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:

1. The 4% rule is gross so tax needs to be deducted after you draw 4% from your investment portfolio.
2. No tax is due if all your investments are held in an ISA;
3. Even if the retirement investments are in taxable brokerage account, you have a healthy Capital Gains tax-free allowance of £12,300.
4. The 4% rule may not work if you retire early because it wasn’t tested on long retirements.
5. Finally, sequence of returns risk means that if stock market returns are poor in the first few years of your retirement, the value of the income you can draw during your retirement years is reduced.

 
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, my name's Kimberley. My husband and I have worked hard to build a financial safety net for our family. 
 
We both come from modest backgrounds and weren’t taught much about money so we’ve had to figure everything out on our own and made quite a few mistakes along the way. Do you have any tips we can use to teach our children about managing money so that they make far fewer mistakes than we did?
 
Thank you!

Thanks Kimberley, this is a brilliant question. As a mum myself, setting my children up for a healthy financial future is something I think about periodically. While every child is unique, from my personal experience and my experience of observing others these are the 9 things that I think help children grow up into good money managers.
 
1. Explain where money comes from early
 
By the time a child is two, or even earlier, they have created an image in their own minds of what money is and where t comes from.
 
Your child might think it comes from your wallet or from a wall in the machine or perhaps even that the plastic thing in your wallet has unlimited purchasing power.
 
What you want your children to believe and know from an early age is that money comes from work.
 
Whether you are employed, self-employed or an entrepreneur in order to earn money some kind of effort has to take place and that effort, be it pleasant or unpleasant, is called work.
 
When I was growing up, my father was a business person and my mother was employed and they showed me two different types of work. Although they both went to work physically every day – one, my mum, was generally free to enjoy weekends although many nights were occupied by trauling through her in-tray which she brought home from work; the other, my dad, generally enjoyed free evenings but spent weekends overseeing his business ventures. These were my examples and your children will observe the type of work their immediate family engages in.
 
2. Explain that you have had to save for things that you buy
 
When you bring a new expensive purchase home like a TV or a sofa your child might, in their own mind think that these purchases just happen, that they don’t involve much effort on your part.
 
To take away any such thinking, I always tell my son that mummy and daddy had to save for the thing and I explain how long we had to save for it. In reality, sometimes I stretch the truth for example, if we are working ahead of our saving plan I might just save less in a given month and get what I was planning to get later.
 
For example, two months into covid-19 lockdown our 13-inch TV broke so we replaced it with a 65-inch TV – very extravagant, I know – and I told my son that mummy and daddy had to save for a whole year to get the TV.
 
He may not understand fully what the whole saving process entails but that information is sitting in his head and is setting an expectation for himself; that expectation being, when he wants something he needs to save for it appropriately.
 
 
3. Make your children practice delayed gratification
 
Delayed gratification is difficult even for adults but I believe that the more it is practiced the less painful it gets.
 
Because things were very expensive in Malawi when I was growing up, my parents only bought us things, including some basic necessities, when they went abroad which was not very often, perhaps every 4 to 6 months, sometimes longer so I often had to wait many, many months to get what I want.
 
Living in England, everything is so much more accessible but I tell my children that they can get what they want on their birthday or Christmas, whatever comes first.
 
This means whenever they want something in shops I can just say, “add it to your birthday list” or “Christmas list” – it helps. As I am writing this article my 5 year old son is watching a YouTube video that’s marketing Paw Patrol toys to him. He has asked for a dozen or so things and because of my usual “add it to your Christmas list” he is writing a very long list for Santa and getting some much needed writing and spelling practice in the process – win-win.
 
4. Don’t give your children more money than they need
 
I remember when I was in boarding school my father made me write a list of all the things I needed for the coming term, then I’d get money to go and buy those things – snacks, feminine hygiene products, stationery, that sort of thing. On top of this, he gave me a very basic allowance for buying the odd donut from the tuck shop.
 
This taught me two things: how to plan for my needs in three-month chunks at a time and how to resist the temptation to buy too many things from the tuck shop too early in the term for fear my money would run out.
 
I hate to say it but I also became an expert at getting people to “treat me” at the tuck shop and when I say people I mean the guys. Fortunately, they were genuine friends and nothing other than my friendship was expected in return. My negotiation skills probably got a lot of flex in the process – how does one ask without sounding like you are begging…? I could do a course on that.
 
There were peers in high school receiving five times the pocket money I did and I will admit, I was jealous at the time but with hindsight I can see my father’s wisdom in giving us no more pocket money than we needed, he didn’t want to set unrealistic expectations for me and my sisters.
 
5. Don’t give your children an expectation that you will bail them out
 
If you rescue a child financially that robs of them of a lesson and also robs of them of any incentive to behave responsibly next time.
 
If your child finds themselves in debt, by all means help them write a plan to get themselves out of debt but avoid paying the debt off for them because that will definitely not be the last time you do it.
 
I watched a friend of mine work diligently over 18 months to pay off debts that her mother could have cleared for her at the click of a button. The person that emerged at the end of those 18 months was miraculously different: not only was she debt free but she cut up her credit cards because her experience of paying them off taught her that the pleasure of the purchase was not worth the pain of paying the loan off. She now only buys what she has saved for nowadays.
 
6. Don’t lend your children money interest-free for anything …maybe only for the deposit on a house (but even that is debatable)
 
Each time I have asked my dad to lend me money he has agreed to lend it to me but at a commercial Malawi rate of interest. Interest rates in Malawi have tended to be between 25% and 35% - so I haven’t taken him up on his offer and have instead borrowed money commercially from banks.
 
Although I am annoyed at the time, I am, again in hindsight, grateful for this approach because it’s let me own my property projects and made my successes feel like my own. It’s forced me to plan and to be prudent about how I spend money.
 
I plan to take the same approach with my children, I will make them take full responsibility for their plans and projects and if I do invest with them, it will be on a commercial basis. They should own their successes.
 
7. Don’t create an expectation that there will be a large inheritance
 
The need to make a living gets many people out of bed every morning. Those that know they don’t need to work to earn frequently don’t bother. Why would you go through that pain of forcing yourself up if you don’t have to?
 
I heard an interesting stat from The Money Guy on YouTube: apparently, 68% of Americans expect to receive an inheritance BUT only 40% of parents expect to leave one.
 
