E29: Pensions vs. cash - which is best? With Holly Mackay and Martin Parzonka

The Pension Confident Podcast

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01 July 2024 /  

The faces are the host, Philippa Lamb, and two guests: Holly Mackay and Martin Parzonka.

The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to episode 29, watch on YouTube, or scroll on to read the conversation.

PHILIPPA: Hello and welcome back to The Pension Confident Podcast. My name is Philippa Lamb. Now, last year we discussed the pros and cons of Pensions vs. ISAs and which was the smartest place to put your savings. Today we’ve got another head-to-head: pensions vs. cash. Since the start of 2022, the Bank of England has raised the base interest rate 13 times! It’s no surprise then that savers are reconsidering where to put their money. But you know where you are with cash, right? Put it in a savings account in your bank and it’s there when you want it. But if the interest rate you’re getting doesn’t keep pace with inflation, those savings could actually lose purchasing power over time. With your pension, you’d usually expect your money to benefit from long-term growth. But you can’t get at your cash - it’s locked away til you reach your retirement age. And of course, that could be decades away. So, what matters most to you? Easy access to your money or making it work harder? And how can you make the most of both?

Today’s guests are trying to get their teeth into those questions. Holly Mackay is the Founder and CEO of Boring Money, a financial website designed to help ‘normal people’ cut through the jargon and better understand their savings, investments and pensions. Hello Holly.

HOLLY: Hi, Philippa.

PHILIPPA: From PensionBee, we’re joined again by Martin Parzonka, he’s their VP Product, and we’ve had him on the podcast before. Welcome back.

MARTIN: Thank you. Happy to be here.

PHILIPPA: The usual disclaimer before we start, please remember that anything discussed on this podcast shouldn’t be regarded as financial advice or legal advice. And when investing, your capital is at risk.

How does inflation eat away at our money?

PHILIPPA: Now, you two are going to hate me now, because I’ve got a little maths question for you.

MARTIN: Morning maths!

PHILIPPA: I thought we’d start with the tough ones. OK, imagine it’s five years ago, it’s 2019. You go shopping, you spend £100, and you come home with big bags full of shopping. Here’s the question: if you went out today and bought the exact same items, how much do you think you’d have to spend?

HOLLY: Five years? Well, we know inflation has been pretty ugly.

PHILIPPA: Yeah.

HOLLY: And we know it got to over a high, at one point of 11%. So, I’m going to guess about, I’m going to guess about £125 because I know you get [less]... Well, everyone knows that, right? You just go to your local supermarket; you don’t get as much for that same £100. So, £125.

PHILIPPA: £125 from Holly. Martin?

MARTIN: I think inflation has been, as you say, running about 11% recently. I think the stats I saw were that the basket of goods [is] probably about 30% higher, depending on what it is.

PHILIPPA: So, you’re saying £130?

MARTIN: Yeah, £130.

PHILIPPA: Holly wins!

HOLLY: Yes!

PHILIPPA: £123.38. But pretty good, both of you, I’ve got to say.

HOLLY: In five years.

PHILIPPA: I know, it’s a lot.

HOLLY: That’s hardcore.

Shopping around for the best rate

PHILIPPA: That’s inflation in a nutshell. Just one of the things we need to balance when we’re thinking about where to keep our savings. Let’s start with the obvious question on that. Why wouldn’t you keep all your money at your bank, in a current account or a savings account? It’s simple, it’s safe - why not?

HOLLY: I mean, I might jump in there. The first thing I’ll say, possibly controversially, is if people have any form of cash savings, your bank is... It’s highly likely that’s the worst place on Earth you could leave your money in your bank’s current account. Because one thing with, particularly the high street banks, is loyalty simply doesn’t pay. So, if you’re banking with any of the big names out there, don’t assume that they’ll look after you. Because the reality is they don’t. So, we have to shop around, we have to look at other options for our money. And it’s easy, isn’t it? Life’s busy, there’s three million things to do on that to-do list. But if you have any sizable chunk of cash savings and it’s in your current account, honestly, you may as well finish listening to this podcast and go and throw some money out of the window, because you’re not getting what you should be.

