested. Adjusted for inflation, the 20-year average return (including dividends) is 6.932%. (source: tradethatswing.com) If you prefer to invest in the UK stock market, you can choose fund that tracks the FTSE-100 in the UK. In the 20 years leading up to 31 December 2019, the FTSE 100 had an average annual return of 0.4% if dividends were not re-invested but this rose to a not insubstantial return of 4% a year if dividends were reinvested. Option 2: Target date funds Target date funds are funds that invest based on the assumption that you will retire in a given year. These funds have a higher proportion of riskier equity investments and a lower proportion of bonds which give a fixed and known return. As the retirement date approaches, more and more money is invested in bonds and less and less is invested in equities. Some in the investment community consider that target date funds get too conservative too quickly because no one retires and needs all their invested money straight away. So, if you want to have some money in equities and a portion in bonds, you could start with a target date fund with the retirement date set further in the future than you plan to retire - perhaps set it 20 years further than you plan to retire especially if you're partly saving to pass on an inheritance rather than just for your retirement needs. Option 3: Ready-made funds Many institutions offer ‘ready-made funds’ to get you started with investing and if you choose to go with that, as I did when I first started investing, take that as a learning opportunity. Seek to understand what is in those funds, what the fee structure is and if you don’t like the underlying investments or see that the relative fees are high, either don’t buy them in the first place or seek to move away to other investments. I do not recommend investing in single stocks, e.g. buying specific companies as this exposes one to a lot more risk than tracking a whole market so I won’t cover single stock investing here. I used to trade in single stocks myself but I no longer do. A simple example - investing in action
I know all this information might seem confusing so I thought I’d give you an example of all this in action.
So, as an example, about 3 years ago, unprompted, I told a 30-year old couple I know and like that if they wanted to have £300,000 or so when they are 55, in addition to their work place pensions, they should put £100 into a SIPP every month. With a lump sum like that they would have the option to retire early and as DINKies (double income no kids) I knew they wouldn’t feel that kind of investment even if it fell to zero – and with the government match they would be 25% up from the outset due to the tax saving. As I knew they were first time investors and quite risk-averse I got them to put almost all of the invested money in S&P 500 trackers with about 10% in an actively invested fund. They use Hargreaves Lansdown – I chose this for them because their customer service is great and you can easily get a person on the phone – but as their funds grow I might get them to move to a cheaper provider. I’ll review this when they have £50,000 or so. Three years later, they have about £20k between them (they invest a little more than I suggested). As I wasn’t happy with the performance of the actively managed fund, I got them to sell all of that and stick to low cost diversified funds. They’re happy with this set and forget strategy and aren’t much interested in overthinking it and unlike most of their friends have savings. In about four years, they will also be mortgage free to boot – based on a repayment plan I’ve advised them to stick to. Financially they’re on a great track and are also enjoying life… So, investing doesn't need to be complicated or big. You can start small and increase your investment as you learn more, develop confidence, and start to understand how different investments work...OVER TO YOU! Get help investing:
If you want help with setting up your investment account and selecting funds, click the PayPal link below to book me and fill the form in to tell me a little about your situation. Your booking gets you two one-hour phone calls during which we will chat through what you want to achieve with investing then I'll help you set your investment account up in your own name and automate everything for you.
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This 6-month coaching program will be custom built to suit your needs.
I used to coach people on business issues only but I quickly discovered most struggles were the result of factors that hadn't even been considered. My coaching programs last 3, 6 or 12 months. During that period you have full access to me by phone, email, text, skype and if you live locally, even for coffees. So that we can just crack on with making you awesome I take payment upfront. Psychologically this makes you commit fully and wholly to the program too. My coaching covers:
Before a coaching relationship starts I recommend you book a one-off call to discuss your self-development needs . If you go on to book a coaching package this "analysis call" will be refunded. You're awesome. Let's make sure everyone who so much as walks past you sees that too! Bonus: you will get the Build A Booming Business Planner & the iPlan To Succeed Life Planner free with this coaching package. Check your email as soon as you've checked out of the shopping cart. 12-Month Coaching Program
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This 12-month coaching program will be custom built to suit your needs.
I used to coach people on business issues only but I quickly discovered most struggles were the result of factors that hadn't even been considered. My coaching programs last 3, 6 or 12 months. During that period you have full access to me by phone, email, text, skype and if you live locally, even for coffees. So that we can just crack on with making you awesome I take payment upfront. Psychologically this makes you commit fully and wholly to the program too. My coaching covers:
Before a coaching relationship starts I recommend you book a one-off call to discuss your self-development needs . If you go on to book a coaching package this "analysis call" will be refunded. You're awesome. Let's make sure everyone who so much as walks past you sees that too! Bonus: you will get the Build A Booming Business Planner & the iPlan To Succeed Life Planner free with this coaching package. Check your email as soon as you've checked out of the shopping cart.