And I bet, some of those 40% of parents that will leave an inheritance are leaving it to the 32% of children that aren’t expecting it.
 
Who do you thinking is working hard to set themselves up for a good life and retirement, the 68% that expect an inheritance or the 32% that don’t?
 
My children are too young to talk inheritance but when they are they are going to know full well that I plan on spending my money liberally before my final call!
 
8. Be a good example – this is probably the most important tip
 
The way you handle money will inform your children’s behaviour around money massively.  Your actions normalise money behaviours for children. Do you buy on impulse or plan your purchase, are you frugal or a spendthrift, are you anxious about money or just sensible without making it a thing?
 
If you never talk about money then don’t be surprised if your kids turn out to be the type of adults that don’t deal with their money issues at all, they might just pretend the issues don’t exist.
 
Whatever it is you do, your children are watching and they are learning.
 
Teach them to acknowledge how much they have relative to many others. A healthy sense of gratitude may help with any sense of discontentment, you know, because Peter has more toys, more shoes or a better phone than I do…
 
…I know we adults (myself included) struggle with comparison to the Joneses constantly ourselves.
 
9. Teach your children the basic concepts of money
 
I see the basics of money as come in four categories:

1. The uses of money: giving, spending, saving and investing.
2. Where money comes from (the sources of money): work, business, property and lending.
3. Budgeting concepts;
4. The concept of ‘balance sheets’ – that is, assets, liabilities and equity.

 
If your child leaves home knowing just these things, they are well ahead of their peers and are more than likely to win with money, here is an example of what I mean, If you like what you’re about to hear get workbook – B. School: for money-wise wealth-bound kids. It’s available in 9 languages!
 
Heather x

Hi Heather, 

My name’s Harriet. Thanks for the UK-focused personal finance podcast. I feel slightly worried that I don’t have a will because of the covid-19 pandemic. I have children and some assets and I want to go about getting a will in place in the right way, please tell me what I need to think about so I get my will done correctly from the get-go. 

​Thanks a mil.

When covid-19 hit, I started getting quite a few questions on wills and as luck would have it, I got a brochure through my door from Julia Fleetwood of the Will Writing Partnership so I invited her to the podcast. In our discussion, we covered the following questions:

• What is a will?
• Do you need a will if you don't have children?
• Do you need a will if your wealth is below the inheritance tax threshold?
• What happens if you die without a will?
• There are several ways you can get a will, you can make one yourself using an internet template or just a piece of paper, you can use a solicitor or you can get a will practitioner, how is each of these routes different?
• What are the disadvantages of template wills downloaded from the internet and done without a lawyer?
• What’s the cost difference between each of the different options for producing a will?
• How come some things are set apart in a letter of wishes rather than as provisions in the will? - I asked these because when I got my will done in 2016, I was surprised by having a separate "letter of wishes" attached to the will.
• Have people started adding digital assets to their wills like what they want done with their social media accounts?
• When you die, how can you ensure that your family a) know you have a will and b) know where to find it?
• What is a lasting power of attorney? I’ve got to admit that I don’t have one of these as I see them as something I should only need when I am say 65+...
• If you have wealth above the inheritance tax threshold, how can you set up a trust so, say, the proceeds of a life insurance claim go straight into that trust?

My key takeaway from the discussion were:

1. Everyone needs a will. Even if you have no dependents you want a say over how your hard-earned wealth is distributed. Even if all you have to your name is a few hundred pounds, your will would ensure that money goes where YOU want it to go.
2. Getting a will done professionally ensure that there are no errors on the will that could invalidate it. 
3. If you have a complex financial or family situation the probate process can take many weeks and even years before any finances are released to your loved ones. Probate is the legal and financial processes involved in dealing with the the assets of a person who has died.
4. The laws of intestate (that is, when you die without a will) may different to what you expect...

If you would like to get in touch with Julia to learn more about wills, estate planning and getting your affairs in order, these are her details:
          Julia Fleetwood
          julia.fleetwood@twp.co.uk
          Phone: 0121 472 0644
          m.me/Juliathewillwriter (Facebook messenger)
          www.twp.co.uk

I learnt a lot from Julia, I hope you did too.

Heather 
p.s. subscribe to my podcast and ask me any money question, HERE - do it now!

Hey Girl!
 
I’ve been trying to get my cancelled flight to Zimbabwe refunded for a month but haven’t made any progress, do you have any suggestions?

Tsungi

Hi Tsungi
 
This is a great question and highly topical now that flights and holidays are being cancelled left, right and centre.
 
The tips below resulted in Tsungi getting a refund of about £1,500 within a week when she had been struggling for a month to get her money back. I hope you have the same luck…ultimately…
 
There are three paths you need to follow for a refund and you need to follow them in the following order:
 
1. Ask the seller for a refund first. 

So, if you booked via a third-party site, eg. Booking.com, trivago, etc call that third-party company and ask for a refund.
 
If you booked directly, e.g. with easyjet, Kenya Airways or Ryanair ask them for a refund.
 
Some sellers are very good at giving refunds and can turn something around within a matter of days that’s why I would choose this route first. It can be pretty low hassle.
 
If you have nothing back within a week go to step 2.
 
2. If you booked your holiday or whatever product it is using a credit card, the credit card provider is legally obliged to refund you if you make a request, under section 75 of the consumer credit act in the UK. 

If you booked via a debit card banks refund you via a voluntary scheme called a chargeback scheme and sometimes this can result in a faster refund than with the legally required credit card refund, although chargebacks are not enshrined in law.
 
According to moneysavingexpert.com, You can use chargebacks under any of the following circumstances:
 

1. If the company you purchased from goes into administration i.e. they go bust.
2. If the quality of item is not as described or is defective.
3. If the goods or services you’ve paid for were not received as promised and the company refuses to refund you.
4. If there is a technical issue e.g. expired authorisation or a processing error by the bank.
5. If there is a clerical error e.g. being charged multiple times or being billed for the incorrect amount.
6. If you have been the victim of fraud and did not authorise the purchase.

 
I used the chargeback scheme when Monarch airlines went into administration and natwest refunded me within less than one week and before they themselves got the money back from Monarch’s administrators.
 
