Retirement Planning

By age 40, many people have already achieved key milestones in their life. Perhaps you are firmly on the housing ladder, married and with young children. However, many goals still lie ahead of you – such as retirement – and you need savings to help you move towards them. Yet how much should you have saved by age 40? Below, our Oxfordshire-based financial planning team at WMM outlines the UK savings landscape in 2022, some ideas for a healthy savings target and how to integrate this into a wider financial plan.

What is the average UK savings amount at age 40?

Let’s first distinguish between common savings and pension savings. The former includes cash held in an ISA or regular account and is often used for purchases like a house extension, a new car or a family holiday. It is also used as a “rainy day fund” (for emergencies). Pension savings, however, are locked away until age 55 (rising to 57 in 2028) and are commonly used to fund a retirement lifestyle. 

Around 1 in 8 UK adults (6.5m people) have no cash savings to their name whilst a third have less than £2,000 to their name, leaving many vulnerable to shocks such as sudden job losses. Those aged 35-44, however, typically have £16,000 in cash savings.

How much should I have saved by age 40?

As a general rule, it is wise to have 3-6 months’ worth of living costs ready in easy-access savings account for emergencies. This helps prevent you from turning to debt if, say, you need to suddenly take unpaid leave to help care for a terminally ill relative. Here in Oxfordshire, the average monthly living costs for a family of 4 (excluding rent) are £2,473. Therefore, saving £15,000 in emergency savings might cover 3-6 months’ worth of living costs in an emergency.

Building cash savings at 40 – some considerations

Of course, £15,000 is a lot of money and would take time for many people to build up. It also imposes a potential “opportunity cost” on your finances (i.e. money saved towards your cash buffer could be put to better use elsewhere, such as overpaying the mortgage). Bear in mind that your target may be higher or lower depending on your needs and circumstances. 

Consider speaking to a financial adviser about how to best build your emergency fund so that your other savings/investments are not neglected (e.g. pension contributions). Be careful, also, not to save too much in cash. Historically, cash has been a poor asset for keeping up with inflation. In 2022, interest rates on savings accounts have gone up, but are still far below the currently 9.4% rate of inflation. This means that cash will almost certainly lose value over time and so households should consider investing in other asset classes (which have the potential for higher returns) once their cash buffer is ready.

Another thing to be mindful of is your use of ISAs. In 2022-23, you can put up to £20,000 into your ISAs and receive interest, capital gains and dividends tax-free. However, committing cash to your ISAs is almost certainly going to be a waste of your ISA allowance. Remember, you can generate up to £1,000 in interest outside an ISA each tax year (£500 for those on the Higher or Additional Rate). Assuming you limit your cash savings to your target 3-6 month emergency fund, therefore, most people are unlikely to need to use an ISA to save on tax on interest. This then allows you to use more of your £20,000 ISA allowance towards other investments such as equities or bonds.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

British people are renowned for their love of property. 65% of Britons have bought the property they live in, whilst in Germany, the figure is 43%. Bricks and mortar are not only seen as a viable route to shelter, but are also popular investments. Buy-to-Let, in particular, is often attractive – where you put down a deposit on a mortgage which is then covered by tenant rental income, also providing a nice profit (at least in theory!). However, how does Buy-to-Let compare against the stock market? Our Oxfordshire-based financial planning team offers some thoughts, here.

The pros & cons of Buy-to-Let

Buy-to-Let is compelling because property is tangible. You can see and feel bricks and mortar, whilst stocks and shares are numbers on graphs and spreadsheets. Buy-to-Let also offers two main routes to a profit. Firstly, the property value can grow over time – allowing you to potentially sell it for a capital gain later. Secondly, the rent from tenants can (with careful planning) cover your taxes and expenses – leaving the remaining profit as a nice “passive” income.

However, Buy-to-Let does have its downsides. There is the hassle factor since tenants may be difficult to manage and you may have to deal with various repairs. The more properties you have, the more this workload increases. Also, Buy-to-Let carries a lot of hidden costs which can possibly lead to you losing money rather than making a profit. For instance, estate agent fees, storage costs, accountant fees and insurance (e.g. landlord insurance) all eat into your returns. There is also the possibility that your property may be empty for long periods if you cannot find tenants, meaning you would need to cover the mortgage yourself.

Stocks & shares, compared

When you invest in an equity fund (collection of shares) or a specific company stock, you can generate a return in similar ways to Buy-to-Let. You hope that the shares will increase in value – allowing you to sell for a profit later – or they can provide an income (via dividend payments). With shares, however, you have far less work than managing a property. You may need to rebalance your portfolio once a year, but otherwise, you can leave your investments to run. You can also generate strong returns over a long period (e.g. 10+ years) with a good strategy, diversification and investor discipline. The S&P 500, for instance, has produced an average of 10.5% between 1957 and 2021.

