Rewirement podcast

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 the hunt for answers. Answers to the kinds of questions I know so many of you have when it comes to money and planning for the longer term.

I’m pretty sure it sometimes feels like everybody else has their act together, and it’s just you who hasn’t. I promise you, you’re not alone. And to prove it, for this series, we found people from all over the country who are trying to work out the best thing to do when it comes to their finances. We’ve paired them up with some top financial experts, and the good thing is we get to listen to those conversations, so I hope we learn loads as well.

Today we’re talking about making the right financial decisions at the right time. And by that, I mean when you’re still young enough for them to make a big impact. So, if you’re in your 20s, you might think there’s plenty of time to start thinking about the longer term.

But if your 20s are long past, you probably feel time goes quickly, and maybe you’re even wishing you’d made some different choices with your money when you were younger. So, we’re going to find out more about the things you could think about if you’re a 20- something and you want to make sure your financial future is as secure as possible. To help us do that. We’re saying hello to Bola. How are you?

Bola: I’m good, Angellica. How are you doing today?

Angellica Bell: I’m good, thank you. And I’m really intrigued to know more about you, Bola, because you’ve already got onto the property ladder. How did that all happen?

Bola: All right, so let me go back a little bit. Property ownership was something that was always very important to me. I don't want to say I grew up poor, but I've definitely had periods of my life where there was a lot of financial instability within my family life and it resulted in me and my family having to move home so many times.

And as you can imagine, there's a lot of stress that comes along with having to constantly pack up everything that you own and having to constantly be on the move. So for me, property ownership was something that was so important to me because it this is something that's going to be mine that I will own and no one can take it away from me, or as long as I keep up my mortgage payment, and I don't have to constantly be moving around all the time.

Angellica Bell: So because, and I hope you don't mind me saying that, you had a bit of instability growing up, you thought that having your own property would give you some stability that you've always wanted.

Bola: Exactly, yes. And then just somewhere to call home, somewhere to call mine, somewhere that can be furnished and designed to my taste and obviously something to just be proud about as well, I guess.

Angellica Bell: So you've ticked off your home. Are there any other big life changing things you want to experience along the way?

Bola: Yeah, definitely. So I'd say I've finished university, I've got my degree, I'm in the industry that I'd like to work in, I've got my property. So I'd say for me probably the next step would be hopefully getting married and starting a family.

Angellica Bell: So are you in a relationship, do you mind me asking these personal questions?

Bola: I am, but it’s still very early days.

Angellica Bell: That’s another podcast. But it’s good to have goals. And you’re looking to the future and you’re setting everything in place. Are you quite ordered in your thinking when it comes to money?

Bola: Yes and no. So, I think in the last few years I have had to become more cautious and more responsible when it comes to how I manage my finances, but I wasn’t always like that. When I was in university, for example, I maxed out my overdraft in the first year and the second year and the third, because I didn’t really have a real job. So, when I had such large sums of money coming into my account, I didn’t know how to manage that appropriately.

But I guess through all the things that I’d experienced in my family life, I had to have that very real conversation with myself and say I don’t want to repeat this cycle. What can I do differently? Home ownership is only one element of that. There are so many other things that I think needs to be put in place to really have that financial security for the future.

Angellica Bell: So, Bola, you’ve got a lot of questions you need answering and I think you need some advice.

Bola: Yes. Advice is always good.

Angellica Bell: Advice is always good. So, we found someone who we thought could help you. Her name is Sarah Astley from wealth management company Mattioli Woods, and she understands that it’s an important age to be making all these sorts of decisions.

Sarah Astley: I think our 20s are an interesting time of our lives because it’s a real transition period. You might think now that there’s lots of different commitments to spending your money on how to spend that, that will continue as you go through into your 30s and 40s, so it’s really determining, and perhaps creating good spending habits to identify how you’re then going to allocate your financial resources to different priorities.

So, having a detailed look at your incoming and outgoing is a good place to start so you can begin to identify the areas where you might be willing to make some cutbacks, and there might be areas where you’re willing to sacrifice an expense because you’ve got a goal in mind.

And I think having a goal, say having a wedding, a purpose for saving is a really motivating route to being successful in reaching that goal. Because I think arbitrarily saving is a difficult concept to make sacrifice for. Unless you’re motivated by seeing money accumulate in an account, the excitement of going out to new places and spending time with your friends and whatever those social activities might be to cause you to spend is always going to be a more desirable pull than having the money sat in your bank account.

Doesn’t have to be big sacrifices. We always read on social media and hints and tips about the takeaway coffees or lunch out when you’re in the office or whatever those things might be. You’ll know areas in your life where you think I could reign that back a little bit. So, I find that’s always a useful tool.