PHILIPPA: OK, what about bank savings rates? I mean, is that better if you put it in a savings account?

MARTIN: I think they pray on inertia as well. So, they know that you’re in a current account. And like Holly’s saying, they’re not going to do much for you because you’re there already, right? People don’t like to switch.

PHILIPPA: They’ve captured you already.

MARTIN: They’ve captured you. And so, they’ll push savings accounts at you, but they’re actually not that much better because they just rely on you to go for the easy option. “I already know this bank. I’m just going to open that savings account”. And oftentimes, they’re also not that great. A little bit better than the current account, but they lock you in and you could get better rates elsewhere.

PHILIPPA: Because they do play on the idea that we think it’s quite hard to move accounts as well, don’t they? Which now it really isn’t, is it?

HOLLY: No, it’s really much easier than it used to be. And the new bank you move to will quite often do a lot of the heavy lifting for you. And just to give people a sense, I mean, in my particular bank, the current account, the attached savings account there currently offers around about, it’s under 2%.

PHILIPPA: Really?

HOLLY: But it’s not hard to go out there and find rates that are double that! So, I think shopping around is a really good idea. There’s not just one pot of money. This is what we tend to think about: “what shall I do with any spare cash I have?” There are lots of different pots that we can use. And so, I think it’s really important to think about, “what do I actually need that money to do for me?” And it might be that you have some money in an easy-access savings account. There might be some you can set aside for a year, say, and then you’ll get more interest on that. So, I think the first exercise is mentally think about the jam jars and what are you going to put in each of them? What do you need your savings to do for you?

PHILIPPA: Yeah, so stop thinking about it as just a pot of cash.

MARTIN: Yeah, for sure. I like the jam jars concept. There’s also, to remove some inertia, there’s products out there that, not offered by high street banks necessarily, but that roll up cash. I’m someone that I don’t really like cash, whether it’s controversial or not. My risk profile is different, [I’m] a bit younger, so I like to make my money work for me. That said, you still want to have some cash on hand for bills. Obviously, you need to operate money to do stuff, to buy groceries. What you want to be able to do is take the thought out of saving that. So, there are some products out there that’ll just roll up (or round up) money that you’ve got that you spend, put it somewhere else, and they generally have a higher interest rate than a high street bank. So that’s something to consider as well.

PHILIPPA: In fairness to bank accounts, I suppose we should say, there are no complex investment rules here. You’re saving, you’re not investing really. I guess you can think of that as a plus point. I think a lot of people do, don’t they? They think, I understand this. I put the money in the bank. There’s nothing complex here for me to understand. If I want it, I can get it. But we shouldn’t be thinking that.

HOLLY: You’re absolutely right. With cash, you know the deal. The deal is pretty clear. But I think we’re just saying, make sure you get the best deal out there. Actually, there are quite often, it’s the challenger banks. We’ve talked about some of the newer brands out there, they’re hungry for new customers. Yeah, they work hard for you. They’re the ones with the good rates. Actually, they’re the ones with the better mobile experience as well. It can be super easy to set up an account. You could do it within 10 minutes on a commute, really.

Building an emergency fund

PHILIPPA: So, as you say, ideally, we want to keep some cash handy. I think everyone feels that if you can, just in case. It’s that ‘just in case’ feeling, isn’t it? If we’re thinking about that jam jar, the cash I like to keep where I can get it whenever I want it, how much should we set aside? I’m not talking about a figure here; I’m talking about a proportion.

MARTIN: I think the rule of thumb is three months of expenses. I think it’s important, again, where you are in your life stage and your risk profile to make your money work for you. But you’ve got to just look at what you can do without. If expenses do come and there’s something unexpected, make sure you can at least draw down from your investments. What I mean by that is if you’re putting money into something that’s not cash, can you still access it? So, stocks and shares, for example, can you sell them if you need to?

PHILIPPA: Immediately.

MARTIN: Immediately, right? And oftentimes it’s pretty liquid, which means you can get the cash out of that quite quickly. There’s obviously a risk with that. If markets have gone down, you might be selling at a loss, which you need to be ready for.

