Too late?

‘I’m 46 – with no pen­sion’

The Daily Telegraph - Your Money - - FRONT PAGE -

‘It’s bet­ter to in­vest spare money than to over­pay what is a very cheap mort­gage’

Em­pow­ered by the in­ter­net and pushed by the fi­nan­cial cri­sis a decade ago, mil­lions of us now work for our­selves.

Last year a record pro­por­tion of the work­force (15pc) con­sisted of self-em­ployed work­ers. There are ob­vi­ous ben­e­fits: work­ing from home, tak­ing time off when­ever you like and no boss telling you want to do.

But free­dom comes at a price, in­clud­ing the loss of perks of­fered by em­ploy­ers. Health cover and life in­sur­ance are typ­i­cal em­ployee ben­e­fits but it is pen­sion con­tri­bu­tions – now a re­quire­ment by law – that are usu­ally the most valu­able.

Work­ers’ con­tri­bu­tions are typ­i­cally matched by their com­pany, giv­ing the chance to build up large pri­vate sav­ings to sup­ple­ment the roughly £8,000-a-year in­come pro­vided by the state pen­sion.

An in­flu­en­tial re­port into the “gig” econ­omy pub­lished last month warned that the self-em­ployed were sav­ing too lit­tle and urged the Gov­ern­ment to cre­ate new in­cen­tives for peo­ple to put money away for re­tire­ment.

Lot­tie Wride is caught in a clas­sic bind. She runs a tree surgery busi­ness with her hus­band in Devon – the area with the low­est pro­por­tion of peo­ple sav­ing enough for re­tire­ment, ac­cord­ing to Scot­tish Wi­d­ows, the in­surer.

The cou­ple have been self­em­ployed for most of their ca­reers and nei­ther has a pri­vate pen­sion or any Isas. Their sav­ings con­sist of £10,000 in a Tesco high-in­ter­est cur­rent ac­count. Com­bined, their salaries are around £40,000 a year.

“When you’re self-em­ployed it’s hard to pri­ori­tise,” said Mrs Wride.

“We’ve got three chil­dren and have con­cen­trated on over­pay­ing our mort­gage, which we’ve re­cently fixed at 1.99pc for five years, and put­ting money back into the busi­ness.”

She wants to re­tire at 60 but at 46 is it too late for her to be­gin build­ing up a pen­sion to sup­port her­self?

Hay­ley North of Rose & North, a fi­nan­cial ad­vice firm, said:

It is never too late to start sav­ing. It’s im­por­tant to strike a bal­ance be­tween pro­tect­ing what you cur­rently have, sav­ing for the short-to-medium term and in­vest­ing for the longer term. Right now Mrs Wride needs to pri­ori­tise in­vest­ing for the long term.

She has al­ready made good pro­vi­sion for the short-to-medium term with her cash sav­ings but is wor­ry­ingly short on longer-term pro­vi­sion. She is miss­ing out on po­ten­tial in­vest­ment re­turns which could make re­tire­ment more com­fort­able and bet­ter pro­vide for her chil­dren as they get older.

In order to pro­vide fi­nan­cial se­cu­rity in re­tire­ment, Mrs Wride needs to con­sider in­vest­ing in a range of dif­fer­ent as­sets. These could in­clude in­vest­ments in pen­sions and Isas, prop­erty and cash.

In the cur­rent en­vi­ron­ment with in­fla­tion at 2.6pc (as mea­sured by the con­sumer prices in­dex), if a sav­ings ac­count is re­turn­ing 0.5pc a year – a typ­i­cal rate cur­rently – you are los­ing money over time. In this case, only £3,000 of the £10,000 Mrs Wride has in sav­ings is at­tract­ing a rate of 3pc (so a 0.4pc net real re­turn); the re­main­ing £7,000 is earn­ing noth­ing. Many of these ac­counts with high “teaser” rates are great for day-to-day use but not sen­si­ble at all for sav­ing or in­vest­ing. Mrs Wride would be ad­vised to save any­thing over £3,000 in an in­ter­est­bear­ing ac­count else­where.

It is re­as­sur­ing that the cou­ple have life in­sur­ance to pro­tect their cur­rent mort­gage. Should they buy a big­ger prop­erty, they will need to en­sure they in­crease the cover to match the new mort­gage.

Mr Wride’s in­come is pro­tected if he were to be too ill to work (although depend­ing on when this starts to pay out, there could be a de­lay of a few months dur­ing which time they would need sav­ings to live on) but on his death, even with the mort­gage paid off, they are likely to have an in­come short­fall.