So, it’s an awesome scheme.
 
As anyone who follows me know, I don’t own a credit card so I have never had the experience of needing to claim something back under section 75 but as it is a legal requirement you would definitely get the money back PROVIDED you spent over £100, i.e. you need to spend at least £100.01 for a single item for you to be able to make a claim under section 75 of the consumer credit act.
 
This is different to the chargeback scheme available for debit cards as you are covered for anything over £10.
 
There is also a difference in timing:
Credit cards allow you upto 6 years to make a claim while chargebacks can be requested up to 120 days from when the service should have been provided. After 120 days you can’t make a chargeback.
 
If you paid via PayPal you have upto 180 days to claim a refund.
 
Although I had a great experience with my chargeback for flights with Monarch Airlines, I have been waiting over 60 days for HSBC to get a chargeback for me from flights booked with Dream World Travel and they are blaming covid for the delay.
 
3. Finally, if the two routes above fail, claim on your travel insurance. Travel insurance won’t pay out until the two routes above have been exhausted.

If you don’t think you have travel insurance check you don’t have via your bank account, e.g. my family gets free travel insurance under my HSBC Premier bank account.
 
In summary, to get money back request a refund:

1. from the supplier of the good or service;
2. from the debit via a chargeback or from the credit card company under section 75 of the consumer credit act
3. from travel insurance.

 
Heather x
p.s. subscribe to my podcast and ask me any money question, HERE - do it now!

Hi Heather

When is a good time to draw equity from your house: when I retire which is in about 5 years or before?

​Mary

Hi Mary
 
Thanks for this question because it really got me scratching my head.
 
I was initially quite flummoxed when I received the question because as a proponent of the FIRE movement (Financial Independence Retire Early) the whole premise of my money management toolkit is to get out of debt including mortgage debt completely and NEVER go back. However, I am going to park this way of thinking and answer your question in the most unbiased fashion that I can and I will also ask you a few probing questions so you can figure out whether this is what you want to do.
 
FIRSTLY, what do you plan to do with the money? Do you want to use the money for general living or to make a significant purchase or investment?
 
Generally, I think in most cases it is not a good idea to get into debt during retirement as it may cause undue stress if you run into any unexpected financial problems.
 
OPTION 1: Take equity out and pay off the debt or interest during retirement
 
I don’t know the value of your home or any other numbers, however, if you take equity out of your house that money will be charged interest and if you enter into a standard mortgage contract, you will have to pay the interest and possibly repayments from the month after you take that equity out.
 
From my follow up email to you I gathered you have a pension that will come in when you retire. I am assuming this is a “defined benefit” pension so it’ll be paid to you from retirement until you die.
 
By taking on debt you will have a reduced income. So, if your pension is income amount to 2,500 per month and if you take out equity requiring 500 in monthly payments you will lose 20% of your pension straight off the bat to debt payments. How will this affect your standard of living?
 
OPTION 2: Take equity out and pay all the interest off when you die
 
If you are over 55, which I assume you are, you can also get a mortgage that doesn’t require interest payments to be made until you died.

• Equity release through a "lifetime mortgage"

If you’re over 55 you can take equity out of your home at a fixed or capped interest rate. A lifetime mortgage allows you to take money out of your property a bit at a time up to an agreed amount and interest is charged on the total amount you have taken, rather than the whole amount available.
 
Depending on the terms you may be allowed to repay some or all of the amount borrowed. Otherwise, with a lifetime mortgage all the interest would be accumulated and paid on your death.

• Equity release through a "home reversion plan"

Under a home reversion plan you sell a stake in your home at below market value to a bank.
 
So if your home is worth 100,000 you might sell a 40% stake to the bank for a 20,000 lump sum. When you die, the bank gets 40% of whatever the house is worth at the point. So if you die 20 years later and your home is worth 300,000 the bank get 40% of 300,000 which is 120,000 for the 20,000 that they lent to you.
 
If you died the very next year and your house has stayed the same in value then the bank gets 40,000 for the 20,000 that they lent to you. Even if your house falls in value the bank is still likely to come out ahead because they take a huge hair cut off the value of the house.
 
The reason these mortgages are only offered to people over a given age is to minimise the chance of the bank losing its money, for example, because accumulated interest exceeds the value of the house on a lifetime mortgage.
 
To safeguard the bank further, they keep the amount of equity that can be released quite low; the younger you are, the lower the allowed equity release. So, a 55 year old might be restricted to releasing no more than 20% but a 75 year old might be allowed to release 30-40%. I am making numbers up here because the reality is that more conservative banks will have lower limits and banks that are more risk tolerant allow a bigger release of equity.
 
It all sounds great on first inspection but banks have received a lot of bad press regarding equity release schemes because in the fine print they have stuff like, you don’t need to repay the interest PROVIDED you live in the house so if you need to move home, even into a care home or to a more accessible home because you develop mobility issues, all that money comes due and you would be forced to sell your house and pay the bank.
 
There are likely to be other catches too because banks are in this to make money so if you go for an equity release scheme of any nature you should have a lawyer or financial advisor look at the terms and conditions diligently for you so you know exactly what you are getting yourself into.
 
The bank might get a guarantee that you will never owe more than the value of your home but this means that you could owe the full value of your home to the bank. If you release equity at age 55 and live until 95 there is every chance that interest can accumulate to the point of exceeding the home value.
 
It’s nice to get a tax free lump sum via an equity release but in doing so you may reduce your entitlement to means-tested state benefits, now or in the future so you need to think about this angle too.
 
I don’t know how well I am doing with the unbiased view thing here as you can probably tell that I think releasing equity is a high risk game and it frankly, freaks me out.
 
If you don’t have any kids or charities/causes that you’d like to leave an inheritance to and you’re certain you will be physically fit enough to live in your home until the day you die then perhaps the risk of releasing equity could be worth it.
 
Another form of equity release is to downsize your home, i.e. you sell an expensive home and buy a cheaper home and live off the difference, this way you release equity but don’t incur any debt in the process.
 
COST OF EQUITY RELEASE
 
According to moneysaving expert.com, a lifetime mortgage equity release typically has an interest rate of c.5%, but some rates are under 3%.
 
This is a lot higher than rates on regular mortgages. E.g. With a 40% deposit you can now get a 5 year fixed rate mortgage of just under 1.4%, just to give you an idea.
 
