Transcript: Planning for tomorrow, living for today
Angellica Bell: Hello and welcome to Rewirement, the podcast where we help you make the right connections to create your brightest financial future. Brought to you by Legal & General. I'm Angellica Bell, and I'm on a mission to find answers to your questions about money and how to manage it. I'm carrying out my mission by finding people with real issues who are looking for real insight, and then pairing them up with an expert who can help. Even better we get to listen in to their conversation and, we hope, learn a whole lot more at the same time.
Today we're talking about something that I suppose is at the heart of pretty much every question you can ask about managing your finances. How do you balance the demands of today with making sure that you'll be financially secure tomorrow? We know that we need to be planning for the future, but we also need our money now, especially at the moment with the cost of everything going up. Plus, we want to enjoy our lives. We only get one today.
Today we're talking to two people who are trying to get that balance right. First of all, let's say hello to Beverley who's with me now. How are you?
Beverley: Hello, Angellica. I'm fine, thanks.
Angellica Bell: So thank you for being here. And I want to find out a little bit more about you and your situation.
Beverley: Okay. I'm going to be retiring hopefully within the next 10 years. I'm a single mum, so I have a grown up child, but being single means that financially I have to be self sustaining.
Angellica Bell: Yeah.
Beverley: So for about five years I had a break in my pension.
Angellica Bell: Can I ask you about why you had a break?
Beverley: I was made redundant in 2016 from a company that I'd worked for 16 years, and the plan was to just get another job. But then my parents became ill and I ended up being their main carer.
Angellica Bell: Mm- hmm.
Beverley: Unfortunately, both of my parents have now passed away. So now I'm back in the workforce and I'm looking at, okay, I need to look after me for the next 5 to 10 years and make sure that all my finances are in order, and that I'm planning and set up and living in my forever home.
I live in Birmingham and I go into the office two days a week. My son lives in Bolton. I want my forever home to be closer to him and his family. So I'm looking for the funding that will allow me to have my forever home in the place where I want it to be, near my family.
Angellica Bell: So are those the key questions about how you can supplement that shortfall?
Beverley: Yeah. How I can supplement or whether I need to?
Angellica Bell: Yeah.
Beverley: What am I going to do in the next 10 years that's going to set me up ready for retirement? Because I don't want to be working until I'm 75 or even 70.
Angellica Bell: Yeah.
Beverley: Everybody expects you to know the answers to these questions about your pension. Nobody ever teaches you anything, and nobody discusses pensions. Who goes to the pub and talks about pensions? No one does. It's knowing as well that there isn't anybody else that I can ask the questions are of or to fall back on.
Angellica Bell: Well, let's try and get some of those questions answered for you Beverley. We found someone to help you tackle some of those points you've mentioned. He's called Phil Anderson and he has his own financial services company bait in Scotland. So we got you two together, and let's have a listen to what happened.
Beverley: I'm just wondering how important is it on a scale of 1 to 10. 10 being really, really desperately important that I keep my payments up and I make up that shortfall. 1 being, nah it doesn't matter, just carry on as you are. It would be good to have some kind of indication.
Phil: To answer your question on the scale of 1 to 10, I would go for an 8. And should maybe be going for a higher figure than that. But I know, like you say, you've got to live for today as well. And especially with the cost of living crisis, people are finding things harder. Bills are going up a lot.
But you also have to be mindful for your future as well. And I would say great you've got your contribution going in, your employer's contribution going in. But I would definitely say if you can afford to pay more in, because it's such an important thing. And if you've missed five years payments, what I would do is try and work out and say, " Right, how much have I missed going in?".
And then you can also look at it and say, " Right, had that money gone in that would've grown as well". So you've got that almost compounding effect on things, you've missed out on that. So although it's maybe five years payments that's been missed, in real terms it's probably more than that because you've not had the growth on that money either. So sometimes you have to make sacrifices to do that.
Beverley: So my next question is, how do you calculate how much you're going to need in your pension pot?
