How to sort your finances: From budgeting, to savings and pensions

0:02Welcome to This Is Money Podcast, sponsored by Charles Stanley Direct. I'm Georgie Frost and joining me today is Simon Lambert. And coming up, we've been a bit news heavy of late. And let's be honest, the news has been heavy. So in this episode, Simon and I have decided to go back to basics. A mid-year financial review, if you like, covering the key areas to help you sort out your money like a boss. You can tell I've just joined TikTok. We'll be taking a look at budgeting, saving, investing, pensions, tax, insurance and wills. Don't forget you're up to date with all the latest breaking money news.

0:36Just go to thisismoney.co.uk or download the app.

1:04expected term. Your finances, your way. Take control today with Charles Stanley Direct. Sign up now. Investment involves risk. But first, a very warm welcome. Simon, just explain if you would briefly what we're doing in this episode, what's coming up, why we're doing it. Well, hi, Georgie. And hello, everybody listening. What I thought we should do is just talk about a quick run through of some of the really important stuff in people's personal finances. Because I talk to lots of people. And as listeners can imagine, a hazard of the job is getting asked questions about anything financial or anything to do with money.

1:45And there's lots of people out there who are financially engaged, they do care about their finances, and they care about what they do with their money, and making the most of their money. And often they're very successful, you know, career wise or financially successful, but they don't know some of the basics or all of it or there's bits that they've got gaps in. And those are the things they ask questions about. What about this? What about that? So I thought it would be a good idea for us to try and do a podcast where we whip through the important stuff and also talk a little bit about what we've learned along the way.

2:23because I think that that's actually, you know, one of the best ways of starting to understand this stuff is when someone's willing to just fess up to the things that they did wrong, because there's plenty of those. Oh, yeah, many. There's two things I thought about with this one, Simon. One is that obviously this is helpful if you're just getting started. Obviously, we're going to be running through the sort of key personal finance pillars. But it's also good for anyone in their financial journey. Because like you say, sometimes we let things slide a little bit. We haven't perhaps ever done the basics, just garnered things as we've gone on.

2:58So it's always good just to take a look. But also, the other thing I thought about is the news has been heavy. We are going into the budget period soon, where there's going to be a lot of speculation about people's finances. People get worried. Every day, there seems to be something a little bit worrying about finances in the news. But the best thing that you can do is the fundamentals. Go back to basics, sort your personal finances out, and then you're much better to weather any storms that may come. But where else to begin than budgeting? Now, this is the financial foundation stone, I think.

3:35And I will admit it to you, Simon, this is where I fall down from right at the start. And I've thought about this, not extensively, but I did think, and I came up with an analogy. So I'm a painter. I like to paint, which makes me a painter in my mind. And this is like the priming your canvas. It's like the getting everything ready for the layers to come. It's getting your paint sound, mixing your colours. It's the bit that I don't enjoy. I just want to get in there and slosh the paint on. And it's one of the things that actually stops me getting started. So just explain what is budgeting, why it's important, how you can make it fun and actually something that we want to do if you can.

4:16I like your analogy there Georgie. Thank you. And whilst I'm not a painter and could never describe myself as a painter I have done some decorating in the past and I feel I feel your pain because I do not have the patience to decorate. Masking everything up you know getting all the dust sheets down is so annoying and then you paint and then you look at it and you go oh that hasn't happened properly and then I start to lose confidence in the fact that I've done it properly and then I just get angry with the wall and the paint and myself. My wife is a much better decorator than I am because she has the patience.

4:54She's also considerably more organized. Now these two things may or may not be interconnected but I suspect for those people who are good at budgeting and those people who are just like meh budgeting snooze balls there may be a connection there and actually whilst we're not talking about the news, I'm going to talk about a news story from this week. Britain's rich are getting poorer. The UK suffered the second biggest decline in average household wealth of any major economy last year. This is according to a report from UBS. And what it said is that actually this is due to high income households experiencing slower wealth growth when adjusted for inflation, and that most people in Britain enjoyed a significant increase in their real wealth levels in 2024.

5:43So last year, most of us got richer. Now, how many people listening to this feel like they've got richer in the last year? I don't know, but I'm still feeling the pain of this inflation spike stuff. I do not feel like I got richer in the last year. I mean, I don't know whether my investments went up enough to make myself richer in the last year. They did, and then they went down, and then up again, and then down again. So who knows where we're at, And who knows where we'll be at in a year's time or sorry, a few weeks time even. But that feeling of do I feel like I'm any richer, I think is directly connected to the whole money coming in, money going out thing.

6:23And so we did a poll. We love a poll. 1 ,142 votes. Do you feel richer than a year ago? Yes. 13 percent. No. 78 percent. The same. 8 percent. What would you say, Simon? i'd say the same oh i said personally i said i said no as i said all this bill stuff it's like yeah you know so this is where the budgeting comes in because it involves getting a handle on what's going on and then working out what you can do and actually one of the best outcomes of doing this and budgeting is that you can feel richer at the end of it do it work it out give it a month. And in a month's time, if you stick to your plan, you could actually start to feel richer.

7:12And that's an immediate, quick dopamine hit from doing your budgeting work. That's not the long term wealth growth thing that happens. So basically, my tips would be, you need to get your bank statements out. You need to know what's coming in, and what's going out. And this sounds really boring. No, no, I blow out there because I want to ask, is this just me or is this more complicated? So I have a business card, a current account card, a sort of just spending account card and two credit cards linked to business and personal. That's five cards because I like using the banking apps are really useful and I know where my spending is, but that's just one card that I have that for.

7:57And this is the problem. So look, I'll tell you what I did when I did this. a while back we've got two main accounts really that i need to look at i've got my current account that i get paid into and then out of that every month i transfer some money into another joint account that we just use for the mortgage uh i transfer some money into our joint account that we use for like the monthly spending and then i'll transfer some money into a savings account that was where i was at right and then i would spend the money from my current account over the course of the rest of the month and then I get paid again and I'm in the fortunate position where I'm employed so I get paid same amount of money every month we also have our joint household account which is where all the household spending goes out of so I needed to look at both of these I needed to look at the joint household account see what was coming into that and that's pretty easy because that's just like two amounts of money coming in one from me one from my wife each month and then all of the money that's going out and then look at my current account again there's only really one big sum of money going into that which is when i get paid every month and then all the money that's going out and then try to categorize it and i've done this in different ways before i've sort of played around with some of the budgeting apps but i've never properly got stuck into them i think if you do find a good one then it can really pay off and if you have found a really good budgeting app email us at podcast this is money.co.uk because we want to hear about it and we'll tell everybody else about it.

