It’s funny how as young adults we don’t often tend to put a whole lot of thought into the future. However, that all changes as soon as we start raising families, and the list of things to worry about suddenly becomes endless! Nevertheless, in these times of great economic uncertainty in a dangerous world, securing the household finances is pretty close to the top of the list of priorities. How can you take care of your family nest egg?
One thing I always used to think was a discussion just for the elderly, but no longer do, is that of pensions. I found it a bit scary to discover that as many as one in seven people retire with no personal pension. For women, this figure increases sharply to one in five. There is of course the basic state pension to help, but even at the maximum of around £120 a week, it isn’t really enough on it’s own.
Partly in recognition of the problems with peoples long-term savings, the Government has introduced a new law which comes into effect next April, whereby every employer in the UK must put staff into a pension scheme and contribute towards it. It does require you to contribute towards the scheme too, and/or sacrifice your salary, but in doing so you are essentially benefiting from free money, a tax efficiency on your wages and the comfort of knowing that you are taking yours and your family’s long-term financial future into your own hands.
There is an opt out, and for some individuals an auto-enrolment scheme may not be the best way to go. However, for most people, it will probably be a no brainer to take part.
The great pension shakeup
One of the reasons people have been sceptical of pensions was that they were previously converted into an annuity upon retirement, which is an agreed fixed income for the rest of your life. The problem with these were that annuity rates have tumbled in recent years, thus condemning pensioners to poor incomes from their hard-saved money.
However, in April last year, this all changed as new regulations came out which meant that pensioners could withdraw from their pensions as much as they wanted from the age of 55, with the first 25 per cent being tax free. Thereafter, each withdrawal is taxed at the person’s marginal rate, but importantly there is no obligation to put it into an annuity.
The key, of course, is to be disciplined with spending thereafter, and find good places to house this nest egg. Some retirees have started using their pension rather like a bank account, while others have turned to investing it. However, investing is obviously fraught with risk. A good middle ground in terms of risk and reward that’s emerged is peer-to-peer lending, which, as the name implies, means you lend directly to individuals via an online platform. Courtesy of the repayments from borrowers, returns are typically in the region of 5 or 6 per cent – but this is not guaranteed.
Of course, these are all decisions for down the line, and the objective for now is to find the best way to save. Another intriguing alternative is the Lifetime ISA, which is also going live next April. This new account will be available to those between the ages of 18 and 50, and entails a bonus scheme whereby for every £4 you save, Government will top you up with £1. The maximum you can contribute each year is £4,000 which means that, for those a bit younger than me, you could theoretically benefit from ‘free money’ of up to £32,000 over a 32-year period.
You may decide that this is a more preferable option to a pension, especially given that withdrawals are free of tax if you wait until the age of 60. However, the counter to that of course is that pensions offer a tax efficiency on your original salary itself, whereas a Lifetime ISA doesn’t.
Deciding what to do
Decisions like these are entirely personal, and there is no single ‘right’ way to go. But it’s an important discussion for any parent and family to have, so best to face up to it sooner rather than later. There are also numerous Government-approved advisories which offer free advice, and can help point you in the direction.
So it need not be a daunting exercise. The fact that there are multiple options out there is a good thing, and schemes like these are here to help you take care of your family nest egg – it’s just a case of finding one that works best for you, and saving as much as you can to get the most out of it.
What do you think of these options?