If you release equity at a rate of 5% then the amount you owe would double every 14 years (see my article on the rule of 72); so if, say, you borrow 20,000 on a 120,000 home, if you  live until 74 you’d owe around £40,000, live until 88 and you’d owe £80,000 and live until 102 and you’d owe 160,000.
 
As well as the cost of the interest, don’t forget that you'll have to pay arrangement fees when you take out the mortgage and in the UK these range from £1,500-£3,000 depending on the mortgage deal and including things like solicitors and surveys.
 
 
ALTERNATIVE
 
As you have 5 years until retirement, you could try to boost your savings over the five years so that rather than borrow money you’ve saved for it. If you don’t feel you earn enough to save the amount you want you can look at things like renting rooms in your home via AirBnB or by getting a more full time lodger.
 
I would personally find it very scary to go into retirement with debt because the need to keep with payments or even the knowledge that I don’t actually own my home but if you are more comfortable with the idea then this won’t be a consideration for you.
 
My biggest advice would be get professional advice before you take this massive step and do whatever you can to avoid having to do it. A debt-free retirement is a peaceful retirement.
 
Much love and thanks for being a long-time follower. See the linked article on equity release on the moneysavingexpert.com website.
 
Heather x

p.s. subscribe to my podcast and ask me any money question, HERE - do it now!

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Heather – What motivates you?

​From…lots of people
​
I wrote a post a while ago sharing a four-hour conversation that I had with my dad. My initial sharing of the conversation was just as a story but I listened to the conversation again with a view to pulling out what I learned about life that has served me well in my journey towards financial freedom.

My dad is one of my best friends and inspiration.
 
A lot of my values, I got from him. For instance, he always taught me that his dad taught him that holidays weren’t an opportunity to do nothing, they were an opportunity to explore other activities and interests including ones that look a lot like work. Of course, you can relax too but the premise of this idea was that even some types of work can count as relaxation and you shouldn’t feel that you need to put a full stop to all productivity.
 
Another thing he always emphasized was to chase work not money, "Heather, don't ever chase money," he often tells me, "Chase work; if you chase work, money will start chasing you". I have always loved that one.
 
Anyhow, over 5 episodes I will give you access to recordings made in July 2010 - exactly 10 years ago - on his life and business journey. The setting was a drive to Neno Village where my father grew up. My dad was sat in the back seat with me and Harry, my then boyfriend now husband, was sat in the front passenger seat next to the driver. It was one of the most enjoyable times I have ever spent with my dad. If you haven't already maybe this will inspire to capture your own parents' life story in this way.
 
My dad went from a relatively poor village boy to creating not one, not two but three businesses in Malawi all of which were multimillion dollar businesses and his success obviously meant I have never had to deal with many of the character building challenges that my dad encountered.
 
He was very careful not to spoil his kids though and while I always had everything I needed, I knew that in order to get the comforts I really want, I had to work for them because they most certainly would not be handed to me, of that my dad was very clear. My dad is very meticulous in setting expectations – he would only pay for a first degree, he would never buy anyone a car, he wouldn’t buy imported treats if he didn’t have to, “support local industry” was an important maxim in our house.
  
My dad has lead such a productive life, I don’t think there is anything I can do to surpass his success or make him think wow, all I can do is record his journey and continue to be inspired by it.

 ​In the first recording of five my dad takes me through some of his earliest years in the village. Sorry if you think I keep butting in too much but this was the very first time I had had a conversation like this with my dad and I didn’t want to miss details like the context or how he felt emotionally about situations. It’s very African to gloss over things like feelings but being a father-daughter conversation this was of the utmost importance to me.
 
Without further adoo… enjoy this journey through the life of a serial entrepreneur before that was even a thing. 

What did we learn?
 
In this episode I picked up:​

• on the importance of not following the crowd;
• that age isn't important when it comes to starting a business.

Before he's sixteen my dad has already experienced 3 businesses:

• Business 1 (aged 11) - Kachasu - a business ran with his mum and siblings.
• Business 2 (aged 12/13) - Zitumbuwa - his first independent business.
• Business 3 (aged 14/16) - vegetable growing and selling - his second independent business.

​Listening to it this conversation for probably the third time, I hear different things compared to the first time I heard it. Because it is a lot of information I heard the high level details of the story only when it was first told to me and I was even forgetting some of that detail as the story was told. On this listen I captured some of the nuance, like the fact that he described his dad as “abandoning” him – that’s sad. He also said he “usually” had enough to eat except if there was a major disaster liker a drought. This means there were times when my dad didn’t have enough to eat. For someone who has never gone hungry this fills me with even deeper admiration.
 
You’ll note I asked whether he had black teachers. I asked this because I myself was sent to a private primary school in Malawi that only had white teachers. I grew up in a 1980s Malawi where "good teacher" meant "white teacher". I don’t know why the “Life President” of Malawi who was in rule when I was growing up decided to make this a thing but it was; colonial mentality, I suppose. My best teacher in high school was a black Malawian so things did begin to change but colonial mentality was a big thing when I was growing up and it still hurts us today.
 
I note that he says he wasn’t bright but when it comes to business and street smarts and general with-it-ness, I know no one smarter than my dad.

His years in the police, at Southern Bottlers (SoBo) and his decision to go Zimbabwe for further education. Dad's brief stint as a houseboy (about 2/3 months). 

In episode 1 we found out that, my dad was walking about town with a friend and his friend saw a job ad for police recruits. He asked my dad to accompany him to inquire about the job. When they entered the police station the officer on duty laughed at the guy and said he was too short but that his friend (my dad) looked about the right height.

My dad had no ambitions to be in the police but when he told his family about the opportunity they essentially forced him to do it because he needed a job. He decided he would do it for 6 months before moving on but on his first day he discovered that as soon as he was sworn in he was committed for four years. 

After lunch he pretended to be sick to buy himself time - that cracked me up. It bought him a month of time because the ceremony was only held once a month on the 5th of the month.

His uncle gave him a right bollocking for messing about so he went to the village to tell his mum so she could back his decision not to join. Unfortunately, he told her the story in front of another villager who said - "Ntchito imeneyo ndi yabwino, posachedwa pano akhala kopulo" (That's a great job, very soon he'll be a corporal). His mother was sold. My dad cried tears as he felt sorry for himself!