9:23I've done it old school, print off the bank statements, get a highlighter or a biro out and then write stuff in and write notes next to it and then try to do it and write it all down on a piece of paper. I'm a writing on pieces of paper kind of person. But I've also, and this is the way I did it most successfully, is I used the function on my online banking, which pretty much all of them have nowadays, I'm pretty sure, to download those statements to Excel. and then I did it month by month each month each month I went through and reorganized it to sort of categorize what I was spending on each thing and then I took the amounts that I was spending on those over I think I did it over five months to try to average it out the amount that we spent on energy over five months the amount that we spent on food over five months the amount personally that I spent on train fares and stuff like that and then I worked it out and I had my list of stuff and it took a while but it was quite a useful exercise because you could see okay how much am I really spending on food now the thing that cropped up here and I imagine there may be people listening to this who are like my partner does exactly this and it's so annoying right we get a weekly food shop delivered a certain person then also has a habit of going to the supermarket or the shops, you know, maybe the butchers even, at the weekend to get some stuff for dinner on perhaps Friday, Saturday, Sunday, and manages to drop, you know, 40, 50 quid every time he goes into the supermarket, thus completely blowing my wife's attempts to keep the cost of the supermarket shop down wide open.

11:04And it's only when you add all those things up and look at them on a piece of paper or a spreadsheet or whatever and you go oh oh yeah I'm actually spending as much doing that as we are on our monthly grocery bills so while I thought that we didn't spend that much on groceries because we're pretty good someone is blowing the budget and the great advantage of doing this on a spreadsheet because it shows up where you spent the money you can just reorder it like by all the tesco ones or all the sainsbury's ones or for for me the place where i go to buy lunch when i'm at work is the m &s near us not because i'm posh but just because it's like the nearest food supermarket and actually it's quite cheap way of doing it you go buy like three days worth of stuff keep it in the fridge at work and then you have three lunches okay so not because i'm just going and spanking loads of money and m &s every day but like then you can see all of those transactions so it's quite an easy way of doing it once you've done this you can then kind of categorize things into your essentials so that's like all your bills your essentials the stuff you just have to spend your regulars that's my things like the money i spend for lunch at work and stuff like that and then fun the stuff that you're spending on entertainment going out dinners out takeaways anything like that pub and then you can look at what you can save so I have a few problems with this Simon I have to do VAT returns every three months I have to do a self-assessment I have to do all of that stuff anyway so you'd think actually it wouldn't be that difficult just to do a little bit extra but no for some reason no and I have to throw in the fact that along with those five cards I've already mentioned I've got a joint account as well where things like food shopping go out as well that's constantly in need of revisiting a sort of budget.

12:53But also my biggest problem with this is I can identify because I don't think I'm not aware of what I spend my money on, but I identify and go, yep, fine. Even though it would be great to spend a little bit less on certain areas in my life, identifying it for me is not necessarily the route to rectifying it. No, but, and I would say your finances are more complicated because you're self-employed and you have lots of accounts now one of the things that i did do before i forget to say this is actually in order to help myself budget i actually opened another account so i opened a second current account i actually already had this second current account lee's a big fan of that yeah right so i did this and i've done it with with starling for example because i think their app works really well.

13:43I now pay a thousand pounds a month into that account when I get paid. So I get paid into my current account, money goes out to, you know, mortgage, joint account, savings, and then also into this other account. And that covers my monthly spending. And that was to try to get a grip on my monthly spending so I could work out, am I more than 250 quid in after week one, after week two, after week three, after week four. And if this sounds like a lot of money, bear in mind that my train fares come out of this each day when I go into the office. So that obviously adds up to quite a lot. That definitely made a massive difference to me kind of keeping a track of the spending.

14:28Because when I had it just in my other current account, mixed in with all the other stuff that comes out, it was just a bit confusing. Now I have to leave a certain amount of stuff in the other current account for things like those regular direct debits that you have that come out of your account but so it's not moving all across but this definitely helped the other thing i would say is reward yourself for budgeting before you even start this process think of something that you are going to treat yourself to could be a really nice dinner that you're going to cook you're going to go buy some great steak or whatever you like to eat whatever floats your boat whatever your vibe is have that thing that you're going to treat yourself to do your budgeting work your way through it work out your plan get all your numbers down and everything so you've worked out what you think you can do realistically and then go treat yourself to that thing say right i've earned it and i'm going to earn it back by making better use of my money and the reason to do this thing is i have this idea like you said you look at this stuff and you're like oh i just can't build is there will be something that you can probably take action on some people there won't be anything and in fact the last time i did this i was like the really annoying thing is that we actually need to spend most of this money so i don't really see where i can save much but examples like we spend 450 pound a month on our food shop and then some mug goes out and spends another 400 quid at the supermarket over the course of the month by buying dinners at the weekend now i can probably dial that back if i just spent half as much money doing that, we'd be 200 quid richer at the end of every month.

16:00And that, going back to what I said before, feeds directly into the, do you feel richer than a year ago? Well, if you're ending up with 200 quid more in your account than you were due to your own behaviour, that is enough to make most people feel richer. I would have two points to this, Simon. One, I would say if you want it to be sustainable, this sort of budgeting and identifying where you can save, make sure it's in areas where you really don't get that much value from. For me, nothing nicer than on a weekend, having some croissants and coffee at a local deli. Is it a bit of a waste of money?

16:37Yeah, probably. But I enjoy it. I don't want to get rid of it. There are other areas where I absolutely can do. So if you want it to be sustainable, you need to pick the things that you don't enjoy. The other area, which is related to budgeting, is before we get onto saving, is it can identify where you can cut back. It's also help you immensely with debt, Simon. Not all debt is bad. And there's some debt that you should pay off much faster than others. Just, you know, what should you be doing if you do have a little bit of debt or you find yourself just constantly, you know, paying off just the interest of your credit card?