Shares also generally have the benefit of high liquidity. If you need to sell them quickly to get to your money, you can. A Buy-to-Let investor, by comparison, might struggle to dispose of their property in a difficult market. However, shares can be challenging for investors to stomach. It is difficult to watch your portfolio rise and fall in value in short spaces of time. This can often lead to poor investment decisions that lose money (e.g. panic-selling when shares fall suddenly, only to see them rise again shortly after). Here, it can help to limit how often you check your portfolio. Also, working with a financial planner can help you maintain investor discipline and commit to your goals.

Be mindful that investing in shares can also carry fees and taxes which eat into your returns, although tax treatment at this time is far more favourable than with a Buy-to-Let property. Again, consider getting professional advice to find out how to mitigate these and put more back into your own pockets.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

For the first time, it now costs £100 (on average) to fill up a car. Petrol prices have soared as oil prices have surged across the world – partly due to sanctions on Russia, a major global oil producer, over its invasion of Ukraine. Yet inflation, as a whole, has also been rising for some time. The overall cost of goods and services in the UK has now risen 9% in the 12 months prior to June 2022; the highest since the 1980s. This presents challenges to working households, of course. Yet what about those in retirement? 

Below, our financial planning team at WMM here in Oxfordshire offers some ideas to help pensioners (and those near retirement) to protect their savings and income.

Be wary of raising spending

With living costs going up, it is natural to want to meet the increase in your expenditure via higher levels of withdrawals from your pension. Yet this could result in your fund shrinking disproportionately. In the worst case, it could lead you to run out of money later in retirement. If you need to spend more on your essentials then perhaps you have other investments that could be used to provide a more efficient income stream. However, take care to not hold too much in cash, as inflation will erode the value very quickly.  

Consider working longer

Unfortunately, not everyone is in the position to draw upon multiple income streams to provide extra retirement spending. For some, it may be best to delay retirement for a few years – letting you build up more qualifying years on your National Insurance (NI) record so you can get more State Pension income. You need 35 “complete” years on your record to get the full new State Pension. Remember, the income rises each year by at least 2.5% under the “triple lock” system and usually follows/beats inflation – protecting its value. Working longer could also give you more time to contribute to your pension pot.

Remain true to your strategy

When inflation rises, it eats away at the “real returns” from your investments. For instance, if your overall return for one year is 7% but inflation is 5%, then the purchasing power of your portfolio has only grown by 2%. With inflation at 9% in 2022, many investors are tempted to take on more investment risk to try and keep up. Yet this is not always appropriate with an investor’s time horizon, personal risk tolerance and long-term strategy. 

This is not to say that you should sell your investments! However, those in/near retirement should be wary of changing the investment plan agreed with their financial planner simply to account for the present economic landscape. Although inflation is high right now, it could return to “normal” levels (2%, or close to it) in the coming years. Taking on more risk than you are comfortable with is likely to lead to costly mistakes later (e.g. “panic-selling” if the markets fall suddenly). If you are at all concerned about your investment strategy in light of the current 9% inflation rate, speak to your financial planner. They will hear your concerns and perhaps draw attention to important information or principles that you may have missed. 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Did you know that UK workers change jobs every 5 years, on average, according to research by LV? A career change is often a great decision, but it can cost you in retirement if you are not careful. It can take as long as three months to get enrolled on the company pension scheme when you start a new role. In that time, many people do not make pension contributions – which can add up to £1,000s lost once you reach your late 60s. At WMM, we offer this short guide to help you navigate job changes without compromising your retirement goals.

Keep track of National Insurance

Your State Pension is based on your National Insurance (NI) record. At least 35 “qualifying years” are needed to get the full new State Pension once you reach your State Pension age. In 2021-22, this amounts to £179.60 per week – or £9,339.20 per year – so it is worth building the best record you can.

Most people will automatically pay NI contributions via their employer, deducted from your wages via the PAYE system. When you change jobs, therefore, your new payslip should reflect this. Yet it is not unheard of for administrative mistakes to be made. Always check payslips – especially if you start a new role – and cross-check the deductions against your NI record. 

If you have just started out on your own as self-employed, make sure you pay your NI correctly via your Self Assessment tax return ahead of the deadline.

Start a personal pension

A personal (or “private”) pension can be a great way to “take your pension with you” when you change jobs, as it is not tied to any employer. The disadvantages are that you need to manage the pension yourself, and you may not receive any employer contributions to it. 

However, it does mean that, in the first 2-3 months of a new role (when you may be waiting to enrol on your workplace scheme), you still have a pension to contribute to. It could also be a useful place to transfer funds from old workplace schemes into. This can help you avoid trying to manage too many old workplace pension pots leading up to retirement.

Be careful not to assume that any loss in pension contributions will be compensated for with a higher salary, when you move jobs. This may not be the case, and it would also be a shame to miss out on the compound interest growth you may have achieved with those extra months of pension contributions. If you have not yet started a private pension, then our team here at WMM would be happy to speak with you about your retirement plans. This can be a great opportunity to not only make your retirement more robust to career change, but could also help you reduce investment fees and increase your real returns through better strategy.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).