What will be your safety net?
What’s your plan if life throws something nasty your way?
You can never be sure what the future holds, but few of us are lucky enough to avoid bad news completely. Illness, bereavement, divorce - they are all life changing moments, but they’re all everyday occurrences, too. There’s no way to prepare yourself to cope with them completely, but that doesn’t mean thinking ahead about your circumstances - including what happens if they suddenly change for the worse - can’t help.
Building a nest egg of savings means you’ll have more options, more time and more security to help you cope when times get tough. For example, if a relationship ends there can be sudden costs to meet. Perhaps there’s alternative accommodation to pay for, or legal costs associated with separation and divorce. Struggling to meet them only makes a difficult situation more difficult.
What if you needed to change career due to injury or illness, be it mental or physical? Having an emergency fund might not replicate your salary, but it could mean you have the chance to retrain or the time to take stock and begin again in a different direction. In later life, there may be care costs to consider. These can place dramatic strain on family finances, sometimes forcing the sale of the home if there are no alternative funds to pay the bills.
A savings pot means you can worry less about what happens after you’ve gone, too. There may be short term costs that you don’t want to leave behind, or long term plans that you want to help your children achieve, like buying a house. Building savings is how you can do that.
So where to start?
No one should pretend that building significant savings is easy, but there is plenty of help on offer. All of us have advantages through the tax system that are available - if we take them.
Stocks and Shares ISAs - or individual savings accounts - allow you to keep money in cash savings or invested in assets like shares and bonds without having to worry about tax on the gains that might otherwise apply. You can stash away as much as £20,000 each tax year this way and you can access the money whenever you like. If you’re looking to the long-term investing your money can lead to a higher return - and a larger pot - than saving inside a cash account. This is of course not guaranteed.
For money you won’t need until later in life, a pension can offer even greater benefits because what you pay in benefits from tax-relief. Relief equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is claimed through a self-assessment tax return. Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due, with income tax payable on the rest.
You may have a pension available through your employer, who may well pay in something on your behalf. Make sure you take maximum advantage of any help on offer. You can set up you own pension - via a self-invested personal pension, or SIPP - which then doesn’t need to change if you change jobs.
Setting up your own Stocks and Shares ISA or SIPP is simple and easy, and once it’s done you can control your contributions and view your total pot in one place online. Services like Fidelity Personal Investing are designed to be simple even for people who have never invested, and include some ways to help you make a start without worrying that you’ll make a mistake.
As your confidence grows, there is information to help you learn and a wide universe of investments that let you take more control for yourself. Once you’re set-up you can start small and increase your contributions over time. Investment returns compound to help build a pot so that, if the worst happens, you and your family will be better protected.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.
This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.