17:17and it's just a may not be absolutely a nightmare for you but it's just hanging over you yes as you said debt is an issue for lots of people and it's certainly something that makes them not feel richer than a year ago um there's you know there's good debt mortgage is good debt it's allowing you to gradually buy a house over a really long period of time um and there aren't many opportunities like that that come along arguably you know people will say student loans are good debt because you've invested in your future although what they've managed to do to the system doesn't make it look great for the people who are using it at the moment but then there's things like credit card debt or expensive loans and those are the kind of things you need to watch out for high interest debt you might have for example a car loan right and that car loan might be a relatively low rate or you might have a pcp deal on a car and that's a relatively low rate you could be you know, realistically could be 5 % or lower.

18:16And that's what enables you to run the car that you need. Okay, that that's fine. That's good debt. Arguably, if you're spanking a huge amount of money on a really big expensive car on finance that is unnecessarily big and expensive and luxurious, that might be bad debt depending on how the rest of your finances play out. Okay, if you're if you're struggling and feeling like you're not doing very well financially, then that's one of the things to ditch. Things like credit card debt, just that you just never pay off that's on 20%, 30 % interest rates, things like that, that that's what you need to clear.

18:52And this is where the budgeting comes in, because you can start allocating money away from things that you don't need to spend it on towards paying off that debt. And if you go to see a financial advisor, most of them will tell you that you should be clearing expensive debts before you start to think about saving or investing. Now, there's lots of people who do actually prefer to compartmentalize these things in their brains and go, okay, fine. Well, I'm fine with clearing that debt and I'm doing it, I'm clearing it, but I also want to build up some savings, also want to build up some investments.

19:23I'm going to do that over there. And that's okay. But what they will tell you as a starting point is pay off the expensive debt first. See, that's the thing. And I just want to get that in there now before we jump onto savings, because there is this sort of linear a pattern, you know, and I'm studying for my financial advisor exams at the moment. So I'm very aware of do your budget, pay off your debt, start saving, then you invest, da da da. But actually, I'm someone who hasn't done it that way. I have done, like you said, a little bit of this, a little bit of that. Now I've got to a stage where I, yes, I do use a credit card, but I pay it off in full every month.

19:57But in the past, it was paying off a little bit here, saving a little bit here. And I wouldn't necessarily recommend that, but certainly that time, and we'll get on to investing in a second, that time in the market, as they say, has certainly paid me back, I think. So is it always fair to say that you have to go in this sort of linear pattern? Is that the best place to start? Or, you know, if you want to get a bit messy, if we're going to stick with the painting? I think as long as you're happy with it, and it's not messy, as in you don't really know what's going on, if you've worked out a proper plan, then that's fine.

20:34But I just I think that the problem is, is that whilst it will work for some people, it won't work for lots of other people. And sometimes the simplest thing is the best thing to do, because it's the simplest thing for a reason. Pay off the debts, then start saving, then start investing. I mean, I would say I always find it difficult when people are being told to pay off debt, you know, use all of their available money to pay off debts rather than build a rainy day savings pot. I think rainy day savings pot is an absolute essential. And actually, you got a credit card, if it takes you an extra two months to pay off your credit card, it takes you an extra two months to pay off your credit card.

21:13But if something bad happens, you don't have any emergency savings to fall back on, then that's where you might end up borrowing more money. And it might end up taking you an extra two years to pay off your credit card. A good thing to have in your financial arsenal is a way of spreading costs. And I would add a note of caution on this. Don't spread so many costs out over monthly amounts that every month you have no money because you've been spreading your costs so much. That's definitely a trap that it's easy to fall into, especially with the whole buy now, pay later stuff nowadays. But something like a 0 % purchase credit card, if you can get accepted for one of those, you've just got sitting in the background that allows you to purchase stuff and then pay that off over a longer period of time without incurring any interest most of those have a limit on how long they will allow that to happen for but what people who use these tend to do is they take out a card use it throughout that 0 % purchase period and then they'll cancel that card open a new one do that it can be handy to have that ability to to spread costs and also like consider where people offer you that opportunity whether you should take it up.

22:23So a great example is things like paying for furniture. Quite often, you know, and this is to try to sell you more furniture just to be 100 % clear, but people will offer you the chance to pay off your sofa or your bed or your wardrobe over the course of a year with no interest. It might be worth considering if the alternative is massively depleting your savings pot. Holidays as well, this is something that's quite popular for package holidays and things like that is to pay it off over a year. And, you know, as long as it's not incurring you lots of extra interest, then that's fine. But if it is incurring you interest on those payments, and you are suddenly looking at your bank statement every month and going, oh, I've got like 10 things going out that I'm paying for, maybe you need to change that.

23:09Absolutely. Just a word about credit cards, which I think another key pillar in our personal finances, as it were, is your credit score, because it can impact so much, particularly if you want to buy a house or indeed get any sort of credit. And that's where you need to be really careful about how you use credit cards, how you apply for credit cards, just make sure you and any sort of debt, just make sure that you have a plan for it. So Simon, we have our budget, we have our debt under control. Now it is time to start saving. So this is the point in my painting analogy. I'm not just throwing this together, Simon, where I sketch my outline onto my canvas.

23:51Now, this can be for emergencies that you also talked about, but it can also be for the longer term as well. Just wanted to point out as well, when we talk about things being messy, if you have an emergency savings pot and you've had an emergency, that will be depleted and you might have some investments over there. Life can happen that makes things not go in a linear path. But Simon, how do you figure out what your financial goals are and why does it matter when it comes to saving and we'll get on to investing in the second half of the show. But it is all interlinked, isn't it? Yes, it is all interlinked.

24:27What you need to be doing is hopefully regularly saving money over a really long period of time. And that's how you really build your wealth. You get to benefit from the power of compounding of interest on interest, returns on returns, gains on gains. but you also get to benefit from the power of just saving money for a really long time and it does start to accumulate and if you can also keep upping that hopefully as your earnings rise then that can make a real difference and the best way to start after you've done your budget have a number this is the amount that i can afford to save each month give yourself a bit of a stretch push it a little bit but don't push it to a number that's just unrealistic don't say i can save 300 pounds if realistically you could only save 200 because it can be quite dispiriting saving your 300 and then taking 100 back out each month although actually that is one way of actually trying to push yourself but it think about my relationship with money all that kind of stuff my relationship with saving am i the person who's going to be bothered and disheartened by the fact that I've had to take a bit of money back out of the savings account?