Saving

In this episode he also reveals what an astute saver he was. He received 18 kwacha per month in the police: Mwk5 was spent on foods that have a long shelf-life (sugar etc.), Mwk5 was sent to his mum in the village to help her with household items, Mwk5 was banked to fund the education of his siblings and Mwk3 was his pocket money.

Over the four years in the police his salary grew to Mwk24.

He says some of his fellow police officers would borrow so much money through salary advances that at the end of some months their salary was negative but he stayed disciplined. He did not go to the staff tuck shop even once in four years.

Business

He still had the business bug and was operating a fruit business as a sideline whilst he was a policeman although that was not allowed. He got caught a mere 6 months before 4 years was up and was punished by being made to become a uniformed police officer after being in his civilian clothing for a long time. It didn't sit well with him and added to his reasons not to renew his contract with the police a few months later. I say it was fate.

Houseboy

For about a period of 3 months my dad worked as houseboy for a white man for a salary of Gbp3 - about Mwk6. 

Salesman

Dad became a salesman for SoBo after leaving the police. From a salary of Mwk24 he started earning Mwk56 then Mwk65 once he was confirmed plus sales commission. He would earn over Mwk200 in some months because he was so good at selling.

At around the time he had about Mwk2,000 in savings an incident occurred where he was being forced to go to work in Chikwawa but he didn't want to go there because he had contracted Malaria on a recent stint there to the point of being hospitalized. He quit the job. ​

What did we learn?

In this episode I picked up on the importance of :

• hardwork in order to progress in life;
• commitment to doing a good job regardless of what you ideally want do in life;
• commitment to doing right by your family;
• discipline saving;
• not following the crowd.

Living in Zimbabwe including visa issues faced in Zimbabwe and working for Unilever.

In episode two of this series, the last episode, my dad had just arrived in Zimbabwe on a flight from Malawi and in this episode he picks up from there. He left our home country (Malawi) without any knowledge of exactly what would happen when he got to Zimbabwe. As it happens, he met a kind man on the flight who let him stay at his house for the night.

I'll give a summary at the end for those that miss some things because they were in the Chichewa language. Two tips on language:

• When you hear toilet 'kunja' that's a toilet outside;
• When my dad says working class in the episode he is referring to a class of people that have progressed to earning and having job stability as opposed to subsistence farmers or day labourers who have a lot of wage insecurity and a more challenging life. Basically, working class is a positive in this context. 

The objective of dad's journey to Zimbabwe in 1975 was to realize his life-long ambition of furthering his education. He bought a one-way ticket to Zimbabwe for Mwk39. On arrival, a kind Malawian stranger that he had met on the flight allowed him to stay over at his house for the night.

When he got to his college he was shocked by the living conditions. Four men shared a room and slept on mats (mphasa) with limited amenities. Now that he had worked for a while and had lived better than this throughout his time in the police and as a salesman it just felt horrid but it was all he could afford.

As fate had it he had the address of an uncle in Zimbabwe - the man had married his mother's youngest sister but they had never met before. He visited him very early one morning (before 7 a.m.) to introduce himself. After he told his uncle where he was staying, his uncle told him it wasn't a good place; he instructed him to collect his luggage and come to live with him rent free. 

His uncle wasn't rich either; in fact he had to share his room with my dad to accommodate him. His wife was stuck in Malawi at this time so he was essentially just living with his daughter. Living with his uncle allowed my dad to take even more courses at his college because he saved money by not having to pay his uncle rent.

Race Relations

From my dad's story, race relations between white people and black people in Zimbabwe were not as friendly as they were in Malawi. My dad went to Zimbabwe on a tourist visa and after 3 months had a lot of trouble with the Zimbabwean authorities. Ultimately, they gave him a "stupor" which basically required him NOT to live in any Zimbabwean town; he was relegated to the village. I found this insight into colonial life mind blowing because I can't imagine being allowed to only live in certain areas and having access only to the blue colour jobs - how ironic that my dad worked a job in a poultry farm, couldn't hack it and about 25 years later ended up owning a poultry farm perhaps that job was his inspiration! I haven't asked yet but I will.

Anyhow what did I learn in this episode?

• I learnt that education is important even if you want to be an entrepreneur, lots of people down play that nowadays with all the stories about successful school dropouts;
• I learnt about the importance of family support to help you progress in life and when you don't have family, connect with any people, like my dad did on the flight to Zimbabwe;
• The importance of having work experience also came through in this one - dad was told that in addition to his qualifications they liked that he had some work experience unlike his colleagues with their first degrees and PhDs;
• Finally, I also learned about the importance of going for a target even if you feel inferior to your pool of competitors.

From unilever to a trade contact business and a tailoring business which he sold for a surprisingly healthy profit while he worked at Old Mutual to his candle business (Candlex) that led to his name becoming a household name.

This fourth installment of the series on the life of Mark Katsonga Phiri is possibly the most exciting if you're into business because dad goes from pure struggling with the tailoring business and massive debts that he had no idea how he would clear to being so cash rich that even he couldn't understand what was going on.

Just to recap, in episode 3, dad returned from Zimbabwe in the late 1970s with his diplomas and secured a job at Lever Brothers, now called Unilever.

Whilst he was at Unilever, after work he started running a business called "International Trade Contact" in which he got the contact details of various suppliers and enabled people to fulfill purchase orders.

After that in 1981 he started a tailoring business. He invested Mwk1,500 in the business and hired a tailor to sew and someone he knew to run the operations and sales. He later discovered that the competition was extremely stiff so 1981 and 1982 were very tough for the business; he says he really struggled. He'd left his job at Unliever to do business full time but things got so rough he had to take on a job at Old Mutual selling insurance so again, business became the side hustle.

By 1982 the business had assets of Mwk5,000 and creditors amounting to Mwk12,000 - that's negative equity of Mwk7,000. He decided to sell the business so he could clear the debts.
​ 
After putting an ad in the paper he was surprised to get 12 offers, he hadn't expected to get any. Incidentally, because the Government had reserved tailoring businesses for Malawians there was huge demand from Indians for tailoring businesses that had licenses. My father didn't have one and the process for getting one was long and painful. 

