Our specialists give recommendations to a reader who wants to save money for the future.
Gail Bowen aims at the balance between saving money for her future yet spending something now to live a full life. She is afraid of making wrong choices, even though she can manage saving money for her retirement. Gail earns a sufficient amount of money every month, yet she thinks she neds to save more and invest into her pension not to be in need during retirement.
She has a partner, Ben, that she met while studying at the university, and the couple is still together, working on software. They live in a semi-detached house with three bedrooms, located in Newbury, Berkshire.
Gail is a higher-rate taxpayer, with her earnings going right into a First Direct account. She divides her finances between a Nationwide joint account that she owns together with Ben, and a Metro Bank. The latter is used by Gali for payments and withdrawals when she goes on a journey somewhere. When it comes to savings, Gail has about £6,000 in a range of accounts, to fund specific purchases such as a new kitchen, a rainy day fund, and spending on Christmas and holidays.
She says: “The idea came about one Christmas when we just ran out of money. The next year didn’t start so well.” She is also saving towards an emergency fund, which she hopes will grow to £20,000. Yet Gail says she needs to shop around because most of her savings accounts earn only 1 per cent. She also has more than £3,000 invested in a stocks and shares Isa, which she tops up with £125 each month.
Gail and Ben own their home outright and have no other kind of debt. She says that she is clear about her aims for the future, but wants to make sure she can also enjoy life now. “I would like to have a pension of £25,000 a year when I retire at age 67, along with building up my emergency savings fund as soon as possible.
“My savings goals need to balance with funding my lifestyle, which includes travelling. I’ve been to some exotic places, such as Cambodia, Morocco and Egypt, but I also love Italy, France and Germany.”
The experts’ advice
Managing director, Equanimity IFA
“Gail wants to balance saving for her retirement with the ability to enjoy her money on holidays and other luxuries. She is saving a good amount monthly in pensions and is not far off target when it comes to reaching her retirement goal.
“Putting her rainy day money into a stocks and shares Isa is a good place over the medium to long term, say five years plus. However, if she needs access to money in a hurry, she may lose out if it’s not a good time to sell the investments. Gail needs to make sure she has instantly accessible cash, which is where her emergency fund comes in.
“To reach her £20,000 goal in, say, five years, Gail would need to set aside £270 per month. However, as she has other cash reserves, it would be sensible for Gail to build this pot up over a slightly longer term and set aside more money towards her retirement needs, so she does not have to cut back on other aspects of her lifestyle.”
Head of retirement planning, Towry
“It is good that Gail is reviewing what final benefits she could get from her pensions. It is important to do this annually as investment returns fluctuate and can knock you off target.
“As part of the review, Gail should consider what she invests in. Do the investments meet her risk tolerance over the timescale she plans to invest for?
Having chosen the right investments, Gail should look at where she can get these at the lowest cost. The charges will be a drag on any investments, so reducing them will help.
“Gail should build up a savings emergency fund before looking to further pension saving. She should find the right Isa, and if she doesn’t need the money before she retires, it will give her retirement funds an extra boost.
“Gail’s pension should increase under auto-enrolment, which will help boost pension savings. It is worth checking what difference this, along with the inclusion of the state pension, will make to her final outcome.”
Pensions director, Aegon
“There are lots of calculators online that can help people work out how much they might need for a comfortable retirement. Gail has 27 years to go, so with inflation reducing spending power, £25,000 won’t buy as much in the future as it will today.
“Saving into a workplace pension attracts not only tax relief from the government, but also employer contributions. In the next three years, under auto-enrolment rules, the minimum contributions will increase to 5 per cent from individuals and 3 per cent from employers. So Gail will have about double the money going into her workplace pension in future. Some people might be tempted to opt out of their workplace pension when contributions go up, but that would mean losing a valuable top-up from their employer.
“In terms of bringing her pensions together, consolidation can be worthwhile, particularly where you are no longer contributing into a pension. It’s easier to review how your funds are performing, but you could also benefit from a reduction in overall charges.
“Gail has used an online calculator to work out she is on track for a pension of £21,600 from her state pension at age 67. This leaves a shortfall of her target of £3,400 a year. Saving more now will make it a lot easier to make up that shortfall.”
“The advice was pretty good. It has given me plenty to think about. I like the idea about evaluating my money on a regular basis. In fact, I’m planning on having a ‘pensions and savings’ day once every month or so, when I can assess where I am financially.
“The comment on savings made me think about the need for a separate account. I’ll keep paying into the Isa, but open another account and save half the £270 recommended towards my emergency fund.
“It may take a little longer to get to my £20,000 goal, but at least I know it’s achievable, which is nice.”
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