25:39Or am I the kind of person who thought, well, do you know what, at least I tried to put as much money in there as possible and almost gamify it in your head of, well, this month, I only took out that much. Last month, I took out more. You know, think about what you're like and how you do it. But get that money going into a savings account regularly. You can use different types of savings accounts. You can benefit from a very high interest rate by using a regular saver account. These limit the amount of money that you can put in each month and pay you a higher interest rate in return for that. But because you've got limits on them, they're kind of capping how much money can actually go into it.

26:14But most of those are going to be taxed accounts. The alternative is to put it into a standard account. I would say what you should do is save it into the best possible easy access cash ISA that you can get because then you're not paying tax on it. There is tax on your savings, you can earn interest of up to a thousand pounds a year tax-free but only if you're a basic rate taxpayer and there's a lot less of those nowadays than there was due to frozen tax thresholds once you're a higher rate taxpayer it's only 500 pounds and once you're an additional rate taxpayer is zero now the problem is is as your earnings go up and governments continue to freeze tax thresholds you might go up a tax band so while you might think not a problem now when you become a 40 % taxpayer, it suddenly does become a problem because you've got built up that pot in your savings.

27:06And now you're paying 40 % tax on the interest and you've only got£500 tax free. And if you're lucky enough to become an additional rate taxpayer, well, you're paying 45 % tax on all of the interest. So I think it's a great idea to get it into a cash ISA. So cash ISA is great for tax. So too, Simon, are premium bonds. However, I've been reading a lot of criticism about premium bonds recently and obviously regular listeners to the show will know that lee has not had the greatest luck uh not winning a penny over the last two and a half years so good or bad because we love them in this country we absolutely love premium bonds but could we be doing more for ourselves premium bonds are good if you're looking for the absolute best rate of return then premium bonds are not where it's at the absolute best rate of return you're going to get from one of the top paying easy access cash ISAs or a fixed rate.

27:59If you take out fixed rate savings you have to be able to lock up your money for that period of time. So it's not necessarily a kind of building your savings product, it's more I've got some savings, I want to park them somewhere and know the exact return that I'm going to get. The premium bonds, there's a prize fund rate, you may or may not get it, it depends how lucky you are, it is a draw basically. Now sometimes you might do better and sometimes you might do worse. The one thing I would say about the premium bonds is I have my rainy day savings fund, my kind of emergency fund in the premium bonds, because although you can get the money almost instantly, you could pretty much most in most occasions, you'd be able to get cash out of it the next day.

28:41There's enough of a barrier to getting the money that you can't just take it out quickly if you need it. So I think that that's where for me personally, keeping the rainy day savings in the premium bonds pays off. When is a savings pot too big? Now, I remember a story that I covered, mainly because it was a mate of mine, actually, who was like, I've got nothing in my pension. And I got a financial advisor to sort of help this. And they dug around. They did find, yes, he had about£40 ,000 in a pension. He was 39 years old and thought, my God, I'm almost 40. I need to sort my life out. He had a decent amount of equity in a flat.

29:17And it transpired he had, I think it was about £50 ,000 in a cash ISA. It might have even been more. And this was one of the areas that the financial advisor was like, I think you've got too much here that you could kind of move it back. No investments, as I said, bearing in mind. I think that's probably the case with a lot of people there. Two questions that are raised for me here is, is that too much in a cash ISA? And we'll get onto pensions in a minute by saying, is 40 too late to do anything about it? But that comes later in the show? At least it's in a cash ISA. There's lots of people who do this and keep money sitting in current accounts, earning no interest whatsoever, or it could be in tax savings accounts.

29:56I mean, is it in the best possible cash ISA? If you want to be keeping that kind of money in a cash ISA, you want to certainly be making sure you're getting a top rate. Arguably, yes, depends on your financial circumstances. I mean, it could be that they have very, very high outgoings. So that's only, you know, three to six months worth of essential outgoings. And it's their rainy day pot. But for most people, that would be too much. The amount that you should have in savings really is your emergency fund, any money that you need for short term things, and the rest of it, you should try to invest.

30:27But you can shift that around a bit. And you can use cash savings to dial up or dial down the risk of your investments. Traditionally, with investing, it would be you held a portfolio of shares and government bonds the government bonds with a safe bit the shares with a bit that gives you the growth and if shares do well government bonds tend to do not so well and then if shares suddenly sink government bonds tend to do better so it lifts them up that relationship's been a bit funny since the financial crisis and doesn't necessarily always work out and in fact the last time we had a big big market fall before the liberation day short-lived stuff 2022 it kind of broke down slightly now what some advisors will tell you or some wealth management professionals will tell you was an easy way to deal with this that doesn't quite do the you know one goes up more when the other one goes down because cash cash will only ever pay you what the cash return is is to basically hold a bit more in savings if you want to dial down the risk or hold a bit less in savings if you want to dial up the risk and think about that cash that you can hold in a cash isa for example as as being part of that but yeah arguably you know in your friend's position they should probably be investing some more of that money because the risk is is although the return you get on cash is guaranteed and the cash is protected as long as you keep it below 80 000 pounds per individual individually licensed bank and it's fscs protected you will lose out to inflation and there are well over 100 years worth of figures that show that investing into the stock market will deliver a better return that beats inflation, whereas investing into cash will tend to deliver a lower return that falls behind inflation.

32:15We'll get onto that in a minute. But one question on the pot size, it changes depending on age. And by that, I mean, if you're in your retirement, you do need, what do they suggest? It's quite a bit more than the three to six months, almost like two years or something, isn't it? Yeah, the numbers for people in retirement can be astronomical. And again, this is down to a lot of people now keep their pensions invested in retirement, and then they draw on them for retirement income. And what you need to be doing is when the market is down substantially, you don't want to be drawing on your pension because you'll start to run your pension down faster.

