Checksies ✅ #1: personal pensions
Money things to read, money things to do.
6 June 2017
Hello
Hi, this is Checksies. It's about how to do money. It's not about vouchers. It's written by @annagoss and @rod. And it's brand new, so your feedback is welcome.
Some things to read
Read these disclaimers
Oh great, we're actually going to start with some small print. We're not independent financial advisors, so this isn't financial or investment advice. Before spending money on financial products, you should talk to an Independent Financial Advisor. The ones you want are qualified as "Chartered Financial Planners", and you can find one here.
We're in the UK, which means we don't understand anything about advice, money or tax in other countries. We have biases. We hold shares in whatever Vanguard thinks is appropriate. We may also hold shares in individual companies, like our employers.
We're trying to work out what's best to do, just like you are.
All the financial advice you need on a post-it note
A few years ago, Harold Pollack said that all the financial advice you need to know could fit on an index card. He later turned it into a book, which we haven't read because it's mostly for US tax-payers. But here's a version of his card for UK tax-payers:
- Talk to a "chartered" financial planner
- Max out your employer's contribution (free money!)
- Pay off highest-interest debts first, credit cards in full every month
- Save 10-20% of your take-home pay
- Invest it in low-cost global index trackers and government bonds, in a mix to suit your goals and risk appetite
- Put those investments in a tax-efficient "wrapper" - SIPP, ISA or your employer pension. eg: get ISA on iWeb, buy Vanguard Lifestrategy funds
- Don't buy shares in individual companies, don't buy and sell loads, avoid actively managed funds. Just buy, and then wait.
- Help protect social safety net - eg. pay fair tax
You might even boil that down to "spend less than you earn, and save in tax-efficient ways". You'll also note that it is easy to write things like that, and much harder to actually do them.
One-Page Financial Plan by Carl Richards is a helpful read, because it starts by asking you to think about what money means to you, and how to talk money things with your family. Recommended.
A story about having a financial cushion
Warning: salty language, but this is a good story about why money can give you time, options and safety.
One thing to do
Max out your employer-match pension contributions
A pension is a good thing to have. Here's a good article describing the different kinds of pension, but broadly there are workplace pensions (which you and your employer contribute to), personal pensions (which you contribute to) and the state pension (which you and/or your employer contribute to in the form of National Insurance, is small, and politically a bit precarious).
12.5% or 20% is a lot of money from your take-home salary, but it can be made easier with employer-match pension contributions.
How do workplace pensions work?
If you're an employee you will have an workplace pension already, or will do in the next years or so. You and your employer have to pay into it.
You put in some money from your pay. It's usually a percentage of your salary, taken before tax. For a basic rate tax-payer, that means that when you're paid £100 by your employer, you usually pay £20 of tax, and you have £80 in your pocket. But when it goes into your pension, you get "tax relief", so the full £100 goes into the pension. (And if you're a higher or additional rate tax-payer, you will get a larger amount of tax relief. You can do that by calling up HMRC and telling them about your contributions, or by filling out a self-assessment tax return.)
And your employer puts some money in too. The best thing about your employer putting in money is that it's money on top of the contribution that you make. To you, it's free money. If you don't take maximise your employer's contribution, you're leaving money on the table that could be yours when you retire. And remember - the pension is yours, not your employer's. If you leave your job, the pension is still yours.
And how does the "employer match" bit work?
How much your employer puts in will vary depending on your employer. Often they'll match what you put in, up to a certain threshold. That's what we mean by "employer match".
Many companies offer matched pension contributions of 4% - so you put in 4% and so will they. Other will put in more: The Co-op will put in 10% if you put in 5%. If you work for the NHS, the level of employee contribution will vary depending on your salary, but they'll put in nearly 15%. M&S will double your contribution - if you've worked there for more than two years, they'll put in 12% if you put in 6%.
Here's an example.
If you earn £42,000 a year, you'd be putting £1,680 a year into your pension, but as your contribution is before tax, it effectively costs you £1,344 from your pay packet that year. And your employer would also put an extra £1,680 a year in.
Or in terms of your monthly pay: because you're making a contribution to your pension, your pay packet is £112 smaller per month, but your pension is getting £336 bigger per month. Jam tomorrow, so much jam.
So: look up your employer's workplace pension scheme. Check you're enrolled. Go and get the free money, because it's yours, and it will grow (more on what to invest in and compound interest soon), and it will look after you in the future.
Thanks for reading.
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