.I always say that if you get nothing else right in your financial life, at least own where you live outright by the time you hit retirement and ideally much earlier. Well that’s not quite right, the other thing you need to make sure of, is that you qualify for the full UK state pension.
Currently, when I am 68, for so long as I have 35 qualifying years, I will get £185/week in state pension until my dying day. That’s about £800/month or £9,620/year. This is not an insignificant amount and if you live with someone, i.e. your partner, a sibling or friend, it’s double that as you would each qualify separately. My calculations suggest that if you’re living on your own, that amount of state pension would at least cover all basic utilities (water, energy, council tax) and food. You can check how many qualifying years you have and whether you can boost them at gov.uk/check-state-pension. If you’re self-employed, to qualify for the full state pension later on, make sure you’re signed up to pay Class 2 national insurance and if there are any gaps in your national insurance record, pay for them asap as you can only fill gaps going back 6 years: gov.uk/national-insurance/national-insurance-classes As the state pension is unlikely to be enough, it’s helpful to contribute towards a personal pension (aka a self-invested personal pension or SIPP) as pension contributions get tax relief such taht every £240/month contribution equates to £300/month into your pension pot. Based on a 7% gross growth rate of your pension pot (and keeping in mind the historic average return of the S&P 500 is 10%)
If you want to play around with how much you should expect to spend in retirement, here are a few other helpful blogs:
Hi Heather
I’m really enjoying your podcasts and have already given a 5 star rating. I am 57 and plan to retire at 60 so love your retirement items. When talking about 4% draw down for retirement income, it’s never clear if the figures are before or after tax. For example 4% of £1m is £40k, but after tax this could be nearer £30k. If you then get a state pension of say £9k, the figure before tax is £49k, but after tax it is nearer £35k. So when you talk about money needed in retirement, do you mean before or after tax? Thanks, David 
David, thanks so much for the review! I definitely appreciate it.
First things first, David I am sorry that it’s taken me ages to get a blog post done on this, however, I did respond to your question directly within 24 hours of you asking it so I hope that will make up for the late blog post response to your question which you asked me roughly 3 months ago and 4 months ago by the time this airs on The Money Spot podcast. Turning to the 4% rule… For those that have not ever heard of it, the 4% rule states that if you don’t want your pot of invested retirement funds to run out before you die, the maximum you can take from that pot each year is 4%. This means that if you want an annual income of 40,000 from your retirement pot, you need to save one million (GBP, USD, EUR) – I believe the study was done using American stock market performance but if you invest in a global portfolio it will be heavily weighted towards the US so you can use the 4% rule as the best proxy we have on what a reasonable withdrawal rate is. To answer, David’s question, the 4% drawdown is gross and you would have to pay tax after that. So, if you have £1,000,000 (for simplicity) in your pension pot in a given year, you would draw £40,000 and pay the tax on that. If you are based in the UK, you cannot throw the gross amount drawn from your SIPP or other taxable investment account into listentotaxman.com to get a calculation of your after-tax income because your drawings from your investments are chargeable to capital gains tax so you don’t pay income tax on them but capital gains tax. Capital gains tax rates are different. In 2020, assuming 50% of the £40,000 you draw is capital gains, then your net income after tax would be calculated as follows: Not taxable: £20,000 (this is the portion you actually saved) Taxable: £20,000 (the capital gain) Deduct capital gains tax allowance: (12,300) Taxable: £7,700 This taxable amount all falls into the basic rate band for 2020/21 so you’d pay tax of 10% on it, i.e. £770. If you had a portion in the higher rate tax band even that is only taxable at a rate of 20%. So, out of the £40,000 the net amount received would be £39,230. This is a huge different to what you would have paid if this was income of £40,000 as the net income would have amounted to £30,841. That’s a difference of £8,389 – wow! People on work place pension will be taxed in that way because the DB pension counts as income, you can’t separate it into capital and capital gain. If you are UK based and have reached your state retirement age then you would have an annual state pension. This is taxable to income tax and you can throw the total annual state pension amount that you receive into listentotaxman.com to figure out how much you will receive after tax. State pension is taxable if all your sources of income sum exceed the threshold needed to pay tax. That annual state pension is just over £9,000 so if that’s your only source of retirement income you wouldn’t pay any tax because it’s below the personal allowance of £12,500 – however, if this is you, you probably wouldn’t be the type of person that listens to personal finance podcasts - #JustSaying. A few BIG things to remember though: ISAs If your retirement income is all in your ISA then it is all tax free; not tax needs to be paid. Capital gains tax allowance Current tax rules allow you to have a tax free allowance on capital gains in addition to the tax-free personal allowance SO your tax bill may be much less than you think because your state pension and any other pension income may fall into the regular income bucket and this enjoy a separate tax free allowance. For 2020 the Capital Gains tax-free allowance is £12,300. I don’t know if this will be available when I retire, there’s talk of eradicating it to raise more tax… Early retirement Those that retire very early, and I’d classify anything before 55 as early may be overdrawing if they draw 4% because the study of the 4% rule was based on a 30-year retirement. David, you’re probably okay given you’re 57. Sequence of returns risk Sequence of returns risk analyses the order in which your investment returns occur. If a high proportion of negative returns occur in the beginning years of your retirement, these negative returns will have a lasting negative effect on the balance of your investment portfolio and the amount of income you can withdraw over your lifetime is reduced. This is sequence of returns risk. However, if you have a few years of good returns when you retire and negative returns only occur later, say in the middle of retirement, then there’s a lasting positive impact. If this happened to me, I would probably stop drawing income from my retirement pot for 2 or 3 years and live off non-stock market income, e.g. if you have cash pot set aside, I’d deplete that first; or I’d consider getting a part-time job; or for those fortunate enough to have rental income, you can live on that and give your investment portfolio time to recover. I think that’s all the main stuff. To summarise:
I hope this answers all your questions and I additionally hope that I threw in a few thoughts that you hadn’t considered. Heather p.s. subscribe to my podcast and ask me any money question, HERE - do it now!