32:53Because if you think about it, say you've got£100 invested, the market falls by 10%. So you've now only got£90, but you still need to draw 5 % of that. If you're drawing 5 % of the original 100, you know, because it's a monetary amount that you've decided you need every month, you're drawing a bigger amount out of that small pot. So they say keep more in cash so that if an emergency happens, if markets fall or whatever, you don't have to draw more on your investments. Again, that very much depends on the rest of your financial circumstances. For example, if you've got a final salary pension, you don't really need to worry about that so much, because you're going to get the money paid into your account every month and it's your previous employer's responsibility.

33:34Or if you've got income that comes in from somewhere else, or you've got a very large pot of investments or things like that outside of your pension, then you might not need to worry so much about it. That's it for part one.

33:49I'm joined now by Blerem Gashi of Charles Stanley Direct for our weekly Investing Explained feature. Barham, we've got a question here from a listener. If I build a lifetime ISA pot for retirement, is the money I take out tax free? Thank you, Simon. Good question. Yes, but with certain conditions. Okay, the main one for retirement is that you have to be aged 60 or over. Anything before that, they don't necessarily call it a tax charge, but they call it a government withdrawal charge, which basically means the government bonus that they give you in the LISA is effectively taken back. Now, what's worth noting is that because of this calculation, it can actually take more than what the government bonus gives you.

34:28It might actually take some from the savings that you put yourself. Blair, thank you very much. Thank you, Simon. Welcome back. Now to investing. The fun part. We're actually doing the painting. We're adding the colour, Simon, and the texture. We're building depth, complexity and long-term value here. But it's also the part where it could go really horribly wrong. So this goes back to the savings part, figuring out your goals, your timelines, your risk. I want to ask, how do you get started? But before we get to how to get started, why do people not get started? What are the barriers that are stopping people?

35:03Do you think, as a financial expert, host of The Investing Show, what's holding people back? When you ask people, they give answers like, investing's not for people like me. They think it's for financial whizzes, people who are really engaged with money, all that kind of stuff. People who like to take more risk. They'll say, well, I don't want to gamble with my money. I don't want to take a big risk of my money. They will say it's too complicated. The other thing they'll commonly say is I don't have enough money yet to invest and I don't have a big enough pot yet to invest. Now, to unpick some of those, the investing is not for people like me.

35:42well in reality for most people your pension is now invested unless you work in the public sector you are highly unlikely to have what's called a defined benefit pension now these are commonly called final salary pensions this is where your employer takes responsibility for providing you with a certain income in retirement you pay money in through your working life and they pay money in during your working period of life they will say at the end of that you have accrued a fraction of your career average earnings for every year that you've worked there for example 140th or something like that and so if you work there for 20 years well it's half of your career average earnings great somebody else is taking responsibility to pay for that most people working in the private sector nowadays have what's called defined contribution pensions which is where you put money in your employer puts money in and then it's invested in the stock market to deliver a pot for your retirement so most people are actually investing and saying it's not for people like me isn't true goes on to that it's too complicated so why do most people invest and not realize that they're investing and lots of them say well it's too complicated it's not for people like me because it's just made really easy you just agree to do something and then somebody else does most of the work for you most people's money is in what's called like a default fund really simple fund that the money goes into for their pension i don't have enough money yet actually it's better to start with a small amount regularly than to build up a large lump sum because if you put a large lump sum in and all of a sudden something happens and the markets fall substantially you lose a larger amount of money whereas if you're investing a hundred pounds a month regularly then it might reduce your gains if markets go up substantially but what you're doing is you're lowering that risk of the moment you put that big sum in and then markets suddenly sink and you cause yourself a problem.

37:29And to go back to the complicated thing, it doesn't have to be complicated. It's really easy to go to what we refer to as an investment platform and to then open an account and to start investing. And most people could do it not only in less time than it takes to listen to this podcast, but in less time than it took to listen to the answer of this question, you could have got most of it done. I'm not saying you should do it that quickly, but you could if you wanted to. One thing that slightly annoys me about this and confuses me as well. So I was listening to a podcast, young gentleman, quite popular, hates those sorts of accounts.

38:12Ah, you should do it yourself. And this annoys me because I was going to say, why let perfect be the enemy of good? but actually who's to say if you pick your own it will be perfect because isn't warren buffett the oracle of omaha didn't he say actually you're just better off sticking into a tracker he did and he had a famous bet um where there was some money allocated to a tracker fund money allocated to hedge funds i think and the tracker fund comfortably won you can pick your own investments if you want to you can go and pick your own shares if you want to that's the kind of extreme end of it right you can go pick a portfolio of shares you need to hold at least 15 to 20 shares for it to be properly diversified and it needs to not be full of companies that do similar things or move all in the same direction so to give an example if seven of those are the magnificent seven you'd have done very very well in recent years but they all go up at the same time and they all go down at the same time that's not a diversified portfolio I have picked my own shares in the past.

39:15I thought I could beat the market. I thought I wanted to be an engaged stock picker, many of those other things. In reality, I don't think my hit rate is that great. And I probably would have been better off just putting the money into a market tracker, because there's so many things that can go wrong with you could be right. but the market is wrong but the market there's an old saying about the market can be wrong for longer than you can stay solvent everybody's been banging on about the u.s stock market being overvalued for years and the the company's driving returns in the u.s stock market being overvalued for years and they just keep going up and you would have missed out on those returns also you need to do lots of research into the companies that you're investing in and you need to keep an eye on them.

40:04And realistically, do you have time to keep an eye on 15 to 20 different companies? So you could then go choose funds, you get a manager to do the job for you. And you go for I want this, you know, US companies fund, I want this European fund, I want this emerging markets fund, I want this UK companies fund, or you could choose an investment trusts as well. That's a good option. Those managers are spreading the risk for you, because they're investing into a diversified portfolio themselves. Some of them will be a bit tighter, some of them will be a bit broader. But it's very difficult to find managers who actually do beat the market consistently over a long period of time.

40:46Lots of managers can beat the market over a short period of time, but there's an awful lot of research that shows there are very, very few that beat it over a long period of time. So you can do that. But again, you do need to keep an eye on it. And you have to accept that you will run the risk of doing worse than the market. So for example, I choose my investments, got shares, I've got individually managed funds in my ISA, and some of them have done well. And some of them have done badly. And I think if I probably put all that money into a tracker fund over the years, I would have done much better.