PHILIPPA: Yeah. I mean, if we’re thinking I’ve always thought three months sounds like a lot. I understand it’s a nice idea, but if you add it all up, it’s a lot. Can we maybe drill down into the actual bits of that expenditure that you really do need to save for? Because we all spend a lot of money over the course of three months, and some of it we probably don’t need to spend, do we? So, is it about actually picking the bones out of that? It’s the rent or the mortgage payment. What do you think, Holly?

HOLLY: Perhaps controversially, no. I’m not sure that I think three months is a lot to have in cash. I think if you talk to financial planners, they’ll typically say it’s between three and six months. Now, I know that sounds huge, but then you think, OK, we’re not in the most certain environment at the moment. What would happen, say, if you lost your job? What would that mean for your rent payments? So, it’s just that comfort blanket around us. Of course, if you’ve got kids, the never-ending voracious cheeping beaks that need to be fed, you might factor that in. So, it does depend, I think, if you’ve got dependents or not. For me, it’s three months as a minimum, as a starting point for our financial plan.

PHILIPPA: So, if we’re thinking about that as one of your jam jars, and I really love this jam jar idea, is that a savings goal in itself? If people are listening to this thinking, “there’s no way I could set aside, right now, three months money, let alone six months money”. Is that the first thing you should be saving for, actually, your emergency cash jam jar?

HOLLY: Absolutely. That for me, is the... I think we all have steps on our financial journey, and there’s an order we should do things in. The first, actually, even before that, would be to pay off any expensive debt. So once that’s done, then absolutely, I think people’s first goal is to get to that three months of outgoings.

PHILIPPA: And just to spell out the reasons for that, if you’ve got debt like that, you’re paying far more in interest, then you’ll gain wherever you put it in savings.

HOLLY: Absolutely. In savings, in an ISA, in whatever it might be, is getting rid of that debt is the very first starting point.

MARTIN: Actually, with the base rate increasing, I think credit cards now are like 30%. It’s insane!

PHILIPPA: Insane. So, if you’re not paying that off every month, that’s a huge bill, isn’t it?

State benefits that are impacted by savings

PHILIPPA: Just sticking with cash, are there any downsides to holding a lot of cash in savings? I’m thinking about state benefits here. Do you risk losing access to state benefits if you’ve got quite a lot of cash saved?

MARTIN: Yeah. If you carry too much cash, too much in inverted commas, it can affect your Pension Credit. If you have £10,000 or less in savings, it won’t affect your Pension Credit.

PHILIPPA: Just remind people what Pension Credit is.

MARTIN: So, it’s the amount of extra money that the government will give you if you’re on a low income and you’re of State Pension age.

PHILIPPA: OK. Other benefits that you might risk if you’re holding too much cash?

MARTIN: Yeah, cash can also impact your Universal Credit, which is a payment to help with living costs if you’re on a low income. So, £16,000 is the cut-off point of savings you can have before Universal Credit is impacted.

PHILIPPA: OK. So just to be clear, if you, and it’s your cohabiting partner as well, isn’t it? If you’ve got £16,000 or less in savings, investments, that’s not a problem for Universal Credit. I’m assuming here that pension savings, we’re going to get on to pensions later, they don’t count towards this? That’s not a problem for benefits.

MARTIN: No, that doesn’t affect your Pension Credit.

What are the rules on cash savings?

PHILIPPA: OK, that’s great. Shall we move on to the options about where you keep this cash cushion we’ve been talking about? Best places?

HOLLY: I think we have to not just chase headline rates. For me, it’s about what institution is looking after my money. I have to say I’m a big fan of NS&I, that’s backed by the government. So, for me...

PHILIPPA: This is National Savings?

HOLLY: That’s exactly right. NS&I is backed by the government. They’re the last man standing, effectively. If everything goes to pot, everything goes to seed, NS&I should be the last financial institution still there. They won’t always pay the best, but they’re typically pretty competitive. I feel very secure having my money there. That, for me, is a consideration when we’re looking at financial institutions. Typically, some of the ‘sexier’ brands out there are some of the newer ones, and I do worry a bit about how they’re funded, who’s behind them. Of course, money is protected for us by the government. If a bank or a financial institution signs up to what you’ll see online as FSCS, the Financial Services Compensation Scheme, then anything up to £85,000 is typically safe with that institution.