Phil: One financial advisor that I know, she often says to people that if you want an income of 20,000 pounds when you retire, you better have a pension pot of 400, 000. So she uses a figure 20 times that amount. That's something I've seen some advisors do in the past.
Some people will spend a lot when they retire, others will spend a lot less. What I do is I'll say to someone, " Let's have a look at your ins and outs now, but also let's have a look at your ins and outs once you retire. Because at that point you might have less commuting costs. Your mortgages likely have been paid off. Would you look to downsize on the house?". Again, that's almost a good reason to review your finances regularly as well, I would say.
Beverley: I did it in a very simplistic way in that I just took the figure of 20 years, divided my pension pot by 20 years to see how much that would leave me. At the moment at the current cost of living, I could survive on that comfortably, not with a huge margin. So there'd be no Caribbean holidays or anything, but I could get by. I could treat myself to nice food. I could go into White Rose and get something really nice a couple of times a week. It was a very simplistic way of looking at it. But I think from what you're saying is so long as I've got my finances organized and I can live within that amount, then I should be okay.
Phil: Yeah. One of the great unknowns is nobody knows how long they're going to live for, and that makes it harder to kind of plan for things. And we can only go on averages and say women live longer than men, so in theory women should really have bigger pension pots than what a man should. It's all got to be individual and personalized for yourself and no two people's retirement's going to look the same.
Beverley: Because one of the questions I was going to ask, at my age, what I need to think about or what I think I need to think about is where I'm going to have my forever home. Now at the moment I work from home three days a week and I work from London two days a week.
My son lives in Bolton, so I want to be near where he is and where his family are. In a common sense world I would move towards London nearer to where I need to commute to, but I can't afford to live in London. So if I'm going to move anywhere, it's going to be nearer to where my son is where I hope to have my forever home and to finish my life nearer to him. But to do that, I will need some additional finances other than the money that I make from selling my current house. Is it ever a good idea to dip into pension funds to contribute to buying somewhere?
Phil: It's something that I've seen a lot of people do in the past, and for some people it's the right thing to do because it helps them to buy their forever home. What I would say is if you're taking money out of your pension pot, that's going to impact on your retirement income. So let's say you take a lump sum of 50,000 pounds out to use that for a home just now, if you've got 10 years until you retire, things can be a bit up and down at times, but over a longer period of time your investments are going to grow. That 50,000 pounds if it does okay, that would then be worth maybe a 100, 000 pounds in 10 years times. So by taking the money out now, that is going to impact on things in the future.
Another option might be to look at financing things with a mortgage. I know the older someone gets the harder getting a mortgage can be, but there are lenders out there that will allow you to take a mortgage term up to say age 70. There's some that'll allow you to go up to age 75 as well.
One thing that may be an option that a lot of people aren't aware of is you get something that's called a lifetime mortgage. Now the way that works is that type of mortgage is usually designed for people over the age of 60, usually over 65 plus.
But let's say you were age 66, at that point you can take out this lifetime mortgage and they would allow you to borrow somewhere in the region or up to about 41- 42% of the value of the property. You don't physically make a monthly payment at that point. The interest rolls up against the value of the property, and then usually when someone dies or goes into long term care at that point that's when that type of mortgage gets repaid. So that may be an option for you somewhere down the line as well.
Beverley: That's really good advice, because one of the questions I had was around how far do I sacrifice the life that I have now for the life that I might have? And that has so many implications, so many ramifications. And it's such a difficult question to answer.
Phil: One exercise that I always say to people to try is get three sheets of A4 paper. On the first sheet, write down where you are now. You can do this for more than just your finances. So for me I do it and say, " My height is this, my weight is this, the money I've got in the bank account is this. I've got so much in my pension pot". Write everything down. Any loans you've got, credit cards.
So that's on sheet one, where you are now. On sheet two you write down where you want to be. So you maybe think, " I want to have a pension pot of X amount. I want to weigh X amount". I go back to the weight cause I'm overweight, that's the one I need to work on just now.