41:21I don't know the answer, because it's quite complicated to try and work out you know money going in over a long period of time at different periods of time comparing the performance of all those things and you know what i also don't think i want to know the answer because i've got a horrible suspicion i might have about twice as much money um if i just bought the simple tracker fund um and it's also like a time and an inclination thing you know a simple tracker fund global market tracker fund basically you put your money in it relies on all the companies in the world that are doing well to keep doing well to put their money to profitable use rather than just parking it in the bank, make a profit, reward shareholders, the winners stay in, the losers fall out of it.

42:01Arguably, it's way too overexposed to the US stock market and the giants of the US stock market. But you can dial that down a bit by putting half your investments into a global stock market tracker and choosing your own investments with the other half. The big risk is that by trying to be right, you end up being wrong and doing that with your entire investment pot increases how much you could fall behind. I am curious to know whether you think more people are investing now with it being so much easier. I'm seeing a lot more people, certainly, who I would probably call it trading over investing.

42:41By that, I mean, they jump out of investments far too quickly. The number of times I've got a friend who lost a chunk of money in some random Brazilian mining thing. And I'm like, what do you know about Brazil or mining? Nothing. They just thought it was the next big thing. And now it's some health thing. And I'm just, do you know anything about these industries? One I think they jumped out of really early was EasyJet. They're like, oh, EasyJet shares are up. Wish I'd have done that. And you're thinking, yeah, because you only give it like a few weeks. This stuff is for a long time, no? Yeah, I mean, you should have a five-year investing horizon.

43:12that's the the base case at least that is put forward to people you can try and time the market and trade stuff and make money and it's entirely possible to buy shares and hold them over a shorter period and make some money what you have to do is be honest about the ones that you're making money from and the ones that you're losing money from and often people will focus on the winners and consider themselves to be an investing genius down to those winners and not focus on the losers they'll just quickly swipe those out of their minds and won't dwell on the fact that maybe they just got lucky with those other ones rather than being an investing genius i mean you know sometimes stuff just seems so obvious that it's going to go up that it goes up i bought the depths of the market being down not immediately after the pandemic but in that kind of before the vaccine rally right i bought some shares in bp i bought some shares in rolls royce and my theory on both of those was that they were effectively so cheap they were being priced as if bp or rolls royce were about were going to go out of business not about to go out of business but that they were on a trajectory to just not existing anymore and i just looked at it and i thought you know what I think they're going to come through this.

44:36The oil price is going to go back up. The world's going to get back to normal. People are going to start flying again. These are very, very big companies that can probably ride out the storm. It's worth a punt, but it was a punt. And the BP shares paid off a lot quicker. The Rolls Royce shares spent quite a long time underwater. At one point, they were down about 30 % on what I paid for them. And I very nearly sold those on a number of occasions because I was like, do you know what? Actually, I was wrong. I was wrong. And I would have just lost money. And instead, I just sat on them and I sat on them and sat on them.

45:11And eventually, when I sold them, I doubled my money. And that was great. I got stopped out in the end, but I needed to pay some bills for like doing work on a house. I was like, great. But if I'd held on to them, they'd be worth about five or six times more now. But most opportunities are not like that. Most times when people invest in stuff is because someone's told them something, they've read something they've heard something they think it's a hot idea or something like that and it's much more likely to go either way so just be careful that stuff and if you are going to pick your own investments again to go back to what i said is just remember you don't have to do it with all all of your pot you can just set aside a small amount in your pot for like fun investing and the larger amount for just sensible every month goes into this and i'm not going to worry about it investing.

45:58And if you were to pick a platform to get started, how can you pick a good one? Which there's so many out there. There are lots of them out there. And what you need to consider is how you're going to invest and what is going to be right for you. Because the right one for me might not be the right one for you, might not be the right one for the person sitting, listening to this in Nottingham, might not be the first right one for the person sitting, listening to this in London. And that's not because it's a different platform that's right for people in Nottingham or London. It's because the person in Nottingham has a different life to the person in London and a different way of investing.

46:34So you need to look at the charges. What do they charge for holding investments? What do they charge for buying and selling investments? Remember, the cheapest isn't always best. Some of them will offer you more help and more assistance. For example, if you need to speak to them and phone them up, they'll be on the other end of the phone. They might offer things like free financial coaching, which, for example, Charles Stanley, the sponsor of this podcast, does. Or they might be something that's purely app based and you can't phone them up and you just do the stuff on your app. But it's very, very cheap and you're very, very happy to use it.

47:06If you go to thisismoney.co.uk forward slash platforms, you will find our guide to DIY investing platforms that explains in lots of detail what you need to think about and runs through the main players that we think are worth considering. Fabulous. Right. Right. Now we're on to, well, you paint the background early on and then you build it up as you go on. Pensions, workplace pensions, self-employed pensions, SIP, the state pension. It's simply making sure we aren't stuck in retirement, which means sorting out early and letting it tick nicely on throughout our lives as we get on with all the other things.

47:44Simon, how do you nail pension saving? right pensions what i would say is just start as early as you possibly can and continue to pay money into your pension auto enrollment has been a major success in this country also enrollment for pensions involves putting people into a pension when they start work and if they don't want to be in a pension they have to opt out this is different to the system before that where when you joined a company, they asked you if you wanted to opt in. And it has massively increased the number of people investing and saving into a pension at work because most people don't opt out.

48:31You probably need to be saving more into your pension than the auto enrollment amounts. They're set a bit too low. But what happens is you pay some money in, your employer pay some money in it goes into a pot it's invested and over the years it should build up there's some rules of thumb of what you should do there's the half your age when you start rule of thumb but generally speaking if you start relatively early and you have about 10 to 15 percent of your income going in and you keep that up for your whole working life you will get a decent pension at the end of it but you get you'll definitely get a better one if you're 15 percent than if you're at 10%.