Bola: I mean, I try and do that, but I guess it just goes back to the most common issue that you find for most people in their 20s or even early 30s is that there just sometimes isn’t enough. Sometimes you make the cutbacks, but like I said, the cost of everything is going up and it’s just so expensive.

Now it feels like I’ve just seen a huge chunk go out, obviously, because I’ve just recently purchased my property and it’s still undergoing renovation. So, every month it feels like there’s just nothing left and I’m getting by a month or month. I always feel like I don’t have a safety there, and I don’t like being in a situation where I feel unsafe, or I feel vulnerable.

Sarah Astley: So, I would take a lot of confidence from the fact that you’ve been able to do this exercise once before and do it very successfully, and I think you’ve just described exactly the point about having a goal in mind and how that motivates you to achieve that. So, I think in terms of going forward, one of my pieces of advice to resolve that feeling of vulnerability would just be to build up that emergency fund again. So, to have that six months of essential outgoings.

So, you’ve got peace of mind to know that if your financial circumstances were to change at all, you’ve got some breathing space. It just gives you that little bit of financial resilience to know that if something unforeseen was to arise, as in a pandemic comes along, that you’ve got the financial means to support yourself for a period.

Bola: I mean, I’m definitely going to try and build the emergency fund back up, but even aside from the emergency fund is thinking I’d like to save for a potential wedding, which I don’t even know whether it’s going to come. And I would like to buy a second property at some point in the future, so it’s trying to do a few things on one income.

Sarah Astley: So, I think from what I’m hearing is that you want your money to work hard for you. One thing that’s quite interesting in terms of your desire to own another property is really to understand your motivators for that, because there could be other avenues that are worth thinking about.

Property is an investment we feel comfortable with. It’s tangible, we can see where our money is invested, and it’s familiar and we can understand it. And therefore, it’s an investment that most of us would think of in the first instance, perhaps. I’m not making any comments regarding the benefits of property as an investment.

All I would say is also consider the negatives, perhaps, of property, and what alternatives there potentially could be for you to explore. For example, it’s quite an illiquid investment and therefore that comes with a lack of flexibility and it also doesn’t allow us to maximize our tax allowances.

So, what you might want to consider is using things such as a real estate investment trust, which effectively is a collective of lots of different properties, so you get lots of diversification, which is important to help mitigate risk. So, they must pay out 90% of their taxable income, but crucially, you could hold them in an ISA wrapper.

So, you’re not paying any tax on your income, you’re not paying any capital gains, and you can get access to those investment vehicles at much lower capital levels. So just to highlight that there are other investment opportunities to consider.

I also think it’s worth thinking about the future, especially in the context of property, in terms of the fact that if you think your career might lead you into higher tax brackets, for example, the tax that you pay on your income on property and your capital gains, for example, is going to erode the investment return.

So, what I would encourage you to really think about is ultimately to do the maths, if you like, and then you’ll really see will this deliver me what I want it to deliver, or might it be a more expensive route to make my money work harder? So just something to perhaps consider and explore in terms of that being one of your goals.

Bola: Yeah, I'll have to see if the numbers stack up. What other asset classes would you suggest would be great for providing monthly returns, especially when considering retirement age and pensions?

Sarah Astley: Rather than thinking in terms of which asset class should I invest in, by asset class, what I mean is different types of investments. Property is one, stocks and shares or equities. Cash is classed as an asset type. Really it's about diversification, because different asset classes will perform differently in the same economic circumstances, because essentially then what you're helping to do is mitigate some of the risk.

But that of course is depending on your timeframe and your attitude to risk. If we're thinking about the shorter timeframe in terms of the wedding, that might determine an investment strategy which might look very different to that that you might employ, for example, if you were thinking about your retirement.

So the more risk that you are prepared to take when you're investing, typically the potential for higher investment returns, albeit there is the potential for greater losses as well.

Now, when you have a long investment timeframe, what that enables you is to recover when investments go down. If we look backwards, for example, over the last 30 years, we know that whilst we've been through a major recession, Brexit, a global pandemic, investment prices today are higher than they were 30 years ago. So taking a higher risk over a longer time period enables us to wait out those periods of volatility. Does that make sense?

Bola: It does, yeah. So what are your thoughts about the lifetime ISA for example?

Sarah Astley: So essentially an ISA, or an individual savings account, is a wrapper which enables us to make investment gains or to generate income without having to pay tax. So they're really useful in terms of helping our money grow quicker.

