When I tell people that I write about money I often get told secrets. Some people just want to unburden, to get a little bit of financial advice or reassurance that what they are doing with their money is right. I hear about buy-to-lets in all sorts of exotic places, inheritances in the pipeline and Premium Bond prizes won.
But by far the biggest secret I get told and often with more than a touch of embarrassment is “I don’t have a pension” closely followed by “It’s probably too late now to start one”.
These people are far from alone. Around one in four UK adults have no pension or only a negligible one, and even those who think they are all right with the £50 or £100 a month they have been squirreling away in a scheme for the past few years may be in for a nasty shock.
Take a multi-track approach, involving debt repayment, property and share investment
The average pension pot in the UK is £40,000. Yes, £40,000, which, along with the (very) basic state pension is meant to last ten, 20 or even 30 years of retirement. It’s not enough. Not nearly enough.
But don’t panic. Frankly, if you’re 50-plus and don’t have a pension they may not be the best vehicle for you anyway.
Pensions by their nature are very restrictive. In exchange for the tax break on payments made, the taxman bars you from getting any money from age 55 and imposes all sorts of restrictions on what you can do with your cash even when it comes time to collect.
Recent changes announced by the government to these rules, removing the requirement to buy an often poorly priced annuity at retirement, are of benefit but not much use if you only have a small pension pot.
If you want to build a retirement pot, the best advice is to not ignore pensions (as they enjoy the benefit of tax relief) but do it as a part of a multi-track approach, involving debt repayment, property and share investment.
1 Manage your debts
It doesn’t make financial sense to be making minimum payments on a credit card, at 15 or 20 per cent interest, or taking out a car loan at ten or 15 per cent while earning a few per cent on your savings. But millions of Britons are doing this right now.
So first, identify all your debts and what you are paying in interest. Repay the most expensive first.
As you repay one debt it should release spare cash, which would otherwise have gone on repayments, so you can pay off another debt.
The only debt it may not be worthwhile paying off right now is mortgage debt. At present the interest rate on the best buy mortgages is below what you can get through investments and savings.
2 Remortgage, remortgage
If you have owned your home for a good length of time, say ten years or longer, it’s likely there is a quite a bit of equity in the property. This means you can have your pick of the mortgage market, and by remortgaging to a new provider your monthly repayments can plummet, allowing you spare cash to invest and save.
3 Open an ISA
This tax-efficient vehicle allow you to save or invest up to £15,000 a year in any combination of cash or shares. ISAs grow tax free and you can take your money out at any time, unlike a pension.
Danny Cox, director at independent financial adviser Hargreaves Lansdown, says that with cash interest rates so low you are much better investing in shares: “For the longer term, investing in a stocks and shares ISA is likely to produce higher returns than cash. Over 18 years the probability of shares providing a better return that cash is 99 per cent.
“If you save £250 a month into a stocks and shares NISA over 15 years, this could build to a portfolio of £71,000, assuming a six per cent return, and produce an income of £2,485 a year with no further tax to pay.”
However, you should aim to have the equivalent of three months’ wages in a cash ISA as emergency ‘rainy day’ money.
4 Your property is your pension… sort of
Most people in their 50s and older are happily ensconced in the family home, which may have been owned for quite a few years. This should mean there is equity in the property, and getting that equity out at a later date is an option to help support your retirement finances.
Downsizing is one option that should help to reduce bills but it does involve substantial moving costs, which could eat into the capital released.
An increasingly popular option is equity release, which used to have a bad press but is now very strictly regulated with more transparent products on offer. The provider – often an insurance company – will in effect buy a portion of the home from the owner and then collect this in cash when the property is sold or the owner dies.
Usually this comes in the form of a loan, which is subject to interest, so the longer the lender has to wait for its money the bigger the eventual payout. This shouldn’t be done without taking independent financial advice but it is certainly a way of turning bricks into retirement cash and is now increasingly popular.
5 Make a buy-to-let investment
If you have equity in your property this could be used to make a buy-to-let investment. Most buy-to-let mortgages are interest only so the capital sum is not repaid, which makes them cheaper (particularly at the moment with interest rates at record lows).
If you buy the right property in the right location with a steady stream of rentals, it should be possible to cover your costs and cream off some profit to put towards your retirement pot.
In addition, when it does come time to retire you can sell the property and any capital appreciation would be pure profit. Over ten or 15 years this can be a tidy sum.
6 Use the ‘golden period’ to supercharge your finances
Most financial advisers talk about a ‘golden period’ in an individual’s finances. This is when they have paid off their mortgage or when repayments are very low and their earning capacity is at its highest; when they are top of their careers. This is often when we are in our 50s.
This is the time when you can make the most of this cash and save and invest hard in order to ensure that you don’t suffer a meagre financial old age.