MARTIN: Well, yeah, on the topic of FSCS, I guess shameless plug, at PensionBee, the way we structure our investments, they’re life-wrapped policies, and so they benefit from 100% protection. If the financial institution that holds an investment, so with us, it’s either BlackRock, State Street, or Legal & General. Honestly, if one of those goes under, there are big problems in the world.

PHILIPPA: Yes, globally.

MARTIN: That said, customers’ funds are protected up to 100%. Now, it’s important to note that when we say safe in inverted commas or safer, it doesn’t mean that money can’t fluctuate. And if markets do drop, the money will drop. So, customers aren’t protected from that, but they’re protected from those institutions defaulting or going bankrupt.

PHILIPPA: Yeah. So, these are all significant. I mean, it takes a while to save the money. You don’t want to lose it, do you? If things go badly. What about Cash ISAs?

HOLLY: That’s the whole point of a Cash ISA, I think, is - I love ISAs. They’re like Tupperware pots. You stick your money in, and the taxman can’t get his hands on what’s inside that pot.

PHILIPPA: So, this isn’t a jam jar?

HOLLY: It’s not a jam jar. God, you can [with] tell my food analogies [that] I’m feeling a bit greedy today! They’re in that pot. This is really important because the tax take for all of us is going up and up and up - and is just going to keep going up. So, ISAs are awesome. But, spoiler alert, we also get a certain amount of money every year we can earn in interest and not pay tax on, whether it’s in an ISA or not.

PHILIPPA: And that’s currently?

HOLLY: That’s the Personal Savings Allowance. It depends on how much tax you pay. If you’re a higher rate taxpayer, you can earn £500 a year in interest before you pay any tax on it. If you’re a basic rate taxpayer -

PHILIPPA: Which is most of us.

HOLLY: Yeah, you can earn £1,000 a year in interest. For me, the smart move, I think, is to look at your first lump sum of money, any cash savings, and go for the good rates. And quite often, those are not in Cash ISAs. But just make sure that the interest you earn on that every year isn’t going to go above that Personal Savings Allowance. So, £500 if you’re a higher rate taxpayer or £1,000 if you’re a basic rate taxpayer.

PHILIPPA: That’s a lot of interest, isn’t it? Most people aren’t going to be getting that much interest on their savings. So, they’re not going to be paying any tax regardless.

HOLLY: And with current interest rates as they are, to give you an idea, if you’re a basic rate taxpayer, that would be about £20,000 in a savings account. That would generate about £1,000 a year. So, it’s quite generous. So, for me, Cash ISAs aren’t quite as shiny as they once were because we’ve got that Personal Savings Allowance.

PHILIPPA: Interesting. What’s your take on that?

MARTIN: Yeah, I agree. I think if you’re going to take advantage of ISA allowances and the benefits that come with them, Stocks and Shares ISA, because that way you’ve got risk on. You’ve got your money working for you. Investing in stocks and shares in that ISA, generally speaking, markets will outpace inflation and interest.

PHILIPPA: Over the long-term.

MARTIN: Over the long-term. Then the benefits of not paying tax on that gain is better than not paying tax on the interest gain. Like you say, Holly, you could save that money somewhere else in a savings account that’s not in an ISA and still get the benefits of not having to pay tax on it.

Small steps to save for your future

PHILIPPA: We’re back to the jam jar idea. But this is starting to sound like a plan, isn’t it? However small the sums are, and it’s important to say that, I think, because we’ve [had] these conversations. I think a lot of people listen to it and think, all I’m talking about is maybe I could save it would be £50 a month. Why are we even having this conversation? But actually, it’s still worth thinking about that.

