Investing and saving are part of being financially responsible and planning for your future is essential especially as you never know what challenges could come your way. Whether you want to save money for something in particular like a holiday, house, your children’s futures, your retirement or you simply want to make sure you have some funds stored away just in case, putting money aside is really important. You should also think about investing your money to make it grow as a longer term option. If you have got money to spare, you should save it or invest it but make sure you understand the difference between saving and investing. With saving you put your money aside without risk, where you will get it all back plus interest. With investing there is potential for your money to grow more, but the returns are not guaranteed and you risk losing some of the interest or some of your cash.
Savings Accounts
With a savings account you will get back the money you put in the account plus interest. Putting a little money away regularly is the best way of saving for certain things that can be very expensive likely a holiday, wedding, house or car. It is also a great way to make sure you are financially secure should something unforeseen happen like you need to pay for an urgent repair or you are made redundant.
There are a wide range of accounts to choose from, with the difference ranging from how quickly you can access your money, the minimum amount required to open the account and the type and rate of interest rate paid. You need to find an account that suits you so you will get the most out of your money. When choosing an account think about whether you want a fixed interest rate or if you don’t mind for it to vary. You may also be given the decision as to whether you want the interest paid monthly or annually. Bear in mind that interest rates change all the time so it is a good idea, once you get your account to regularly check it, to make sure you are still getting a good deal. Always check what notice period the account has, watch out for penalty charges when your make withdrawals and most importantly shop around and use comparison tables to see what’s on offer.
Individual Savings Accounts
The government offers tax breaks to encourage people to save and one of the most common and accessible is an Individual Savings Account or an ISA. You can use them to save cash, or invest in stocks and shares. With an ISA there is no income tax relief on payments into ISAs, like there is on payments into pensions. Having said this, unlike with a pension, you do not have to pay any tax on the money you withdraw and you can access your funds more easily, if for instance you need to fund an emergency. However please note that there can be tough restrictions on how much you can invest with an ISA and therefore, higher earners may find these limits too low.
You can invest in two separate ISAs in any one tax year, a cash ISA and an investment ISA and you can do this with the same or different providers. Cash ISAs work like standard savings accounts except the interest is tax-free meaning they can be ideal for short term saving and you can usually access your funds whenever you need. Cash ISAs will also usually pay a higher interest rate than normal savings accounts. Investment ISAs can fall in value as well as rise so you could potentially get back less than you invested. However, over the long term they can deliver much higher returns but there is more risk involved. To start a cash ISA you need to be at least 16 and to open an investment ISA you need to be 18 and over.
The ISA market is competitive so make sure you fully understand what will happen to your money and what restrictions there may be. Also make sure you read the terms and conditions thoroughly and don’t be afraid to ask any questions. If you are thinking about switching your ISA account, check with your existing ISA provider for any transfer costs.
Saving for retirement is one of the biggest investments that people make and the most popular way to save for your retirement is through a pension. A pension is an income that you will receive when you retire. It is a regular savings contribution and a long term investment. Many people choose to ignore the idea that one day they will be old but everyone needs to plan for when they retire, especially as people are living longer. The sooner you start paying into a pension the higher your income in retirement will be. To encourage people to put money away for their retirement, the Government provides tax relief on pension contributions. When you pay into your pension fund, the Government adds the tax that you have paid, or would pay, on that money. However, there are restrictions on how much you can contribute, depending on what type of pension scheme you have.
In the UK the earliest age you can take your pension is 55 but most people choose to wait until they are 60 or 65 but you do not have to retire from work to get your pension benefits. You can put off taking your pension until you are 65. There are certain situations where you can take your pension before you are 55. Your pension scheme provider will tell you what your scheme allows. There are three main types of pension. The first is the State Pension which is provided by the government. However, many people will not be able to live just on this amount alone so if you think you are likely to need more than this then you should consider a retirement plan. Some employers will provide a salary-related pension and lastly there are personal pensions which you are responsible for paying money into. You can build up your own pension through a private pension plan or put a portion of your earnings into a company pension scheme.
Generally speaking your pension fund is invested and when you retire the money you have accumulated over the years is used to buy an annuity which will provide an income for the rest of your life. The amount of this income depends on a number of aspects, including the amount you have contributed, how the money was invested, the age you are when you take out your pension, you gender, health and how much you get for the annuity. The final value of your pension fund will depend mainly on how much has been paid in and how well the fund’s investments have performed.
Personal pensions are available from banks, building societies and life insurance companies who will invest your savings on your behalf. You can save as much as you want with a personal pension and you can pay regular monthly amounts or a lump sum to the pension provider. Personal pensions are suitable for those who are self-employed, people who are not working but can afford to pay for a pension and employees whose employers do not offer company pension scheme. To choose the right pension provider your decision will mainly depend on how much you can afford to save for your pension. Make sure you know what the rules on making contributions are and how the money will be invested.
The Pros
- Pensions come with tax breaks. It is therefore a tax-efficient way of saving to secure a regular income when you retire. Remember however that tax rules can change over the years and this may affect your pension fund.
- Personal pension funds usually invest your money in shares and although there are certain risks involved, shares usually deliver a better return than cash savings over a long period.
- In most cases the money in your pension fund can’t be accessed until you retire, so you won’t be tempted to spend it.
The Cons
- Because you can’t access you money until you are near retirement, you can’t access the money if you need it in a financial emergency.
- As personal pension funds are typically invested, the eventual size of your pension cannot be guaranteed. If for example you have chosen to invest in shares, these could end up performing badly and you could end up with less of a return than you hoped for.
- Watch out for charges. For a basic pension you should expect to pay a single annual management charge. There may be other administrative costs depending on what type of pension you have and which provider you choose.