So you can access the funds within a lifetime ISA on purchasing your first home or reaching age 60. From your perspective, you've obviously now purchased your first home. So in terms of you being able to access monies from a lifetime ISA, you would have to wait until retirement. In terms of a tool for saving for retirement, I believe that a pension is more an effective vehicle with a caveat of depending on how your perhaps funding that pension provision.

If your pension is being funded via means of the salary sacrifice arrangement at work, you benefit from national insurance savings as well as the tax on your income. So you get a higher rate of tax relief than you would if you used a lifetime ISA, because essentially what you're doing is sacrificing part of your salary, so it brings down your gross income, so you're paying less tax and less national insurance. Whereas with a lifetime ISA, you put money in and then the government essentially give you the equivalent of a basic rate tax relief.

Bola: I wanted to ask another question off the back of that, Sarah. So you mentioned the salary sacrifice scheme via employers to contribute towards the pension pot, which I have done for my current role, and I believe my last three roles, but I guess what's that resulted in is me having pensions with so many different providers. So what would you advise or recommend is the best way to get all of those consolidated together?

Sarah Astley: So I think first off I would just make sure that it is the right thing to move a pension arrangement. So before you transfer a pension, you should check whether there's any penalties for doing so. So the best way to do that is to compare a current value against a transfer value, and you can ask your provider to give you those. And that will identify if there's any possible penalty because the transfer value will be lower than the current value.

And then you also just want to check whether there's any valuable guarantees associated with a policy that might be lost on transfer. So typically that could include guaranteed annuity rates, guaranteed minimum investment returns, protected retirement ages, enhanced tax- free cash entitlement. Typically those guarantees come with older pension policies, but I don't want to make a sweeping statement and then for you to take action and you'd be detrimentally affected.

Bola: I had another question, it's not related. So with regards to living in the UK, being a property owner, is it advised to set up a will, because in the unfortunate case that a person passes away and they don't have kids, or they're not married, what happens to that estate?

Sarah Astley: So I think it's always important that we have a will, regardless of personal circumstances. If you don't have a will, then effectively your estate is distributed in line with the rules of intestacy, which basically are guidelines that say this person's not nominated who they would like to benefit from their wealth, therefore this is the criteria, or this is the list of who will benefit.

But what it means is that the people potentially that you would want to benefit might not benefit at all, might not benefit in the proportion you would want them to, and intestacy is a longer process. It's more complicated. And ultimately it's a time when your loved ones are going to be grieving potentially, so would you want to put that on them to have to navigate? So really it's just a piece of personal housekeeping that I think we should all have in place.

Bola: Yeah, thanks. That's good to know, because I don't think I've heard anyone discuss this topic before, especially at my age, so it's good to know. There was one more on my list. So this was the balancing of credit card debt whilst trying to invest at the same time.

So from time to time, I do try to benefit from and make use of balance transfers, for example, where there's a specific interest free period, but in the scenarios where I don't always have access to those deals, what would you advise is the best way to manage between both? Because I know that, for example, if there's high interest rates on credit cards, it would probably make sense to pay those off first.

Sarah Astley: So I think you've hit nail on the head in terms of you've got high interest rate on credit card. Then in the first place, pay that down effectively. If the debt's going to cost you more than you potentially think you would ever get in an investment return. The question in terms of if you've got debt held on a 0% basis for a term, ultimately it comes down to attitude to risk.

From a personal perspective, I would advocate that if you had a 0%, say, for 12 or 24 months or whatever it would be, that you have the means to be able to pay that at the end of the term, so you don't end up having to pay or the borrowing, but there is the opportunity that you could choose to have the credit card and you could be investing at the same time, but it comes down to money management as much as anything, and being prudent in that we don't know what might come up in the future.

And perhaps not over stretching yourself, because it goes back to the question of investment timeframe in that if you are investing and you're investing into something that is easily sold, so more liquid investments, if you have a short timeframe, you might be in the unfortunate position that your investments haven't made money, they've gone down. So if you cut short that potential timeframe that you'd anticipated to pay off debt, for example, because your circumstances have changed, you might find yourself in a worse position for trying to have been overcomplicated almost with your strategy. So I hope that helps.

Bola: Yeah, thanks. That's good to know. So Sarah, so as you know, it's been said that a lot of Millennials, we live in this microwave generation where we want things now and we want it immediately. We don't really want to wait. So how do you think we could find a balance between having a good time, enjoying ourselves, and getting the things that we want, but also having foresight to be able to plan for the future and make the right financial decisions?