Ultimately, though he sold the business for Mwk25,786 plus Mwk4,000 for the working capital or work in progress. That bid of Mwk25,786 had been on the table for 2 months before he finally got the license and the Indian buyer was losing patience - there were quite a few sleepless nights for dad. 

The day they drove to get the business license from Lilongwe my dad said he felt like that licence was pure gold. It was approved by Mr Malange, now my cousin's Grandpa but this was well before that happened.

After his auditors had paid all creditors (and themselves) he had Mwk18,000. He used Usd4,500 to buy a candle machine from Japan. This was a time when Malawi kwacha was still pegged to the British pound and was much more valuable than Usd. Usd4,500 was about Mwk3,000.

What happened next was pure magic. 

Within 6 months of launching the candle business he had Mwk150,000 - we're not talking turnover here, we're saying saved up! Quite shocking when you consider that each candle was selling for just 10 tambala each and cost 4 tambala to produce. Keep in mind this is still 1983 - basically, when little Heather was born in November of that year business was booming, the sleepless nights were a thing of the past. 

What did we learn in this episode?
You may well have learned different things to me but I learnt that:

1. To survive in business, you need to enjoy the suffering as much as the positive stuff.
2. Don't do Mickey Mouse businesses. No matter how small your business is, legitimise it by setting up systems, having qualified accountants and auditors; this foundation is why he ended up selling a small sewing business via what looks like a proper M&A process with ads, cash being held in escrow, licences being applied for, etc. 
3. Intangibles assets like licences and intellectual property (in the case of the international trade contact business) are very important and have value;
4. Don't rush to spend the proceeds of your hard work - even when dad had Mwk150,000 sitting in the bank he bought a second hand car costing 900 AND we continued living in the same humble two bedroom semi-detached bungalow for another 6 years, over 6 years.
5. Sometimes all it takes is a little confidence and courage - my dad had enough conviction in what he was doing to call a very senior government official to state his case and you know what, it worked - what are you holding yourself back from doing? What one action could you take today, within the next hour that will bring you a step closer to your goal?
6. Treat everyone you meet on the way up and when you're at the top with the utmost respect, you never know when you might need them!

In episode 5 we are taken through the early years of Candlex the booming business that was introduced in episode 4. It was his 7th business and still his most memorable as it made him. Although I never really understood this until I got to secondary school age and would often be introduced as the daughter of the owner of Candlex.

In this episode I ask my dad how he came up with the name Candlex and I also want to know why he didn't buy a Mercedes Benz the moment he was cash rich. 

This is the modus operandi of the majority of guys I know who sniff the littlest bit of "big" cash. By the end of 1983 he had the funds to afford a Mercedes but he kept his little Datsun and didn't get a "flashy" car until 8 years of good business later in 1990.

​Some people will immediately say, he was just lucky. To a certain degree, yes, he was and he says so himself by saying "I have always said my businesses are God-given because I don't know how the ideas come into my head" he also said, "I have made some very big errors by not doing proper research but a natural solution always came up". One thing that can't be missed though is that luck was generated by his own constant actions and hustle which meant that when the opportunity hit, dude was prepared to take advantage of it.

In the first episode you may remember that my dad's friends were mostly playing when he was 11 but he was helping with his mum's business.

Throughout his life story I can tell you that two things were almost completely absent: drinking and football. There was a brief period of less than a year when my dad took up wine drinking but in the end he decided it wasn't for him. He would have a glass at home and always allowed me and my sisters to have some too. In addition, my dad has never been a watcher of sport or films; he had a handful of VHS films.

​As he said in his story after work he was always researching the next thing or working on a business. It took 20 years of practice before he got his lucky break but he wasn't working towards a lucky break. His ambition was to have a wife children a good second hand car and to own a home that was it, he didn't imagine that he was capable of much else...

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.

1. Add to my passive investment portfolio which is spread across equities and bonds. It’s down about 8% since Feb. I’m not planning to access this for 7 to 10 years. I could put it in now as a lump sum or drip feed 2.5k every week for the next month. I see the advantage as cheaper units and likely long term growth. The disadvantage obviously is that the market could drop significantly again. I know it’s dangerous to try to time the market.
2. Invest in my SIPP which has similar funds but will lock my money in for the next 12 years. As a higher rate tax-payer I know there are significant benefits.
3. Buy added Civil Service defined benefit Alpha pension. A 10k lump sump would buy approximately £1k self added pension or £900 self and dependent pension. The defined benefit looks attractive but again the money would likely be locked in until I turn 67.

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:

1. Portfolio effect;
2. The return;
3. When you might want to access the money, i.e. horizon/flexibility; and
4. Inheritance.

Anyone reading this that has a 'defined benefit' workplace pension (e.g. NHS workers) can apply the principles that I outline here to evaluate their own options for investing a lump sum of money.
 
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:

• then when you are 55, £10k could be worth £22,500 (10k x 1.07^(12 years)) or about £16,000 after inflation; and
• when you are 67, £10k could be worth 50,700 or about £25,600 after inflation.

 
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.

• then when you are 55, £16.7k could be worth £37,530 (16.7k x 1.07^(12 years)) or about £26,680 after inflation; and
• when you are 67, £16.7k could be worth £84,530 or about £42,720 after inflation.

 
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:

• an ISA or taxable brokerage then your spouse would have £50,700 gross;
• a SIPP would mean your spouse would have £84,530
• the Alpha scheme would leave your spouse with  £760/year if the Alpha contribution starts inflating from now or £375 if the £1k increase in your Alpha is as at the age of 67.

 
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

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. 

• 'Learn more' about managing your money.

Hi Heather
 
Can you do an educational post on Life Insurance? A lot of people in our community still depend on donations when there is a bereavement, I think they’d be surprised to find out how cheap it actually is to get life insurance.
 
Miriam

Firstly, I need apologise because I got this request in September 2017 when I was so focused on finding a job. It’s been at the back of my mind ever since but deaths from COVID-19 have prompted me to get round to writing this as a matter of urgency!
 
So, how do you know if you need life insurance?
 
The test is very simple. If you answer yes to any one of the following two questions, you need life insurance:
1.Is anyone financially dependent on me?
2.Would my death cause a financial burden for anyone else?
 