Hi Heather, just discovered your podcast and blog. Really inspiring. Could I ask a question?
I have about £10k to invest and I’m considering three options. I’d really appreciate your help in deciding what to do.
Any advice would be hugely appreciated. Many thanks Nik M 
Hi Nik
I apologise for the delayed response as I realise your question was time-sensitive but I was in project execution mode over the last two weeks. I think this is an awesome question and I’ll tell you how I would go about thinking about this. Firstly, did you know that I too am a civil servant with access to the Alpha pension scheme? Let me know via the comments box if you did know. I have never mentioned it in any blog or podcast before but it is on my LinkedIn. Given what you have said about when you could access your SIPP, I am guessing you are about 43 years old, i.e. you have 12 years to reach age 55 when you can access the SIPP and if your retirement age is 67 then you have 24 years until you can access your Alpha pension savings. There are 4 keys things you might want to consider:
PORTFOLIO EFFECT By portfolio effect I mean you should consider how the lump-sum is invested in the context of other sources of income you expect to have in retirement. Firstly, I opted out of the Alpha pension scheme because my husband works for the NHS and has access to their defined benefit scheme and because we manage our household finances as a single unit, I felt we could take more risk. His NHS pension gives us a safety cushion and I went for the civil service partnership pension which works exactly like a SIPP in that what I get at retirement depends on the return. An added benefit is that I can access the money at age 55 rather than 67 if I want to although I doubt I would do that as I’d rather use up my ISA savings first. THE RETURNS Average stock market returns have historically been about 10%. This could be the same in the future or it could be different. There are no guarantees. I am not sure what your passive investment portfolio is specifically invested in but I will assume it is a passive global fund and as you haven’t said it is in an ISA, I will assume it’s in a taxable investment account. The last time I looked for a reasonable return to use to model my future returns I found an article that suggested 9% gross and 6% net of inflation was reasonable. I prefer to use 7% gross and 4% net of inflation. If we go for the 7% return in taxable brokerage account – i.e. ignore the SIPP option to begin with:
If you drew the money down according to the 4% rule which says that you should draw no more than 4% of an invested portfolio so that it doesn’t run out, then if you start to draw on this money from age 67 (same as when you would have access to your Alpha pension money) you would draw £2,028 in the first year of retirement (50,700 x 4%). The following year when you are 68, you would draw £2,083 i.e. (50,700-2,028) x 1.07 x 4% - you draw slightly more because although the money has been drawn it is still invested and continues to grow at the average rate of 7%. These are gross numbers – what about after inflation? If you wanted to look at what you would be drawing after inflation, then in the equivalent of today’s money you would draw £1,024 (25,600 x 4%) and you would draw slightly more in real terms the following year. You need to compare what this looks like against Alpha. I know Alpha is inflation protected but I am not clear whether the £1k increase in Alpha payments that you mention is from today or whether it’s £1k from the age of 67 and growing from inflation at that point. If it’s £1k and growing with inflation from today then at the age of 67 you would be getting £2,030 in real terms (1,000 x 1.03^24) whereas with the stock market investment you were getting only £1,024 in real terms – from this perspective Alpha is a no-brainer as it’s a guaranteed £2k per year until death rather than a probabilistic gross drawdown of £2k per annum. I see the stock market as broadly providing some inflation protection given all companies increase the prices of their products over time. If it’s the case that the increase in the Alpha pension is £1k at age 67 then growing by inflation from that point then the additional gross £1k in real terms after 24 years is only £490 (1,000) / (1.03^24) – in this case the stock market investment looks much more attractive. If you go for Alpha with self and dependents then multiply the Alpha benefit by 90% to evaluate the impact. If we go for the 7% in a SIPP account – then you get an immediate uplift because there is an immediate tax saving. As a higher rate tax payer note that the SIPP provider would only claim tax relief at the basic rate of tax and you would need to claim additional tax relief via your self-assessment tax return or if you don’t do a tax return you would need to call HMRC to see if you could just do it by changing your tax code. With the full tax relief £10k translates to £16,667 in your SIPP.