Sarah Astley: That's a really great question, and I think it's probably something that we struggle with all through our lives, depending on our personalities, maybe. But I think focusing sometimes too much on today, which is what we're so often encouraged to do, be in the moment, might lead us to missing opportunities that might ease the financial burden of tomorrow.

So something that I encourage all of my clients to do, regardless of their age, is to consider when they would like the financial freedom to work because they want to, and not out of financial necessity, which is how I position retirement. Thinking about it in terms of financial freedom, it becomes more relatable. So once you've determined, perhaps, when that might be, then the next part of that equation is to consider, " Okay, what kind of lifestyle might I want at this point? Am I happy with my lifestyle currently? Is it something I'd like to replicate in retirement?"

If it is, then essentially take off those expenses that you don't anticipate having at the point that you want financial freedom. So for example if you don't imagine having your mortgage still at that point.

And once you understand that you can begin to capitalize and think, " Okay, well how much money as a lump sum do I need to have at that point in the future to not have to work if I don't want to?" One of the best tips that I could give somebody is the more aggressively you can fund long- term saving, and the earlier you can do that, the cheaper it will ultimately cost you because of the effect of your investment growth. Establishing good financial habits is what I'm thinking about, is taking advantage of matching employer pension contributions, for example. It's free money.

Thinking about salary sacrifice, asking those questions in terms of how your pension is funded. So actually the difference to your net to take home pay is not so great in terms of how much you're going to be putting gross into your pension, so that you can really begin to get that building at an earlier age.

Another thing that I think is worth mentioning is insurance. And I'm thinking about ensuring ourselves. We are our most valuable asset. So we all ensure our cars. We ensure our homes.

We ensure our pets. But I would hazard a guess that we don't prioritize ourselves or think about the what ifs. So that is something that I would really advocate younger people to consider, especially if they're getting on the property ladder. I'm a big advocate for enjoying our lives. We only have it once and we should make the most of it. Establishing a lifestyle that provides you with all the stimulation, all the enjoyment, all the opportunities you want to explore, but also making sure that we can be savvy as well.

Angellica Bell: So Bola, you got lots of fantastic age appropriate advice there. What sort of things did you take away from the conversation you had with Sarah?

Bola: The conversation with Sarah was really good, because it made me think about some things that I hadn't previously considered. So for example, I had mentioned to Sarah that in the future I was considering potentially purchasing another property, but then Sarah did mention maybe some alternatives that would be good.

Angellica Bell: And that second property ambition, do you think that you'll tick that off in the next couple of years or look at other options?

Bola: I guess we'll see. She did mention the importance of sacrificing and being disciplined. So if I'm able to do that again and implement the necessary changes, who knows what the future holds. I could meet someone and we're able to do it together and it's a lot easier. It's quite difficult to say, but I'm glad that she pointed some of those things out for me to start looking into.

Angellica Bell: And that's the main thing. Bola, thank you for sharing your, your story with us, and I have my hat ready just in case. Good luck with all your plans.

Bola: Thank you so much for having me. It was a great chat.

Angellica Bell: So Bola seems to be really getting it together, and there was a lot in there from Sarah for anyone just setting out on their financial journey, but are there some general lessons we can learn? Well I'm joined now by Matt Frain, a director at Legal & General Financial Advice, who's going to chat to us a bit more. So Matt, what should younger people be thinking about when it comes to finance?

Matt Frain: Thank you Angelica. Before I answer that question, I just wanted to say a massive well done to Bola. She's done so well to get on the housing ladder on her own with no help from the bank of mom and dad. And while she is quite understandably feeling under some financial pressure at the moment with the credit squeeze, the cost of living squeeze that we're seeing, her determination and focus signs through. And what I think's really interesting with her story is how well she has set herself up and appreciates the need to enjoy life today, but also to place herself well financially for the future.

Angellica Bell: Well, exactly, and a lot of young people now don't have the resources, finances, or help from parents to do that, through no fault of their own.

Matt Frain: Yeah, absolutely. Times are hard and people are feeling the squeeze and she's doing really well, so hats off to her. And it leads me onto my first key point. So I want to talk about the importance and the value of starting pension contributions in your early years, if you're able to do so.

So just to give a brief background around pensions, any pension contributions you make receive tax relief at your highest marginal rate. So if you're a basic rate taxpayer living and working in England, then your pension contributions will receive 20% tax relief on them. If you're employed, then there's a good chance you're receiving employer contributions as well.

So if I run that as a brief example, you may be in a situation where your employer's paying 5% of your salary into a workplace pension, provided that you also pay 5%. Quite often matching schemes like that are in existence. So that would mean that 10% overall is going into your pension pot.