Con­sid­er­ing “fam­ily in­come ben­e­fit” for each of them would be a good idea as this will en­sure a reg­u­lar an­nual in­come un­til their chil­dren are in­de­pen­dent.

They are look­ing to buy an­other prop­erty, which would be ex­cel­lent as an­other source of in­come, but they need to take into ac­count the fact that buy-to-let mort­gage rates are higher than on stan­dard mort­gages, big­ger de­posits are re­quired and they in­volve tighter lend­ing cri­te­ria. The cou­ple will also have to pay higher stamp duty on a sec­ond prop­erty.

Re­ly­ing on the state pen­sion in re­tire­ment is un­wise. Re­cently an­nounced changes mean that nei­ther of them will re­ceive the pen­sion un­til they are 68. At 60, Mrs Wride should have worked for 44 years and would qual­ify for the full state pen­sion when she reaches 68. Her hus­band is 11 years her ju­nior so has to wait even longer. When they both be­gin draw­ing the full state pen­sion, they’ll re­ceive £159.55 a week each or £8,297 a year, leav­ing them £23,407 short of their cur­rent an­nual in­come.

We would rec­om­mend stop­ping the mort­gage over­pay­ment and us­ing this £150 a month to top up life in­sur­ance with fam­ily in­come ben­e­fit and then in­vest­ing at least £100 a month into stocks and shares Isas that match their at­ti­tude to in­vest­ment risk.

At a growth rate of 5pc net of fees an­nu­ally, sav­ing £100 a month now would give Mrs Wride £24,380 to use to sup­ple­ment her re­tire­ment in­come at 60. The chil­dren would also ben­e­fit from stocks and shares ju­nior Isas, as they too have long in­vest­ment time frames and again would ben­e­fit from higher rates of growth.

Tom Kean of Thame­side Fi­nan­cial Plan­ning said:

Mr and Mrs Wride should re­con­sider where they save reg­u­larly. In­stead of over­pay­ing what is a very cheap mort­gage, they could con­sider in­vest­ing into an Isa and pen­sion in­stead. It all de­pends on their ex­pec­ta­tion of fu­ture in­ter­est rates against the likely re­turn from an in­vested fund.

If they aim to re­tire when Mrs Wride is 60, they’ll need to gen­er­ate in­come, be­cause they cur­rently have no in­come-gen­er­at­ing as­sets. They could down­size at some point, but that doesn’t sound vi­able given their three young chil­dren. So build­ing up the value in their busi­ness and in­vest­ing should be their pri­or­ity.

Be­fore they can be­gin in­vest­ing they should pick a “plat­form”, or “fund shop”, which can be used to op­er­ate both pen­sions and Isas at the same time. There is a mod­est cost to hold­ing funds on these plat­forms, but that is nor­mally off­set by the sav­ings made.

For ex­am­ple, lots of funds have no en­try costs if you’re us­ing a plat­form. You can also switch be­tween funds for free. And it’s the best way to ac­cess cheap ver­sions of

funds ne­go­ti­ated by the plat­form.

For in­stance, the pop­u­lar Wood­ford Eq­uity In­come fund, which I like, has an an­nual fee of as lit­tle as 0.65pc, depend­ing on where you buy it, although fund shops levy their own charges on top.

Be­cause Mr and Mrs Wride are rel­a­tively young I’d be in­clined to sug­gest that new sav­ings should go to­wards fund­ing both pen­sions and Isas, and that they should take some risk – that means ex­po­sure to the stock mar­ket.

They al­ready have a cash base, so tak­ing risk now should work for them. A good mix of Bri­tish and global stock mar­ket funds would seem to of­fer the best so­lu­tion here. Our “ad­ven­tur­ous” port­fo­lios have a mix of funds in­clud­ing In­vestec UK Spe­cial Sit­u­a­tions, Lazard Emerg­ing Mar­kets, Lind­sell Train Global Eq­uity, M&G Global Div­i­dend, Marl­bor­ough UK Mi­cro Cap Growth and Stan­dard Life Global Smaller Com­pa­nies.

Mrs Wride should be aware that the state pen­sion is now payable much later in life. For her, this will prob­a­bly be around 68 – as­sum­ing the Gov­ern­ment doesn’t put the ages back even fur­ther.

Lot­tie Wride and her hus­band have ig­nored pen­sions in favour of pay­ing down their mort­gage and de­vel­op­ing their tree surgery busi­ness

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