Important information: 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.
Where do you see yourself in 10 years’ time? Tough question, isn’t it. It’s like being told to ‘name an interesting fact about yourself’ - it’s something no one likes being asked and which few of us have a real answer to, yet it’s a question people insist on asking.
Without a tangible response in mind, finding the motivation to invest can be difficult - after all, why save when you have no idea why you’re doing it? So instead, try to imagine yourself in five or 10-years’ time when you do have an answer to that question, and it involves travelling the world, or starting your own business, or raising a family. Wouldn’t it be nice if you could finance your future with savings you had begun amassing years before?
In this article, I’m going to explain why investing now is essential to fulfil your future objectives - even if you’re not too sure what they are just yet.
Saving for retirement
When it comes to investing in your 20s, two things should be on your mind - retirement, and everything else. I know what you’re thinking - how can something as far off as retirement be important now?
The simple answer is that retirement ain’t as easy as it used to be. Just ask your parents. Theirs is the first generation to face the harsh reality of several changes to pensions which have made funding our retirements far harder.
Honestly, the picture is bleak. According to a 2019 Fidelity global retirement survey, only 41% of 35-54-year olds said they were confident their retirement savings plan would achieve their goals, while a mere 22% felt on track to cover all their expenses.
If you want to avoid having to work well into your 70s, saving for retirement needs to be on your radar now. Fortunately, we can learn from our parents’ mistakes, and since we have more time ahead of us to let our savings grow, that sun-soaked villa in the Bahamas isn’t entirely off the cards.
The benefits of investing early
David starts investing £100 a month into his pension when he is 25; Mike invests £200 a month from the age of 45, so they both save the same £48,000 by retirement. Assuming a 5% annual return (for illustrative purposes only as this can’t be guaranteed). The effect of compounding has longer to work on David’s investments, and so he ends up with almost twice as much as Mike. Source: Fidelity International, July 2020.
You can usually pay up to £40,000 each year into a pension, and make use of a number of tax benefits, which are outlined here. The big one is ‘tax relief’. When you pay into your pension, you receive tax relief on any contributions you make. This is at the highest rate of income tax you pay. So, if you’re a basic rate taxpayer, for every £80 you put in, you will get another £20 paid in by the government.
It’s likely that you already have a workplace pension that will be paid into directly out of your salary, with contributions coming from your employer as well. If you can, it’s worth topping it up with voluntary contributions, which many employers now offer to match.
You can also open a SIPP if you want to have more control over your investments. These are personal pension pots which you open and maintain, much as you would an ISA.
Investing in an ISA
As important as investing for retirement is, you won’t be able to access any money you put into your pension until you turn 55, under the current pension rules. That’s great on the one hand - there’s no temptation to start withdrawing cash before you retire - but at the same time, it’s no good if you need to access your savings before then.
That’s where an ISA can be helpful. You can invest up to £20,000 each year into an ISA and enjoy tax benefits which also make it an efficient place to hold your investments. You don’t get the same tax relief on your ISA savings as you do in a pension, but all the gains you make within an ISA are tax-free; so you won’t pay a penny of it to the taxman, no matter how well your money grows.
And unlike a pension, you can withdraw money from an ISA whenever you want. This makes it a far more flexible way to fund your ambitions over the course of your lifetime.
Save, save, save
You may not know yet exactly what it is you’re saving for. That’s fine - I certainly don’t. But what is important is that you put yourself in the best possible position to finance life events when they do eventually pop up. Small, regular payments into an ISA or pension mean you can get on and enjoy yourself while your savings tick along in the background, allowing you to look forward to your future without worrying about how to finance it.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. 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.
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