If you have dependents then you need life insurance. The dependents might be your children, your parents, your partner or someone else entirely.
 
Even if everyone is completely independent of you, if you don’t have enough money in the bank for the funeral then you need some kind of insurance, either life insurance or funeral insurance depending on your age.
 
Should you get life insurance or a funeral plan?
 
With a funeral plan you essentially prepay some of your funeral costs. The specifics of what is covered vary from provider to provider. Also, to get a funeral plan you usually need to be 50+, I won’t say much more about funeral plans in this post other than if you want to cover more than just your funeral then a funeral plan is NOT what you need.

What is life insurance? How does it work?
 
When you buy life insurance you make monthly payments to an insurance provider and in the event of your death they pay a pre-agreed amount of money to the dependents named on the policy, these are called the beneficiaries of the insurance policy.
 
There are two main types of life insurance?
 
Term life insurance and whole-of-life insurance
 
Term life insurance pays out if you die within a specified number of years. So, you buy the insurance policy for a fixed term of say 20 years and if you die after that 20 year term there is no pay out because the life insurance will have expired.
 
This is ideal if you want your dependents protected only for a specified time. For example you might choose a term that coincides with the 21st birthday because you decide that by that point a) the child will no longer be dependent on you or b) you will have saved enough money by that point to cover your dependents’ financial needs.
 
In addition to protecting dependents you might want to cover extra funeral costs. For example in my last will and testament I state that I want to be buried in the UK as that is where my husband and children live but I also state that flights must be covered for my parents, siblings and the children of my siblings to attend the funeral.
 
Think carefully about what you a) need and b) want to be covered in the event of your death. If it’s just your dependents’ living costs for x years think carefully through what their annual cost of living is likely to be, does it include school fees? or university fees? Make sure you don’t forget anything that is important to you.
 
If your family has a monthly budget then you can use this as the basis for calculating your dependents living’ costs.
 
Whole-of-life-insurance pays out whenever you die. It is more expensive because you are definitely going to die at some point. You would buy a whole-of-life policy if, say, you want to cover inheritance tax as well if you expect to have enough wealth to be subject to inheritance tax.
 
Most people just buy term life insurance because they just want to protect dependents. Inheritance tax only kicks in for estates worth £1million and over. This is a not a problem for most folk but is more likely to be an issue for the type of folk that listen to personal finance podcasts.
 
TERM LIFE INSURANCE
 
If you decide to buy term life insurance, in addition to the term, you need to make three critical decisions:

1. Whether you want level term insurance or decreasing term insurance;
2. Whether to add critical illness cover to the insurance;
3. Whether you want a lump sum paid out or a monthly pay out over a fixed amount of time.

 
Level term insurance pays a fixed amount whenever you die while decreasing term insurance falls towards zero as the maturity date or the end of the term approaches.
 
You would usually buy decreasing term insurance to cover your home mortgage. So you would set the maturity to match the date when you will finish paying off your mortgage and over time, as the mortgage balance falls, so does the pay out.
 
The interest rate used to calculate the balance on your decreasing term insurance policy is usually much higher than the interest rate you actually pay on your mortgage. How this impacts you is that your mortgage balance falls faster than the pay out of the policy. This is obviously good as it means your pay out will be a little higher than the mortgage balance if the terms match exactly.
 
Critical illness cover increases the price of an insurance policy by A LOT but it means that if you get any of the covered illnesses you will get a pay out. Most people add critical cover to the decreasing term life insurance policy that covers their mortgage.
 
If you fell critically ill, the policy would pay you enough to clear your mortgage. This would be really useful if you are the main breadwinner and lost income because of your illness. As the mortgage is usually the biggest monthly expense, not having mortgage payment to worry about would reduce the household’s stress significantly.
 
One extra thing, you can reduce the cost of life insurance by getting a policy that pays out monthly or annually for given number of years instead of getting one lump sum. So, instead of £300,000 paid out in one go you can have a pay-out of £30,000 a year for ten years or £2,500/month for 10 years. You need to decide if this is worth the reduced monthly cost of the insurance policy.  Get a quote for both before you decide. You might decide to go for the annual or monthly pay-out if you think your dependents wouldn’t use the money wisely if used in one go.
 
How much does insurance cost?
 
It depends on how old you are and what level of cover you want, i.e. the monthly payment on insurance that would pay out £100,000 if you died is cheaper than insurance that would pay out £500,000.
 
The younger you are, the cheaper it is but obviously the younger you start the longer you will be paying the provider for.
 
I know it’s easy to think I don’t want to pay for something that is likely not to be needed. Possibly the insurance won’t be needed and that’s awesome because it would mean you’ve stayed alive, the better way to think about it, however, is that “in the unlikely event of my untimely death would I regret having paid £x per month to ensure my dependents do not suffer?” Even if all you can spare is £10 per month you should be able to get some life insurance for that amount.
 
How long does it take for life insurance to be paid out?
Usually you can expect a payment within 30 to 60 days of filing a claim, but delays can arise—if the insured person dies within the first two years of the issuance of a policy, for example, that may need some investigating.
 
At a base level, this is all you need to know. So, let’s summarise to help you with next steps. If you have figured out that you do need life insurance then you need to decide:

1. How much life insurance do you need?
2. How many years do you want the cover for?
3. Do you want fixed or level term insurance or decreasing term insurance?
4. Do you need or want critical illness cover?
5. Do you want a lump-sum pay-out, monthly or annual payments?

My thoughts are that at a minimum you should have enough life insurance to cover your mortgage and the costs of living until your youngest child is 18. Critical illness is great but if you can’t afford it don’t stop yourself from getting life basic insurance. Please don’t leave your dependents to depend on the good will of people, get insured.
 
I hope this helps! Much love and stay blessed.

Heather

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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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:

1. a defined benefit pension plan; or
2. a defined contribution plan

but I won’t cover either of these here as you are not currently working. I will cover DB and DC pension schemes in a future post and in podcast episode 24 (links to my podcast are here).
 