But on sheet two write down where you want to be. And then on sheet three, write down what you're willing to give up to get from sheet one to sheet two. Because if you do what you've always done, you'll get what you've always got. So that's always just an exercise that I think is really useful for people to try.
Angellica Bell: Well, it sounds like a good exercise to try there from Phil. Beverley, how was the conversation for you?
Beverley: It was really positive. And I think the biggest takeaway from the conversation with Phil was that I know more than I think I did.
Angellica Bell: I think you do, and I think maybe it's giving you that confidence to seek out what you want and what's right for you and your family.
Beverley: Yes, definitely. And it's also given me the confidence to talk to other people about pensions as well. I'm going to be recommending the podcast to a number of friends who were asking me questions about what I'd learnt, what my plans are moving forward. And it's given me something I can pass on to my son as well.
Angellica Bell: Amazing.
Beverley: That conversation is something that I never had with my parents. So that's something really valuable that I can pass on to him.
Angellica Bell: Beverley, thank you so much for sharing your story with us today. And good luck with getting that balance right, I know it's not easy.
Beverley: Thank you.
Angellica Bell: Now our second person looking for help with their balancing act is Lisa. Welcome to Rewirement, thank you for being here.
Lisa: Thank you.
Angellica Bell: So tell us a bit more about your story.
Lisa: In a nutshell, I sort of got to that age where children are about to go to university. Recently we lost my mom, which made you sort of think about priorities a little bit more I guess. Fairly average I would imagine situation, not a lot disposable income, lots of places it should be going.
Angellica Bell: Well our first guest Beverley also lost her parents. And often it's when we lose people close to us, especially unexpectedly, and also when it's a parent, it sort of shocks us into thinking about our own lives and children and the protection we've put in place or not. Wouldn't you say?
Lisa: Definitely. Yeah.
Angellica Bell: So Lisa, tell me a bit about the kinds of things you're looking to find out.
Lisa: I think it was looking to find out how to prioritize things originally. Should it be funeral planning, a will, financing my eldest for university, put a bit more back in your pensions, how to try and find some money to save. There's just so many different places that money should be going. And with the cost of everything going up, the amount of money left to go anywhere is getting smaller and smaller I guess.
Angellica Bell: Well Lisa, let's go back to Phil, because when it comes to priorities he's a man with a plan.
Phil: Probably the best thing to do would be to list the various priorities that you've got. So you'd mentioned about the kids going to university, paying off the mortgage. And then maybe even just put a number next to them and say, " This is my number one priority. This is number two priority". You might think life and critical illness cover, that's a priority. And some of them will be equally as important as one another, but it's good just to kind of see what you think is most important to yourself. Then start saying, " Let's work on this first, this one second" and kind of base it from there.
Lisa: I suppose it sometimes you do, whether you do it on what you think you should be doing or what's actually the most immediate problem. So I think part of me is going, "Actually I should get a funeral plan because I'm this age now and it's going to be cheaper if I do it now".
And the other part of me is going, "He's going to university in September". So they both seem to be top priorities. Both of my parents died of cancers quite young. So I'm holding out till next month really when they become regulated, but I was thinking of getting one of the prepaid funeral plans. Just because I think actually the amount of money I paid into my mom's whole of life policy, I probably didn't get back as much as I paid in (inaudible) with to be honest.
And sometimes think actually it'd be better to get one of the prepaid funeral plans once they're protected, just something to stop the kids having to sell the house to get rid of me.
Phil: That's it. There's a few different options for funeral planning. As you say, one is a whole of life policy. That's a life insurance plan that guarantees to pay out an amount on someone's death. So that's one option, funeral plans is another. And even with funeral plans, there's a few different ways you can do funeral plans. Some providers you can pay a lump sum and then that guarantees your funeral at that cost, and other ones let you pay it up monthly as well.
So if someone died soon after, it's good value. But if you were to live to quite a good age, then you'll find that you've probably paid in, again, an awful lot more than what the cost of it has been. Funeral price inflation has been really high over the last few years. The average cost of a funeral's gone up. It can range from anything 3000, 4000, 5000 pounds if you were paying it now as a lump sum.