49:11And the reason is the magic of compounding gains upon gains. And there comes a point that kicks in about 30 between about year 30 and year 40, where basically, just by those extra 10 years can double your money. So really, really pays off to start early. And even if you think it's only a relatively small amount of money going into my pension, just think, don't worry about that. it's great and the really important thing is you don't have to fund it all if you put in 50 pounds and you've got an employer that will match your contributions they put in 50 pounds but you also get 20 basic rate tax relief automatically added that's a great deal take it up and if you work for an employer that still has a defined benefit scheme like it's going to probably be career average not final salary so if it's public sector or something like that definitely join that pay in the money that you need to get the benefits that they will give you and that will definitely pay off in the long run we're going to give a shout out now to the self-employed as i always do when we talk about pensions is you're on your own so get on with it you know you're not going to get that employer support so it really really is on you one thing going back to uh my mate who's 40.

50:28Not too late to get going. 40, 45, even 50. I've had people ask me, is it too late? It's never too late to get started. And to get back to your point about self-employed, many people who are self-employed will find themselves in that position because when you're self-employed, every penny absolutely counts. You don't know how much money you've definitely got coming in every month and you definitely sort away money. People who are self-employed are probably far more likely to be the people with huge amounts of money sitting in their current accounts rather than the savings accounts even but if you are self-employed it's really important for you to take responsibility for your pension and actually from the moment you start out start paying that money in regularly and just work out what your rough annual income is 10 % of that then either do it at the end of the year but are you definitely going to have that money there some people do it out of their tax account for example and my wife is self-employed she keeps extra money aside every month to pay her tax bills and then she over works that out so at the end of the year there's a buffer and then i've said to her take some of that buffer put that money into your pension some people will find it easier to do monthly some people might even find it easier to do every time an invoice gets paid you can do that you know but however you do it make sure you have that money going in to your account because that will really really pay off in the end and to go back to your is it too late no it's never too late obviously the later that you start the less time you have to build money up but you might have for example a large amount of money somewhere else that you can ship into a pension and that can be very tax efficient and give you a big benefit and if it is the scenario where you have left it quite late it is going to cost you money but it could be worth going and getting financial advice and speaking to someone and saying look I'm basically, you know, I'm in my 40s.

52:21I've hardly got anything in my pension. I'm concerned about this. What can I do? And that person will then help you get a plan that is going to pay off. And although it will cost you money now, the benefit of that is going to probably far, far, far outweigh that by the time you get to retirement. Now, obviously, this is money, have lots of articles and stuff that can help you find the right sip, etc. One thing I will say is if you are self-employed and you're choosing your own pension, one thing that's really been a, hate this word, but a game changer for me is having one which has got a great app where I can see what I've got.

52:56It makes my pension saving very real. I save actually into every two weeks. And because it's a great app, I can, if I'm having a good payday or pay month, I can put more in that month and still obviously keep the stuff I need for tax, the stuff I need for saving, etc. But it just makes pension savings so much more real to me. There's one thing before we move on from this that because of pension freedoms and this kind of end of the gold-plated pension era means it's so much more on us. So one thing we've got to think about, obviously, when we're younger is getting money in there. Great. That's one job done.

53:31And then on the way out is what do you do when it comes to retirement? Do we have enough financial knowledge to make such a big decision? What are the options? What do we do? How do we make that decision? I mean, the evidence is that, broadly speaking, most people are muddling through. So there was a big concern that people would not have, well, that they just wouldn't be equipped to do this. And actually, if you think about it, it's quite complicated. You get to a certain age, and then you discover that you've got£200 ,000 in an investment pot, and you've got to work out how to turn that into an income for the rest of your life and make it last for you.

54:06Now, one option is you buy something called an annuity, which is a financial product that provides you with an income for the rest of your life. Those were considered to be quite bad value for quite a long period of time when interest rates were very low because they're directly connected. The return on those is directly connected to interest rates, particularly government bond yields. They are offering better rates now, but many people still prefer to keep their pension invested. and then you can either draw on it regularly and have the first 25 % of that tax-free or you can take a 25 % tax-free lump sum and then go into something called drawdown where the rest of it remains invested and then you draw on it.

54:48You need to be careful not to drain your pension pot too fast and you need to think about where to keep your pension invested and they do get help from their workplace pension schemes in terms of when it comes to that point that you need to turn your pot that you've built up into income. You can get something that's called a free pension wise appointment. This explains the option to you. It's impartial. It's backed by the government. Go to a website called moneyhelper.org.uk. That's the official site. Watch out for Google results from things that are not money helper or not officially pension wise.

55:23So do check up on this. and also the other thing i would say is that the investment platforms that we talked about before do a huge amount to educate people and help them and help them to understand and of course if you want to find out more you can go to thisismoney.co.uk for such pensions where you can find all of our pension guides and tanya has written loads of stuff on what to do with your pension at retirement and got the advice of proper pension experts to help her out well done tanya so to conclude our little painting analogy, tax and insurance. This is the cleaning your brushes as you go along and varnishing at the end.

55:57You clean your brushes, obviously, to avoid messing up your hard work and muddying your colours. It's like keeping tax efficient accounts or claiming allowances. And just like varnishing at the end protects your work, planning ahead for tax and getting insurance helps preserve what you've built, Simon. See, do you like that? Anyway, in terms of tax, What do we need to be thinking about? How can we not get caught out? Right. So the main tax that most people are concerned about is income tax. This is the tax on the money that you earn. And it's actually done in two different ways. You've got income tax and you've got national insurance.

56:33Both of these things are levied on your earnings above the tax free personal allowance, which is£12 ,570. Income tax is charged at 20 % until you reach the higher rate tax threshold at£50 ,270. National insurance is charged at 8%. So actually you're paying 28 % tax. Above the higher rate threshold you pay 40 % income tax but national insurance reduces to 2%. this can sometimes sound a bit unfair to people but if national insurance continued to be eight percent above that threshold people would be paying 48 tax that's why national insurance goes down to two percent just to you know explain it and you continue to do that until you get to 125 140 at which point your income tax rate goes up to 45 and your national insurance rate stays at 2%.

57:32Beyond earning less money, there isn't a lot you can do about income tax, as I said. But there are some people in the tax system for whom earning less money can pay off substantially. And this is due to some quirks of the system that can drive up what are known as marginal tax rates. A marginal tax rate is just the effective tax rate that you pay on the next pound that you earn. Okay, so the first one is actually built into the tax system itself. And it's the removal of the personal allowance, which gets taken away at a rate of one pound for every two pounds that a person earns over 100 ,000 pounds.