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:

• L&G Global technology index (annual cost: 0.32%, passively managed)
• Vanguard US Equity Index (annual cost: 0.10%, passively managed)
• L&G US Index (annual cost: 0.10%, passively managed)
• Fidelity Index US (annual cost: 0.06%, passively managed)
• Fundsmith Equity I (annual cost: 0.95%, actively managed)

 
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:

1. How much of your portfolio do you wanted allocate to equities vs. bonds?
2. Will you dabble in single stock investing or will you stick to diversified funds that track a whole country or industry?
3. What markets and industries do you want to invest in? e.g. I don’t have any UK-focused index funds  because I started investing in equities more intentionally after Brexit and I don’t think the UK’s prospects are certain enough for me to put any of my hard earned pension investments into the UK stock-market.
4. Will you invest in actively managed funds given their atrocious historic performance or will you stick to passively managed index funds?

 
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:

• An account opening fee;
• An annual management charge (AMC) for the platform;
• A dealing charge for buying index funds;
• Usually a different dealing charge for buying shares;
• If you buy index funds, each fund has a different annual on-going charge;
• There are other fees but I’ll just give you the first four listed here.

 
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

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £12.50 per trade; £2 per trade if you schedule automated regular investments

 
Hargreaves Lansdown

• No account opening fee
• 0.45% AMC
• Dealing charge for shares: starts at £12 but falls as you buy more shares;
• There’s no dealing charge for buying or selling funds.

 
iWeb

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £5 per trade.
• Big note: you can’t automate investing, you have to manually make your trades every time.

 
Vanguard

• No account opening fee
• Annual account fee 0.15% capped at £375

The big difference between the Vanguard platform and the others above is that you can only invest in Vanguard’s own funds, they don’t offer products from other fund managers. However, the other platforms I have listed will give you access to Vanguard funds and a plethora of other fund managers.
 
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

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Hi Heather,
 
Thank you so much for launching your podcast. I am really enjoying all your advice.
 
My name’s Vivienne. I’m single and in my late 60s. I receive the state pension and find that I struggle to make ends meet – my saving grace is that I own my home outright but I don’t have any other investments outside of that. Although I would like to work because I get lonely sometimes, I lack the energy I used to have in my younger days and certainly I find a full day’s work very exhausting nowadays. Is there anything you can think of that can help me boost my income?
 
Thanks

​Thanks for this question Vivienne.
 
Given you are not working, I won’t give you advice about saving and investing at this stage as I normally would.
 
I’m sorry you get lonely – loneliness is a rising issue in Britain and not only amongst older people – in 2016/17 Younger adults aged 16 to 24 years reported feeling lonely more often than those in older age groups according to the Office of National Statistics.
 
I have two income boosting suggestions for you that could help boost your income and reduce your loneliness too.
 
In the past, I have also given people advice about boosting their income by monetising any skills they might have on freelance sites like fiverr.com or upwork.com or by tutoring via websites like tutorful. However, I am going to suggest something totally different to you, perhaps even radical: have you considered taking in a lodger or renting out any spare rooms you might have on airbnb.com?
 
You could do this even if you didn’t own your home as long as you get permission from your landlord to sublet.
 
There are pros and cons with each option.
 
Option 1: LODGER
 
If you take in a lodger, you will have someone living in your home on a full time basis and you will probably have to give up some of your space in places like the kitchen to them. You will also need to be comfortable with that person using your appliances and white goods.
 
Are you happy for someone to share your hob, your fridge space, your washing machine and your living space that closely.
 
Taking a lodger in could flip you from being lonely to being frustrated very quickly if that person has very different habits and a very different lifestyle to you.
 
Instead of a full-time professional lodger perhaps you could take in a more transient lodger like a student. Some students, especially international students don’t see university as one long party and may well be studious, well-behaved and easy to live with.
 
If the person comes from Europe, they are also likely to go back home regularly leaving you to enjoy your living space on your own terms during such periods.
 
The government allows you to earn up to £7,500 a year tax free by letting a room in your home. This amounts to £625/month, all tax free.
 
Given that the state pension currently sits at c.£8,800 a year, you would almost be doubling your income if achieved this amount. If you have a generous spare room with an ensuite you might well be able to charge this kind of rent. Or if you have two spare rooms you can get a couple of lodgers.
 
You could also exclusively look for someone that is retired with the objective of keeping each other company in retirement. The type of person you decide to let a room to is entirely up to you.
 
One downside is that you might find a lodger who keeps too much to themselves and isn’t interested in bonding with you which might make you feel even more lonely. This brings me to option 2.
 
Option 2: AirBnB
 
Have you considered renting any spare rooms out on AirBnB? If you have the energy to change sheets and provide a breakfast this can be a fantastic little earner especially if you live in a popular city.
 
However, even if you are in a quieter city it is certainly something that is well worth trying.
 
A major advantage of letting rooms out on AirBnB is that you will retain full control over your home and kitchen space. When you are not home, for instance, if you are on holiday or visiting friends and family you won’t be leaving the house to a lodger which may offer you some peace of mind.
 
Just as importantly, during times when you expect visitors such as at Christmas you can have the house free of AirBnB guests.
 
A key advantage of AirBnb over a lodger is that you will get exposure to many different types of people with many curious about you and your city – based on them having to rent an AirBnB you can assume that most won’t be as familiar with your local area as you are and you can enjoy telling them about it and where to visit.
 
Personally, if I were in your shoes, I think I would go for the AirBnB option but you should decide based on your own personality and preferences. For instance, you might find the perfect lodger for you – someone who is perhaps older and not transient and even wants to spend time with you.
 
When I was single, once I bought a house, I always had a lodger for two reasons: firstly, I didn’t like the person I was becoming when I lived alone – I was becoming very rigid and set in my ways; secondly, I needed the extra money because my first mortgage was expensive and the monthly income boost made a big difference to me. I was also very likely to always find lodgers that I had things in common with so we could do some things together.
 
Just as with getting a lodger, you can rent rooms out on AirBnB and not have to pay tax until you are earning over £7,500.
 
I hope this is helpful. Outside of this there are the more obvious things like getting a part-time job or baby sitting when you have the energy and inclination to do that kind of thing.
 
I hope this helps you thinks more broadly about how you can boost your income and get some companionship at the same time.
 
If you are enjoying listening to my podcast, please give me a 5* rating wherever you listen to podcasts. If I don’t yet deserve your 5*, please let me know how I can earn it.
 
I hope this helps!
Heather

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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