But I guess one of the advantages of doing that is that you know regardless of what the funeral price is and the future that's how much you've paid for it. It's good to be thinking about things like that. I mean death is not a nice subject to think about or talk about, but it's good to be planning and looking at all these sort of things. One thing I noticed you had mentioned was about wills.
Lisa: I do need to do one.
Phil: Yeah. I would always recommend to people writing a will. And if you do have a will, make sure it's up to date. I've seen it before where people have maybe got divorced or they've separated and that can cause issues. And again, you want to have a look and you think what age do I want my children to inherit any money at.
There's so many considerations, and making a will is so important. A lot of solicitors will offer free wills, but I'm always a bit not cynical, but you don't get nothing for nothing. And what they do is they often put themselves down as the executor. It's almost a license to print money at some point in the future when they are sorting out the estate. So I always say to people, if they can, try and find your own executors. I know it's asking somebody to sort things out when somebody passes, but saves the estate a fair bit of money doing that as well.
Lisa: In about three years time I finish off paying this quite chunky loan. So that will give me a bit more disposable income. I'm thinking child one will probably be coming out of university at that point, while child two might be going in it. Would you recommend using that disposable income towards a pension or helping to reduce their student debt?
Phil: There's quite a number of different things that you can do. You mentioned there about trying to help your son at university, so that's one of the options. But it's really important to look at your own financial future and make sure that's all taken care of as well. So looking at your own needs as opposed to your sons, you've got the needs of retirement planning.
So there's the option to look at paying money into a pension. You might also want to consider trying to repay the mortgage earlier. I think you were looking at the mortgage term running out at age 70. Now you might think, " I don't really want to work until age 70". So trying to pay the mortgage off sooner may be a good consideration as well. But it's so important to have your retirement plans all in place and make sure that they're well funded as well.
Lisa: That's probably given me quite a lot to work with to be absolutely honest. I've got share safe plans that I take out through work, but I'm only putting in about 10 pounds into each at the moment. And it's before you actually get paid, so you don't really notice it too much. But as for sort of putting any extra money away for saving at the moment, it seems that's probably not an option for me. That money really should be directed to paying off some of the debt on the credit cards, rather than putting some away for a rainy day over and above the share saves or the pension. Would you agree with that?
Phil: Even even small amounts. I mean if you think, " Yeah, I can afford 10 pounds a month or 20 pounds a month". Something is better than nothing. And you've got the option where you can put money into ISAs, Individual Savings Accounts.
Any growth that you get in that you don't pay any income tax or capital gains tax on it. And one of the things I would say is that financial planning and investing, it's not just for people who have got a lot of wealth. Building up for someone in your position, Lisa, even trying to save small amounts, whether that's 10 pounds a month, 20 pounds a month, if you do your budgets and feel that you can afford a certain amount it's always good to try and build the savings up. It gives you a lot more options in the future as well.
Lisa: So Phil, what would be your recommendations around budgeting? I mean obviously at the moment it seems like you've got very little left at the end of paying all the bills and it seems to need a hundred places to go. How would you start sort of seeing where you could cut back?
Phil: When I'm looking at budgeting with people, I see all sorts of ways that they could improve their finances. It might be that they've maybe got current account with a bank and there may be better ones out there. You get some current accounts that actually pay you for having the account with that bank. Another option may be to review the mortgage.
I know you're in a fixed rate at the moment, but when that fixed rate ends you've got the option to look at remortgaging to try and get a better deal. Sometimes for some people it's worth consolidating their debts into the mortgage as well, that can sometimes save quite a bit on the monthly outgoings. The downside with that is that you're then taking the debt over a longer period of time, so there can be disadvantages there.
Sometimes it can be that you maybe got a credit card that's on a high interest rate. So we can look at redoing that. Is there a 0% balance transfer deals out there? Are there subscriptions? I mean people will subscribe to things like Amazon Music, they might have a Spotify subscription. Quite a lot of the times, those things not always are they used or needed.