58:08This means that the income tax rate that they're paying is actually effectively 60%. Because what it does is it adds half to the income tax, the official income tax rate of 40%. because you're losing some of your personal allowance each time. For people who are earning over£100 ,000, that means it can really work out beneficial to get your income below that. And you can do things like pay more money into a pension, salary sacrifice, for example, which can be used for pension, can be used for electric cars with a very low clawback on the tax, can be used for some childcare schemes, but not all childcare schemes.

58:49there's a cottage industry and earning less money here basically to avoid paying 60 tax and all that there's also one further down the scale with the removal of child benefit and this only affects obviously parents who have children who would otherwise be getting child benefit and that starts to be removed from people between earning 60 000 pounds and 80 000 pounds um it used to be lower than that it used to be 50 000 pounds and 60 000 pounds and now the problem here is that it's only if one person in a household earns more than that you lose it all right so basically this creates quite an unfair scenario where you could have a household with two earners on 59 000 pounds and they're getting all the child benefit but a household that has one owner on 62 000 pounds and they're starting to have it taken away or 80 000 pounds and it's all gone um this is a problem in the tax system that's existed for ages there's some other quirks around student loans and things like that.

59:42And there's a tax free childcare thing, 100 ,000 pounds, where if one person earns over 100 ,000 pounds, you lose your 30 hours free childcare, which can create this astronomical marginal tax rate, all these things are totally nuts. But that's where trying to earn a little bit less money pays off. But there's other places where you can definitely do stuff about tax. And that's by making sure that your savings and your investments are as tax efficient as possible. How can you make sure they're as tax efficient as possible, Simon? The chief answer here is to use an ISA. You can have a cash ISA, you can have a stocks and shares ISA, you can have a lifetime ISA.

1:00:21What this does is it protects your gains from tax, whether that's interest on your savings, whether it's profits on your investments, or whether it's dividends that you get from those investments. And the money can grow in this tax-free wrapper and you don't end up getting taxed on it. And it's a huge, huge benefit. you can put in up to£20 ,000 a year into an ISA and you should definitely, definitely, definitely take advantage of this. The other one is pensions, money that you pay into a pension, you get tax relief on, you get automatically, you get basic rate tax relief and then you get the uplift of higher rate tax relief if you're a higher rate taxpayer or even more if you're an additional taxpayer and then once you start earning a very large amount of money you start to have it limited what you can put in.

1:01:06You can pay in up to£60 ,000 into a pension each year but that's the money you put in that the government puts in and your employer puts in and it can't be more than your earnings but that's like most people are never going to get anywhere near that the problem with a pension is you can't take the money out currently until you're 55 but that's going to move to 57 very very soon so you need to be sure that it's not money that you're going to need in the short term but the beauty of a pension is also that you can't take the money out and that means they will sit there earning returns until retirement.

1:01:40And those are the two main basic bits of being tax efficient that people need to worry about. Right, a word on insurance, because when I went to a financial planner a couple of years ago, they looked all over my finances said, yeah, you're in a fairly reasonable position. The one big gap is you have no protection. What do we actually need? Financial advisors love protection insurance, largely for a very good reason. when you really really need it you will possibly be at your financially most vulnerable and it will kick in and it could make an absolutely colossal difference so this is the kind of thing that covers you if you lose your job don't find another one or end up unwell and unable to work you have a terrible accident you're unable to work you you get you know you get very ill and you can't work and it's the thing that will support you and your family when you need it it can on the surface look to be quite expensive but you need to look at what do i actually need and that can bring the cost down for example if you can delay the policy kicking in then that can bring it down and you can do that because you might have a notice period at work if you're employed you might have your employer will guarantee you a certain amount of sick pay or something like that.

1:02:59Or you might dial down the amount of money that you need from the protection insurance because you might go, well, I spend this much every month. But you know what, in an absolute emergency, I could divide that by three, that will limit the amount of the premiums are. And you can get different kinds of protection insurance, you can get income protection insurance, you can get critical illness policies, you can get protection insurance that will cover you if you're too old to work. And you can also get life insurance, which pays out if you die. lots more people do tend to get life insurance you know for example if once you have a family or if you have a more house that you share with someone else and you have a mortgage you should have life insurance because what it means is it can at least pay off the mortgage if something happens to you and then the other person at least doesn't have to worry about that and it's also advisable to maybe go a bit above that but you know i think statistically speaking people are and this is you know morbid thought but statistically speaking people of a kind of younger working age who tend to be supporting families or helping to support others are more likely to suffer some form of life-changing illness that means they can't work than they are to die early and so that's where having that kind of income protection insurance that covers that can really pay off all right Simon just a final one word on wills get a will right there you go that's it that's all we need yeah it's like just get just get a will basically you need a will if you don't have a will and you'll do something called die and test date and there's some rules about where your money goes to and you won't have any decision in that it will just be it will follow what the rules say get a will you can go write one with a solicitor you can go write one with a will writer you can use an online will writing service and some of these are really quite good for example there's one called farewell which i know is good there are others available but i do know farewell is good and if your circumstances are relatively simple then something like that is much much better than not having a will at all and if your circumstances are complicated then go and speak to a professional and get a will and i say that as a man who didn't get a will until i think my oldest daughter was about five or six and we used to regularly talk about this on the podcast because the podcast dates back that far and georgie'd be like you got will yet i was like no working on it yeah years years i was moaning at you for i actually did one of those online while writing things.

1:05:21I can't remember who it was with. And actually, it wasn't very expensive. I don't have very complicated wishes when I pass. And actually, I got cash back on it as well. Right, that is it for this week. We hope we've helped. You can keep up to date with all the latest breaking news just to go to thisismoney.co.uk or download the app. If you have any comments or questions to the team, anything you'd like them to look into, any suggestions for future episodes where Simon and I just shoot the breeze. Simon? Email us at podcast at thisismoney.co.uk and you can come to thisismoney.co.uk forward slash podcast to find all podcasts past and join in the debate and read the comments.

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