If you drew the money down according to the 4% rule, then if you start to draw on this money from age 67, you would draw £3,380 gross (84,530 x 4%) or about £1,700 in inflation adjusted terms and steadily growing. From a returns perspective putting the money into a SIPP begins to look very attractive indeed. This brings us to the next consideration, horizon/flexibility. 
HORIZON / FLEXIBILITY
With a SIPP you have access to the money from age 55. Unless you are 100% sure you don’t want to retire before age 67 or even to part-retire then you don’t need earlier access to the money. With the money in a taxable brokerage account you can draw the full gross amount invested in one go, if you like. There would be tax to be paid but you would still have the full amount if you wanted it. You can reduce the tax amount due from a full drawdown if you put half i.e. £5k into your own investment account and half into a spouse’s investment account. You can avoid tax completely by putting the full £10k into an ISA (the annual limit is £20k so you would be within that). INHERITANCE If you have all your assets in a defined benefit pension plan then your dependents don’t have access to those assets except to the extent defined by the plan. For Alpha, if you die before your spouse then I believe your spouse continues to get 37.5% of what you would have got and children only get a benefit if they are under 18 or under 23 and in full time education. With a SIPP your family gets everything invested and under current tax law money sitting in a pension is protected from inheritance tax if you die before the age of 75 (this could change given the tax rules are constantly changing). So, as basic example, if you died at the age of 67– in 24 years just before you could claim any pension, if your 10k had been invested in:
I apologise that this response is so full of numbers but this is essentially all the things you need to think about and the numbers are pretty important when we are thinking about pension and retirement options. IN SUMMARY If having access to a few pots of money before the age of 67 is important to you or if passing on some cash to dependents matters, then Alpha is not attractive. If you are risk averse and want to ensure you have a comfortable, guaranteed inflation-linked pension pot then plough the £10k into the Alpha pension plan as this would suit your risk tolerance better. I hope this helps! Heather Have a money question for me?
If you have any personal finance questions send them to [ME] – I respond to all emails but there can be a lag of a few weeks between me getting a question and responding to it as I try to give very comprehensive responses.
Hi Heather!
I'm 22 years old and I've been trying to get a good control of my finances. I'm still a student so I don't have a regular income. I've set up a LISA account to save for a house but I'd also like to begin saving for retirement. I've looked everywhere online but nothing seems to explain what different kinds of pensions there are, how to open them and how they work. Please help! Alex 
Alex, this is an amazing question to be coming from a 22 year old! Well done for setting up a Lifetime ISA, that's a good move especially as they are considering phasing that scheme out.
I have been meaning to write a post on personal pensions this since Christmas because another person asked a few specific questions so I’ll tick their questions off in this post too as they could apply to you as well at some point in the future. PENSIONS! Pensions are one of my favourite topics. If you were in a job you would have access to either:
What you need to open is a self-invested pension plan or SIPP. When you do have a work place pension, you can also have a SIPP in addition to it; there are no penalties for doing so unless you’ve reached the annual limit for investing in a pension but this isn’t something most people need to worry about. Once you open a pension account, you need to decide how you want your money to be invested. This is your decision unless you hire a financial adviser. However, even if you do get financial advice I always strongly advise getting some financial knowledge so that you can judge whether you agree with the advice you are getting or not. Every financial adviser has her own beliefs and biases about investing, that's human, the question is whether you agree with her. Most people don’t know a lot about investing (including me when I started working) so some investment sites might ask you to answer a few questions on how you feel about risk-taking and then they suggest “ready made portfolios” to you to invest in which would be aligned with what you say your risk tolerance is, your “stated” tolerance for risk. On some sites you might have access to “target retirement funds” this means you state when you want to retire and they adjust the risk of your investments based on that. For example, if you want to retire at the age of 62 which is 40 years from now, in your case, you would select a 2060 target retirement portfolio. The fund manager would then manage the risk by investing in more risky stuff now when you are far away from retirement and as you approach retirement the balance of investments would be adjusted away from higher risk, higher return investments towards lower risk, lower return investments. The risk-return relationship is very important here. If you say you have a lower tolerance for risk then the options you will be given will have a lower associated risk but also a lower return on your money. If you have a long time until retirement, and being 22 Alex, you have a very very long time until you need to retire then you can afford to take more risk. Personally, 100% of my stock investments are in equities (that is, they’re invested in company shares) because I get a fixed bond-like return from property investing so that balances it out. By comparison, the average investor will usually have a portion invested in bonds and a portion in equities. By buying bonds you lend money to companies or a government and they pay you a fixed amount for that loan. As a lender, you are not a part-owner of the company and as such you don’t get a share of the company’s profits as you would if you invested in the shares. By the way: shares, stocks, equities are usually used interchangeably – they mean the same thing in most cases. Equities vs. bonds I won’t go into too much detail on equities vs. bonds but here are some important differences:
Why am I telling you all this? Because you need this sort of high level knowledge to decide how your money will be invested. What portion of your investments will you put into equities and what portion into bonds?
