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Ruby writes… I am 28 and earn £40,000 per year. I currently live with my parents, having previously rented both with friends and my partner. My partner and I are currently looking to buy our first house in Leeds and I have £12,000 saved in a Lifetime ISA (LISA). We are also getting financial help towards the deposit from our parents.
I know I am fortunate to be able to afford a house and get on the property ladder soon and so the main things I want to save for at the moment are travel, holidays and building up a larger private pension pot for the future.
I am still in the probationary period of a new role so have not yet been enrolled into the company’s pension scheme. In terms of pensions from previous roles, I have tracked down some of these and put them into a private pension fund via the Moneybox app.
Currently, I only save around £200 per month, which I keep in a savings account, but I would like to start investing this (or more) both into a private pension fund (either the one I’ve already set up through Moneybox or a different one) and a stocks and shares ISA. The main difficulty for me is knowing which funds to invest in.
In terms of my aims for retirement, while this is far away, I am conscious that I would like to have enough money to live comfortably, travel and enjoy my hobbies. I would also like the option of retiring earlier than state pension age if my savings allow me to do so.
Alina Khan, money coach reporter at the i Paper, responds… After receiving your email and some back and forth, you told me you have £12,000 saved in a LISA and £10,000 in savings as well as £3,500 you have in a private pension with Moneybox.
Your first priority seems to be to buy a house, and it sounds like you are close to achieving this through your LISA savings and help from your parents. A LISA is a great way to save for your first home but there are a few rules you need to meet when withdrawing the funds or you risk incurring a 25 per cent penalty.
The LISA has a property price cap of £450,000 and you need to have been saving into the product for a full 12 months before making your withdrawal.
Once you move into your home, it is going to be important for you to have some savings in case of any emergencies – I had a hole in my roof when I first moved in!
Ian Else, founder of 4 Financial Planning, suggested having six months’ expenditure somewhere that is easily accessible.
There are many easy-access savings accounts offering decent savings rates for new customers. For example, Cahoot is currently offering 5 per cent on up to £3,000, while Revolut is offering 5 per cent for 6 months on up to £25,000.
It is worth shopping around online to see what account works best for you.
In terms of pension savings, during our email exchange you mentioned you may have two lost pension pots from past employers, but you weren’t sure how to find them.
After providing me with your national insurance number and the names of the employers as well as when you worked there – I was able to locate both pots with Nest. They are going to speak to you about how much is in them.
You mentioned you wanted to save more into a personal pension but Else said once you pass your probationary period in your new role, if you are eligible for a workplace pension that would be the first place he would top up savings, ahead of a personal pension.
He said: “Workplace pensions are often lower cost, and there’s a chance your employer will match extra contributions, which is free money.
“If your employer offers salary sacrifice too, you’ll pick up meaningful national insurance savings by investing through your workplace scheme rather than a personal one. While the functionality is often limited, as is the fund choice, I’ve never come across a modern workplace pension which doesn’t do the job for someone in your position.”
In terms of how much you are going to need to save into your pension to be able to travel and enjoy your hobbies as you mentioned, we can use Pension UK’s Retirement Living Standards to gauge this.
To be able to enjoy a 2-week holiday in a three or four-star hotel in the Med (£1,789) with around £115 per person per day spending money and three, long weekend breaks in the UK with £448 spending money per break – two people would need £62,700 a year in retirement.
It is good that you want to start investing to supplement your savings and there are many ways you can do this.
The first thing you need to think about is how risky you want to be when choosing what to invest your money in.
Else said: “Investment risk is something few people really comprehend but it’s important to focus on decades not days. I would argue for someone aged 28 not taking enough risk is a bigger danger than taking too much, at least until you get to within a decade of accessing your funds.”
The general rule, according to Else, is the higher the percentage of shares and equities in a portfolio, the higher the risk.
He added: “Over the long term, you’d expect to be rewarded for taking that extra risk in the form of higher returns. You will also likely see more volatility (the amount the portfolio moves up and down).
It’s critical to be patient during marketing volatility. The biggest single mistake I see DIY investors making is panicking when they see values falling. You wouldn’t sell your house if it went down in value, so don’t sell your investments either!”
You can choose to pick each individual fund yourself that would make up your investment portfolio, or you can select a pre-made solution.
Else said if you were to choose to select your own basket of funds, although this would give you more control over what you are invested in, it will take more work.
You would need to check in every year or two and rebalance the portfolio, which essentially means changing the split between equities and other assets, so that your risk level doesn’t creep up.
Therefore, for a beginner investor he said the preferred option would be to choose a pre-made solution.
He said: “Someone, or something, manages the selection, reviews and rebalancing for you. Vanguard’s LifeStrategy range, BlackRock’s Consensus range and HSBC’s Global Strategy range are all worth a look.”
It looks like you are in a healthy place given your age and the fact you are thinking about retirement this early will give you plenty of time to build strong saving habits that should place you in a good position when retirement does come.
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