And sometimes people duplicate things. They've maybe got broadband with one company if they put it in with their phone deal they can sometimes save a bit there. I've had a couple of people who's been paying two home insurance policies. So we thought, look you only need one.
So there's an awful lot of ways that you can review your finances to try and make improvements to free up cash. I remember once as well seeing somebody that had mobile phone insurance that they'd been paying for about 10 years on a mobile phone that they didn't even have anymore. They actually got all that money refunded from the company, which was great. So it's really good to go in detail of all the ins and outs that you've got and just see exactly where so we can make sort of savings and help you with your financial plan for the future.
Lisa: I think I definitely would look at my budget. I think I tend to just run out of money third week of the month and go, "Okay, here we go. We're living on pasta guys". But actually if we possibly shaved a bit off at the beginning of the month, maybe would be okay.
Phil: You've got a good handle on things. You've got a better handle than a lot of people I come across. So that's a really good thing. And I would say just now, especially with the cost of living crisis, really important to kind of look at all the ins and outs that you've got. If you can make savings there and use some of that gains for the long term future, you've got the basis to really push on and do well for the future Lisa.
Angellica Bell: Lisa, there were some encouraging words from Phil weren't there?
Lisa: There was indeed. Yeah. Nice to know when you think you got things a bit right anyway.
Angellica Bell: And what were the main things you took away from that conversation?
Lisa: I think it's definitely to have a look at getting that will in place as soon as possible. Definitely re-examine my budget and go with the prioritization plan really. Actually make that list of everything that needs some attention and prioritize it from there.
Angellica Bell: And then you can set them out and tick them off when you've done them.
Lisa: Exactly. Yeah. Nice to do (inaudible).
Angellica Bell: Well thank you so much for talking to us today on Rewirement, and I want to wish you all the very best in your journey towards making sure today and tomorrow are both being looked after.
Lisa: That's lovely. Thank you.
Angellica Bell: Beverley and Lisa there telling us about their own individual financial balancing acts, and I'm sure there are things that we can all recognize in their stories. And to give us some general pointers about managing that balance as successfully as possible, I'm joined once again by Matt Frain who is Advice Director at Legal & General Financial Advice. Now Matt, thinking about tomorrow is all very well and good, but we don't know what's around the corner. So we sometimes have to live for today. How do we strike that balance?
Matt Frain: So whilst Lisa and Beverley are both approaching this from a retirement planning angle, the payoff between current day and future needs is very much one that we experience at every stage of our lives.
I would strongly suggest, particularly in the current economic climate, to challenge yourself on what's really important and to prioritize accordingly. And when you do this, make sure that you strike that balance between today and tomorrow. And the reason that that's very difficult for people is a concept known as present day bias. Don't know if it's something you've ever come across.
Angellica Bell: No, no.
Matt Frain: No. So it's an interesting one, it's one that's used in behaviour economics. It's where you overemphasize the importance of having things today rather than waiting for tomorrow. And as human beings, we are kind of hardwired to do that.
Angellica Bell: Is that about patients as well?
Matt Frain: It can be that, absolutely. And when you look at financial planning, that can become a real issue for people. It's very hard for them to see themselves in the future. It's particularly prevalent in pensions. You see a lot of that where people don't save early enough because they can't imagine being old and needing to draw a pension.
There was a discussion earlier around potentially accessing pensions early. Now that could be a very sensible option, however it could also be a sign of present day bias in action. And as the financial advisor Phil rightly points out you need to consider the impact on doing something like that, on taking your pension early, on the retirement income that you'll then receive. Now how do we actually go about striking the balance? For me, one of the best ways is budgeting. There are lots and lots of free to use budgeting tools online.
And when you do this, particularly if you're in the latter stages of working and looking towards retirement, don't just budget for today but also budget for what you're going to need in the future so that you can look at both sides of the argument and make sure that you're setting yourself up well for the future whilst also being able to enjoy today.
Angellica Bell: There's lots of things for me to think about there. But what about knowing if you are on the right path for you?