If you’re investing in ready-made portfolios and they give you an indication of risk, the higher risk portfolios have more equities and the lower risk portfolios have less equity investments. Single stocks or index funds You can manage your risk by only investing in funds or portfolios that invest in a wide variety of companies. Some people find it more exciting to buy a single company's shares (single stocks) but that is much more risky than investing in funds because a fund is a diverse portfolio of lots of companies. As Index funds include a large number of companies, the complete failure of any one of those companies would have a much more limited impact on your return. I have dabbled in buying single stocks myself and I can tell you that it’s very difficult to choose winning stocks – to maximise your chance of winning “buy a whole stock market”, either by buying index funds that track a whole country or by buying index funds that track a whole industry. If you do want to dabble in single stock investing, don’t put any more than 10% of your portfolio into them and as your portfolio gets larger I would reduce that to 5%. So, for every £1,000 invested don’t put more than £100 into single companies and as you move towards a portfolio worth £100,000 I would personally reduce single stocks to no more than 5% of my investments. These are arbitrary percentages and as you gain experience you will decide what feels more appropriate for you. Actively managed vs. passively managed funds There are two main types of fund to choose between, actively managed funds and passively managed funds. Passively managed funds track a whole market such as the S&P500 which tracks the 500 largest, listed companies in the US or the FTSE100 which tracks the 100 largest listed companies in the UK - I emphasise listed because there may be companies that are just as large as those listed on the stock market but because they are privately owned you wouldn’t have access to buy their shares. Alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or consumer goods. Actively managed funds have an actual person choosing which shares are likely to outperform the market and investing in such undervalued shares or choosing companies that are likely to grow rapidly and enjoy a rapid increase in value. The objective of an active manager is to beat the market index, while the objective of a passive fund is to match the return on an index. Now, you would think active funds, managed by "clever" fund managers are likely to beat the average market return from passive funds, right? Unfortunately, history has taught us that this very simply isn’t so: over 95% of the time fund managers do not beat index trackers. Not only that, the fees on actively managed funds are higher so even if you observe that an actively managed fund has achieved the same gross return as a market tracker you would be earning less from the active fund after fees have been deducted. Where to start? Where to start? I realise that this is all very technical stuff especially if you are beginner so here are links to a few indices to get you researching and investing. These are all funds I am invested in but I am not recommending you invest in them, only that you look at them to see what is included in each fund, what countries are represented, which companies are invested in, what the fees are and what returns have looked like over the last 5 years. I have put the fees each fund charges in brackets as the fees charged is one of the primary reasons I choose whether or not to invest in a fund. Fees can dramatically erode your return so you should always consider what the fees are before you invest in anything:
Even from the above you can see the large difference in fees between my actively managed fund and the passively managed ones. However, I am personally convinced by the management of Fundsmith. Their investment philosophies are aligned with mine and I think they have the potential to beat the market over time but I don’t put all my eggs into the Fundsmith basket despite my confidence in them. In summary, if you invest in a self-invested pension plan there is no commitment to a fixed pension income at the point of retirement. You therefore need to carefully decide how the money is invested. In doing this you need to consider:
Where can you open a SIPP? The biggest difference between the various platforms where you can open a SIPP is the user interface, customer service and the FEES. In a nutshell you might be charged any and all of the following fees:
Here are a few places you can open a SIPP account including the fees. The money to the masses website has a table showing what the fees look like depending on the amount invested. I recommend you have a look at that but below I share four that I consider to be popular and cost effective. Halifax share dealing
Hargreaves Lansdown
iWeb
Vanguard
Having only Vanguard’s funds is not necessarily a bad thing, they are cost effective and if you have an ISA elsewhere in addition to the SIPP at Vanguard, you can use that to invest in funds run by other institutions, e.g. Legal and General and Fidelity to name a few. Vanguard are very well rated in terms of performance and customer service in addition to having good fees. That said, you could save money on the account fee by investing in Vanguard funds via Halifax share dealing or iWeb and those two platforms would give you access to a wider variety of funds as well. Also, Vanguard’s minimum investment is £100/month or £500 lump sum. If you want to start out with £25/month which at your age is absolutely fine, then you need a platform that will allow lower monthly contributions. Where do I invest? I have a SIPP for my son at Hargreaves Lansdowne and I have a SIPP for myself at iWeb. The fees at iWeb were the cheapest for my ISA and I decided to have my SIPP there too as the fees were reasonable although not the cheapest at the time I opened it. It didn’t make sense to have a SIPP elsewhere to save not very much money. iWeb don’t offer junior ISAs and I wanted to keep my son’s SIPP with his ISA as well so I added it