We get asked these questions a lot, usually from people in their 20s and 30s:
'Should I save into my workplace pension?'
'What should I invest my spare income in?'
It often stems from a place of being unsatisfied with the returns they are getting from their bank savings account. Let’s face it, interest rates on standard bank accounts are less than desirable! You want to be making the most of the money you have worked hard to earn and save.
The following tips should help you to save money and start a pension pot successfully.
We’d always recommend joining your workplace pension scheme if that’s a possibility. If you’re employed, they should offer this to you by law. If you have a workplace pension, your employer will also pay in for you (again, required by law). Bonus!
If a workplace pension scheme isn’t an option for you, you can easily set up your own plan. This can usually be done online with the likes of Legal & General, Royal London, and many other providers. Drop us an email if you want us to point you in the direction of the ones we think are best.
The right pension scheme will set you up with a pot of money designed for your retirement and often provide a decent return. Psychologically, they are good as they prevent you from 'dipping' into the pot as, in your mind, is it set aside for a different cause.
We suggest having 3 pots of money:
Everyday spending - This could be your current account.
Medium-term savings - Essentially, this is emergency cash that you need to set to one side in case your boiler or car breaks, for example. Pop this in a savings account you can easily access. We’d suggest keeping this at around 3-6 months' worth of income, depending on what you feel comfortable with.
Long-term savings - This is surplus money you can afford to put away after you have topped up your medium-term savings. It’s a pot that you aren’t likely to need access to in the next 3 years. Here, you can afford to put this into an investment platform to benefit from the long-term growth of the stock market. More on markets, later!
Even if you can only afford to save a small amount each month - it all counts!
Whether it’s to your pension or personal pots 2 and 3, saving regular amounts, no matter how little, will yield a fantastic return over time (especially if you invest in the markets). Check out our blog on market returns and volatility to learn more about this.
Once you get into the habit of saving, you may find that the money isn’t missed. You could then try to increase the savings into your pension / longer-term pot each year, as long as this doesn’t limit your lifestyle too much. A good time to increase your savings is when you get a pay rise.
With your pensions and the long-term savings pot, we’d always suggest investing in the stock market. But, only do so with money you don’t need in the short term as you want to be able to sit tight and ride the wave. By this, I mean wait it out when markets are down as, overall, data has shown that they will grow over time as a result of combined high and low years. You don’t want to take your money out when your investment has decreased in value, you need to be able to wait for it to increase.
Think it sounds scary? You’re not alone, but the stock market should be accessible to everyone and you don’t need to be afraid of it.
It’s just a way of investing your money into thousands of companies all around the world. This can be the likes of Google, Amazon, Microsoft, and also some lesser-known but high-reward companies. There is also the option of ESG (Environmental, Social, Governance) funds that invest in sustainable companies.
There are some high-risk strategies out there, and there are also some people who think they can predict the future, recommend holding 20-30 companies, or even worse, investing in cryptocurrency. In our experience, this never works.
If you’re investing for the long term, keep it simple, follow the evidence and invest in a broad, diversified portfolio that offers a global market capitalisation.
As an example, the Dimensional* UK Market index has returned an average of 11.2% per year from 1970 to 2021. Cash in the bank? That’s returned 6.5% per year. If you then add inflation into the mix, the UK market has made 5.2% and cash has made just 0.8%. A clear advantage!
*(Dimensional is a fund provider investing in the UK stock market)
You can see how markets have grown each month, over the past 30 years here:
Monthly growth of wealth (£1), 1992–2021**
If you take anything away from this blog, let it be this - the best time to start saving is now, starting small will still make a difference, and don’t be afraid of the stock market as long as you’re investing sensibly.
Whether you’re starting your savings journey or want to make the most of your current savings, we’d be happy to grab a coffee for an initial chat.
**Data presented in the Growth of £1 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Past performance (including hypothetical past performance) does not guarantee future or actual results. Performance may increase or decrease as a result of currency fluctuations. In GBP. The Dimensional and Fama/French Indices reflected above are not “financial indices” for the purpose of the EU Markets in Financial Instruments Directive (MiFID). Rather, they represent academic concepts that may be relevant or informative about portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See the appendix for descriptions of the Dimensional and Fama/French indexes.
**Emerging Markets Value is the Dimensional Emerging Markets Value Index. Emerging Markets Small is the Dimensional Emerging Markets Small Index. Global Small is the Dimensional Global Small Index. Global Large Value is the Dimensional Global Large Value Index. MSCI data © MSCI 2022, all rights reserved. UK Treasury Bills, January 1955–December 1974: UK Three-Month T-bills provided by the London Share Price Database; January 1975–present: UK One-Month T-bills provided by the Financial Times. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.
.The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.