But you actually receive tax relief on the amount that you contribute. So what is happening in effect is that 10% is going into your pension. 5% of that is coming from your employer. 1% of it is effectively coming from the government in the form of tax relief, with 4% of it being paid yourself. So you're receiving 10%, or 10% is going into a pension on your behalf. It's only costing you in net terms 4% of your salary to receive that 10%.

Angellica Bell: So food for thought there.

Matt Frain: Yeah. Now why does it make such a difference starting this process early in your career? Well, if you plan to retire at, say, age 65 and you're 25 today, you've got 40 years or 480 months, which sounds like quite a frightening number, but you've got all that time to regularly save in and build up a pot of money. If you delay by 10 years, then you instantly drop down to 360 months.

So you can see that effect and the opportunity to save gets less and less. And what you would need to do in that instance is actually to save more into your pension at an older age to make up for the lost contributions from the early years. It's actually far easier to start off small and build it up than to try and play catch up when you're a bit older.

And then the other big benefit from saving and investing early is a phenomenon known as compounding. Now, compounding is essentially where you earn interest on your savings, but you also earn interest on the interest itself. To try and visualise that, it's almost like having a snowball atop of a hill and pushing it down. It will just keep picking up more and more snow and get bigger and bigger until you've got a giant snowball at the end.

Angellica Bell: Great analogy. What about paying off debt, because it's something that Bola asked about.

Matt Frain: Yeah, indeed. So Bola spoke around whether she should think about clearing her credit card or actually put some money towards saving, especially as she's moved onto a 0% credit card. First thing I would say on that is the putting your debt into the cheapest vehicle available is very sensible as she has done.

So something like a 0% credit card could be a really good starting place. However, where possible you should be using this for breathing space to allow you the opportunity to pay off your debt whilst it's not incurring any additional charges and not growing any further. The risk of leaving it is that the offer period will eventually come to an end, you may not be able to find another 0% credit card in this example, and then you're going to start to pay quite high amount of interest on that debt.

So I'd always suggest paying off your debt wherever possible to start clearing them down. And a really important point around debt. Please reach out for help and support if you are struggling. I've mentioned on a previous podcast that you can get information on debt from the Money Helper website. There are other places for support as well. You could speak to the likes of Citizens Advice, to StepChange Debt Charity, or to the National Debt Line.

Angellica Bell: Okay, so there's some places you can go if you want to discuss that further, which is great, but what can you do if you were in the fortunate position of having excess savings or disposable income?

Matt Frain: So if you've cleared your credit card debts, if you've built up an emergency fund and that's held in a cash deposit easily accessible, then you might want to think about what to do with excess money. One option is around potentially paying into your pension where you've got the benefits of tax relief. You do need to consider that pensions are only accessible at a certain age.

So if you want the money before then, that's not the place for it. But if you are looking to build up and take advantage of tax relief, a pension could be a good option. You might want to consider something like a lifetime ISA, particularly if you're saving for your first home. Anyone age between 18 and 39 can open a lifetime ISA and pay in up to 4, 000 pound a year, and the government will add a 25% bonus to that up to a maximum of 1, 000 pound a year.

You can then use that to purchase your first property, or you can keep the money invested until at least age 60, and then you can use it to help fund your retirement. So that’s another option for people.

If you’re in a position, maybe a bit like Bola, where you’ve bought a property without having to use a lifetime ISA, then you could consider investing in collective investments like a stocks and shares ISA. You’ll take on investment risk when you do that. However, you’re far more likely to get long term returns from something like stocks and shares ISA than you would through a cash investment. And given today’s high inflationary environment, that could be one of your better options if you’re looking to get returns that keep pace with inflation.

The current ISA limit is £20,000 per annum, so there’s a lot of scope for saving. However, you can start from as little as, say, £100 as a lump sum or even £20 a month, so you can start quite small and build up those savings. Plus, with stocks and shares ISAs, you do have some good tax advances. You don’t pay tax on any of the interest earned, you don’t pay tax on any share dividends, and you don’t pay capital gains tax. So, they can be an efficient vehicle for building up savings.

Angellica Bell: Thank you, Matt, and a big thank you as well to Bola for talking to us about her financial hopes, dreams, and questions. And don’t forget that wherever you are in life, you can find lots more resources and information on Legal & General’s website. Just go to legalandgeneral.com.

For instance, if you’re thinking of buying a property, just like Bola, there’s our handy guide called What to Consider When Buying a House.

I’m Angellica Bell, and do you join me next time on Rewirement, when we’ll have more people with more financial questions to figure out and another brilliant expert to help them. You can follow this podcast on your favourite platform so you don't miss an episode, and I'll catch you then.