to his Hargreaves Lansdowne account. Based on the small amounts being added to his SIPP (£100 per month) the SIPP fees were actually cheaper at HL but they would have been more expensive for me because my SIPP account has much more invested than my son’s. To cut a long story short, where you choose to open a SIPP can also be influenced by where you have an ISA and whether you want these to be kept together. It’s not necessary to have your investments all in one place, I certainly have several investment accounts for various reasons. Before you decide speak to a few people including family members so you have a flavour for where your social circle seem to be investing, if at all. How much can you put into the SIPP each year? You can have a SIPP if you're resident in the UK whether or not you pay tax but your earnings impact the maximum amount you can put in each year. If you are not employed via the PAYE system, the maximum is £2,880 if you are not employed which becomes £3,600 including the government top-up which is equal to what you putting times 100/80. When you are employed you can put the equivalent of your full salary into your pension up to a maximum of £40,000 per year. I won’t go into lifetime limits for you as you are so young and will discuss those in my general post on pensions. Can you have a SIPP if you are a British citizen living abroad? You cannot make contributions to a SIPP if you are not a UK resident even if you have a British passport. You have to be a UK resident. If you have spent some of the year abroad and some of the year working in the UK, HMRC counts the number of days spent in the UK to confirm if you are UK resident. I won’t go into detail here because the actual number you need to qualify as a UK resident depends on whether you were a UK resident in the previous few years. You can, however, set up a SIPP if you're resident overseas and want to transfer a UK pension from a previous job to the SIPP (but you cannot make further contributions to it). So, for example, if you have a pension with a UK employer and want to transfer that to a SIPP while you are abroad, you can do that. If you’re resident abroad but paid in the UK and pay tax here you can also have a SIPP. So, for example, some British expats work abroad but are paid in the UK and pay a portion of their tax in the UK and are likely to qualify, however, speak to an accountant or financial planner to make sure you don’t fall foul of any rules if you’re ever in this complex domicile situation. What happens if the company you have your SIPP with goes bust? If your SIPP provider becomes bankrupt, your money should remain unaffected. Your money is not invested in the SIPP provider themselves; they either simply manage your investment or act as a platform for you to manage your own investments. I hope this helps! Heather References: What happens if my SIPP provider goes bust? Build a low-cost DIY pension Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
 What's the point of saving?
Hi Heather,
Based on the things you told us about investing, my husband and I started putting £125 per month each into our SIPP pension. I hope this isn’t a silly question but what are these savings for? When can we expect to start spending that money and should we try to spend it in specific ways or on specific things? Both my husband and I are 30, we don’t plan on having children and our jobs have fixed pension benefits. Thanks Flora Hey Flora, That’s a great question. While everyone has a different value system, there are two main reasons that I strongly recommend that people put money into a self-invested pension plan or SIPP a) flexibility and b) security including funds to help pay a mortgage off early. A SIPP can be better than a stocks and shares ISA, in some cases, because you effectively pay less tax and because you can’t use the money until you are about 58 so it forces you to save. Let’s talk about each reason in turn: The first reason: is flexibility over when to retire In the past, a lot of work-based pensions (aka defined benefit pension plans) used to allow early retirement from between the ages of 55 and 60, most of these type of scheme are being completely phased out and are instead being linked to the state retirement age which for you is currently expected to be 68. There is talk of moving this to age 70, so this is a future possibility. Whatever happens, the funds that you build up in your SIPP can be taken from 10 years before the state retirement age. This means if the state retirement age moves to 70 you will still be able to use money that’s sitting in your SIPP from the age of 60. If you and your husband are putting £125 each into a SIPP then when you are 55 years old, you and your husband’s combined pot of savings would be worth £135,000 if the pot of money only grows fast enough to keep up with inflation of about 3%; if you get growth equivalent to the average stock market return of 7% then you would have £250,000 at the age of 55 and if you get an average stock market return of 10% you would have £410,000 saved up. At age 60 the figures would be £180,000 @ 3%, £375,000 @ 7% and £700,000 @ 10%. These sort of returns aren’t cuckoo. According thebalance.com, “the S&P 500 Index, delivered its worst twenty-year return of 6.4% a year over the twenty years ending in May 1979. The best twenty-year return of 18% a year occurred over the twenty years ending in March 2000.” Various sources suggest the S&P 500 has returned 10% before inflation if you buy and hold the money you invest into it. But of course, it’s useful to remember that this past success doesn’t guarantee that future returns will be as good. Right now you would struggle to find a bank account that gives you an interest rate of 1.5%. Back to flexibility on when you retire, however, unless you believe the US has no room for growth, then this total of £250/month you are saving could amount to a lot of money over a 25 to 30 year period and this would allow you to retire with a decent income well before the state retirement age. If your mortgage is fully paid off by the time you retire then your cost of living could be low enough that even a modest growth in the SIPP would provide a comfortable income before your state pensions and work-place pensions kick in. The second reason: to save the money is the added security from having extra retirement income Having money in a SIPP means you can top up your retirement income. Having the SIPP would mean you have 5 sources of income:
If the pension income from your jobs is lower than your final salary having access to extra funds will mean you can more or less maintain your lifestyle. This will be especially important if one person lives a lot longer than the other. There is one special feature that the SIPP has but all the other 4 pensions do not: and that’s the fact that if you or your husband dies the state pension stops coming through and the work-place pension either stops completely or is massively reduced. However, whatever money is outstanding in the SIPP would fully transfer to the spouse without penalty. Just to be clear, I will make that point twice: a work-place pension either dies with the person and at that point the spouse receives nothing or, from that point, the spouse gets a heavily reduced benefit – usually 50% or one-third of the amount that was being received before their spouse died. A LOT OF PEOPLE forget this about SIPPs and other defined contribution pensions. I won’t go into the differences between defined benefit and defined contribution pension plans here but if someone is interested go to themoneyspot.co.uk and leave me a voicemail with your request. Finally, when can you expect to start spending that money and should you try to spend it in specific ways or on specific things? Technically, the plan is that you will never have to spend the capital but can just spend the growth. If the fund is worth £250,000 when you start drawing from it and you are earning a 10% return per year at that point, then you could just withdraw the 10% (i.e. £25,000) or less and spend that. If your withdrawal rate is lower than the growth rate of the fund then your retirement would continue to grow even as you take money out. Note that some research suggests that the ideal withdrawal rate to maximise the likelihood that the money will never run out is 4%. But given you have pension income from your jobs in addition to the state retirement and you’re not worried about passing wealth on to children you could be more aggressive than this. As for how you spend that money, well that is up to you and is a great problem to have. Having more money doesn’t only mean more holidays, it also means you can buy private health insurance which might be a necessity to avoid NHS waiting lists at a time when health problems are more likely. This would give you a lot of peace of mind. Ability to pay mortgage off early One thing worth adding, is a note that once you can withdraw money from your SIPP you are allowed to take 25% out as a tax-free lump sum. If your household had £250,000 saved up, you could take £62,500 out in one go which could be used to clear all or most of your mortgage. You would then be allowed to take the rest out as an income or you could buy an annuity – with an annuity you essentially buy a fixed income which keeps being paid to you for the rest of your life. I wouldn’t recommend an annuity for you given you have two fixed pensions coming in already, you don’t need the extra security and annuities don’t tend to be worth the money now that interest rates are so low. What you could do instead of buying an annuity is withdraw what you need from the SIPP every year. You would pay taxes based only on what you take out and could manage the withdrawals to minimise the tax bill. I hope this helps. Heather Have a money question?
Hi Heather,
I want to earn extra income, however I work as a nurse in the NHS which takes up my time, do you have any suggestions on any investment that can make money. I am also interested in the stock market but don’t know where to start. I am interested in both generating extra monthly cash flow now and increasing the amount of money I have in retirement. Denise. Hi Denise, Thanks for this question. I love it because I have two nurses in my immediate family, my mother-in-law was a nurse for a long time and my cousin is still one now. Boosting current income
The, “how can I make a little extra cash now” question is one I asked myself quite recently because I wanted to put extra cash into our household ISAs. There are a few things you can do to boost your cash now:
1. Working extra shifts / locum shifts My mother-in-law says this is not a great idea because being a nurse is hard enough work, as it is. I agree that it is very demanding work but one of the great features of working at the front line of medical services is that you can actually make more money by working more hours, even temporarily. Some jobs don’t offer opportunities to earn more by working more, you’re paid a fixed annual salary and that’s it - no overtime. Overtime either goes uncompensated or is compensated as time back in lieu. You can sign up to a locum agency and do the same type of work for higher pay on your free days. If you want to really juice up your income you can even look at things like working a 4-day week in your regular NHS job (your NHS pension would therefore be lower) and work for a locum agency on the 5th day. The advantage with this strategy is that you will boost your income without working more hours because the hourly rate is higher as a locum nurse. If the extra income is invested wisely it could more than make up for the lower NHS pension. Also, keep your eyes open for higher paying promotions. 