Matt Frain: It's a very, very interesting one. It's one that comes up all the time in financial planning and retirement planning in particular. How much should I contribute towards my pension? How much will I get as a pension? How much will I need in retirement? The slightly unhelpful but ultimately correct answer to this is that it absolutely depends. We're all different, so it depends on what your plans are, what your ambitions are. It depends what age you want to retire, what kind of lifestyle you want to have in retirement. So it absolutely depends on your individual circumstances.
Angellica Bell: So it's always personal and it's about what's right for you.
Matt Frain: Absolutely. There isn't a one size fits all answer here. It is personalized, as you say. So first things first, think about the type of retirement you'd like to have and work out how much your monthly costs are likely to be in retirement. Then I would suggest using a pensions calculator to work out how much your pension is likely to be worth at your chosen retirement age.
Now most insurance companies, most pension providers will have a free to use calculator, or you could use somewhere like MoneyHelper which will also have one of these tools. What's fantastic about these tools, Angellica, is that you can play around with them and come up with what if scenarios. So what if I retired a year earlier or a year later? What if I paid an extra a hundred pound a month into my pension? And you can see the impact that has in real time. So it's really useful as part of that planning exercise.
Angellica Bell: Now I know you wanted to touch on housing equity here.
Matt Frain: Yeah, so it's another avenue for people to explore. We heard from Beverley about purchasing her forever home as she called it. And some of her considerations around where she can move to and potential cost challenges. Something that we see people do in their latter years, particularly if they're struggling financially, if they don't have enough in their pensions or any other means of funding their retirement, it's to downsize. Now downsizing can be a really good option for some people, particularly if the house has become a bit too big for you, possibly a bit unmanageable. It can make absolute sense and it can free up funds that you can use for retirement, so there's a lot to be said for it.
But for other people they will have potentially a strong emotional attachment to the property. Their children may have grown up there, their grandchildren may be used to playing there and going around to see grandma and granddad, and they don't necessarily want to move out of that home.
However, there are alternatives. And one of the things that people can consider is later life lending. You can take out a lifetime mortgage, you can take out retirement interest only mortgage, and what these products do they allow you to release equity from your home that you can use to spend on something like your retirement income, but without the need to actually move out of the property that you might be very much emotionally invested in.
Angellica Bell: Which means you can help yourself financially, but also stay where you want to stay.
Matt Frain: Absolutely. And that can be really important to people.
Angellica Bell: Thank you, Matt. And of course, a big thank you to Beverley and Lisa for sharing their stories with us. Wherever you are in life, you can find lots more resources and information on Legal & General's website, just go to legalandgeneral.com. And one of the things you'll find there is more detail on the course they've developed with the Open University for people who are approaching retirement age. It's called Retirement Planning Made Easy and is designed to help you with one part of the great financial balance of life.
You'll find links to the course and more in the show notes. I'm Angellica Bell, do join me next time on Rewirement when we'll be talking about something we're always being told is a good thing, getting on the property ladder. Well it's easier said than done, especially for younger people.
And we'll be talking to two keen first time buyers and trying to help them get a foot on that all important first rung. You can follow this podcast on your favourite platform and I'll catch you then.
We all know we need to be planning for a secure financial future, but we also need our money now – especially at the moment with the cost of everything going up. Plus, we want to enjoy our lives - we only get one! Lisa and Beverley are both in their 50s and trying to get that balance right.
Find out what our adviser Phil Anderson had to say to help them prioritise where their money goes and saving for future plans. And Legal & General’s Matt Frain returns with his thoughts on budgeting and making sure you’re putting enough money away for your retirement.
A personal finance expert and managing director, Phil’s ambition is to make financial advice accessible to as many people as possible. He also has his own podcast, helping people get the most out of their money.
Matt is Director of Advice at Legal & General Financial Advice. He’s worked in financial services for nearly 20 years, and is a Chartered Financial Planner. His goal is to make sure that everyone gets the individual level of support they need, so that they can make the best financial decisions for them.