2. Do some extra work in another field. If you have another skill that you can monetise you can look into doing extra work in that field. So ask yourself, "what other skills do I have?" I'll give you an example from my own life: In my early 20s when I worked in banking the bonuses were not good one year and to make some extra money I slipped flyers into doors offering massages (for women only) at my house for £25/half-hour. I had someone sign up that very day. I had done a course in therapeutic massage at London College of Massage for fun and when I needed it, that skill helped me boost my income. I didn’t do it for long but it showed me that if I wanted to earn more money I could monetise other skills in my free time. There are some things you can do that don’t even need a new skill such as babysitting. You could sign up at childcare.co.uk or sitters.co.uk and your credentials as a nurse would be very attractive to people that needed a babysitter for nights out or weekends. You haven’t said whether or not you have childcare responsibilities of your own so I don’t know if this is possible for you. If you have skills that you can monetise online then list yourself on freelance websites like upwork or fiverr. There is a wide range of professions people hire for on these sites. I have used these sites myself to buy all manner of things including artwork, copy, copy editing and even voiceovers! Imagine that, all you’d need as a voice over artist is a microphone that records your voice clearly. Some people make serious money side-gigging on these sites. These first two options are not completely aligned with your question as you asked for “investments that you can make” but I decided to add them to give a fuller answer. 3. Invest in or produce products that make cash. Investing in something necessarily involves parting with money in the hope that you’ll earn even more money. You haven’t said how much money you have to invest so here are a few options. Can you make something that people would be interested in buying that you can sell on etsy, eBay, amazon or Facebook marketplace? Make a few samples of what you want to sell and list them on all these sites. I ran a product business myself for almost 6 years mostly using Amazon so I would recommend that you:
I would never discourage anyone from starting a business but having experienced it, I would tell you that it is very hard work. It involves a lot of long hours and is nothing like as glamorous as our culture makes being an “entrepreneur” sound. A business could consume absolutely every free moment you have – evenings and weekends. And all that time might not even produce a profit. Investing in a business comes with a lot of risk – stats vary depending on source, however, 80% to 90% of businesses fail in under 3 years. 4. Teach Could you make money teaching something online? You could create a course and list it on Udemy, Teachable or another similar site. This would take some time to produce well, in the first instance, then you would need to spend some money on marketing your course but you could keep the costs very low. Alternatively if you want to teach a GCSE or A-Level subject (High school level) or even a university course level, you can sign up to places like tutorful (previously, tutora). 5. Invest in property. If you have enough for at least a 25% deposit then it may be worth looking into property investment. Because interest costs on buy-to-let property are no longer fully tax deductible, (that means, you can’t subtract the interest payment from the rent you receive before calculating your tax bill), property is not as attractive an investment as it used to be. That said, if you can buy a place with cash, or if the property produces a high enough profit to clear the mortgage within a reasonable amount of time (I personally target 10 to 15 years) then it could be worth doing. Overall, the option you go for will depend on your risk tolerance and the amount of cash you have to invest. If you are relatively risk averse and don’t have cash to invest then working more to earn more will be more attractive. If you can tolerate some risk and do have some spare cash saved up, then investing in property will provide you with medium risk while investing in a business will be the higher risk option. Boosting retirement/future income
If you’re looking to boost future income then you have two main options:
Property investing we've already talked about. The stock market provides a good return over long periods of time; most investment advisors would suggest an investment horizon of 5 years or more. Putting money into the stock market in the hopes of a good return in a year or less is gambling rather than investing, that's why I didn't offer it as an option when we were thinking through how to "boost income now". The most tax efficient options for investing the stock market are investing via an ISA or a SIPP. ISA are individual savings accounts and SIPPs are self-invest pension plans, they are a type of personal pension. If you invest the money via a SIPP then you won’t have access to that money until you are between 55 and 58 years old. The exact age will depend on your age and has been set at the state retirement age minus 10 years. The SIPP is a good option because for every £100 you put in, HMRC pay back £25 of tax and this saving is automatic. It is claimed by the SIPP provider and is shown on your investment account. The maximum you can put into a pension a year is £40,000 or your salary whichever is lower. So, if you earn £30,000/year you can put up to £30,000 into your pension without getting a tax charge. If you earn more than £40,000/year and haven’t reached the lifetime allowance of £1.055m, you can put up to £40,000 into your pension without getting a tax charge/penalty.
I will be writing several blogs on investing over the next few months that should hopefully build your confidence to make the move. In the meanwhile, you might find this useful: What platform should you use for investing and what should you invest in.
I hope this is helpful. Have a question? If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
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Heather on WealthI enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™. Categories
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Heather Katsonga-Woodward, a massive personal finance fanatic.
** All views expressed are my own and not those of any employer, past or present. ** Please get professional advice before re-arranging your personal finances.