HOLLY: £50 a month? Yeah, it can be huge. I started working in finance in Australia, ages ago, aeons ago, and pensions were compulsory, and my employer set it up for me and they paid in, it was probably about $40 a month. And I remember at the time going, “well, that’ll buy me loads, won’t it?” And then I moved back over to the UK, forgot it was there and then tidied it up a few years ago to bring it over. And I was like, “oh my God”. Because we talk about compounding quite a lot. Here’s another analogy for me. I think it’s like building a snowman. And you start off with a tiny little ball of snow and you roll it around your garden forever, and you think, blimey, I’m going to be here all day. And then just towards the end, the bigger the snowball gets, the quicker it grows. And the same is true of our money. So, I’d say to people, even if you start a pension and you put in £10 a month, it doesn’t matter. It’s just the first step is getting started. And it does grow, that snowman does kick in.

PHILIPPA: See, I’m worried about the snowman idea, because my idea of a snowman is that you build this snowman - and then it melts!

HOLLY: I guess the melting is maybe you spending your pension in retirement, swanning around the world having a laugh!

Are pensions ‘hot’?

PHILIPPA: But what you say is absolutely right. I think this is a good moment. Let’s leave cash behind for a moment. Talk about pensions. The basics, they can be hard to understand. I think there’s no denying it. They can feel very complicated to ordinary people.

HOLLY: I wish I was in charge of marketing for the government because I’d run a really good pension [campaign]. Pensions are hot!

PHILIPPA: Go on then. Give us your elevator pitch.

HOLLY: You get ‘free money’. I mean, if you’re a basic rate taxpayer and you put £80... Let’s forget the word pension. You just put it into this ‘account thing’. You put £80 into this ‘account thing’. The government wave their fairy wand and that pops another £20 in that pension account, so that £80 becomes £100. Just like that, you don’t have to do anything other than put that money in. I think that’s really poorly understood as still we don’t explain that core benefit to people very well. Now, why does that happen? It’s basically bribery from the government. They’re patting you on the head, Philippa, and saying: “Philippa, we’d really rather not have to pay for everything you need when you’re really old”.

PHILIPPA: When you’re old and needy.

HOLLY: “So please, Philippa, be a good girl, put £80 in a pension, and to encourage you, we’ll give you back all the tax you paid on that money”. Roll it all up. So, bingo, you’ve got £100. And that’s such a fundamental benefit. It gets even hotter, Philippa, for higher rate taxpayers, because not only does that happen for them, but when they come to do an annual tax return, they get effectively another £20 on that £80 because you reduce your income in that tax return by another element because you’re a higher rate taxpayer, you’ve paid more tax, so you’re getting more tax back. So, if you pay into a pension, in any one financial year, when you come to do your tax return, you’ll be high fiving yourself because you can reduce that taxable income. And that’s a nice feeling in January.

PHILIPPA: Yeah, absolutely. At any time of the year, I think, isn’t it? And as you say, the chunks of ‘free money’ here, they’re substantial as a proportion of what you’re saving. They really are. I think it’s worth talking about workplace pensions here as well, because as you mentioned, Holly, your employer back in Australia, lobbed this what seemed like a very small amount of money into your pension pot at that time, years ago. And then it just rolled up and rolled up. This is ‘free money’ from your employer, isn’t it? And Auto-Enrolment, the government’s bid to make us all jump into that method of saving. That’s been very effective, hasn’t it?

MARTIN: It has, yeah. So, there’s a couple of things also to consider is that a lot of employers will match the contributions you’re making into a pension as well. And so, if you don’t contribute yourself, they also won’t contribute. And so, you’re losing out twice.

PHILIPPA: Yeah, that’s a good point.

HOLLY: I think everyone listening, it’s really worth it if you don’t know. This particularly happens with larger companies, bigger brands. If you don’t know, get on the phone to HR, look on the intranet, whatever, find out about this matching. If your employer matches your workplace pension, then that’s what I’d call a no-brainer, right? Because if you put in, as Martin has just said, another 1%, they’ll give you another 1%. That’s like getting a 1% pay rise.

PHILIPPA: Yeah, right there, isn’t it? They put ceilings on this, don’t they? There’s a limit to how much they’ll let you pay in because there’s a limit to how much they want to match. But well worth doing.

HOLLY: For most of us, we won’t reach that, sort of, limit. So, it’s really worth investigating. And if they do match and there are those extra contributions, there’ll be very few other places where you can get such a good return on your money.

MARTIN: Just on the point about a few places you can get that return on your money, just going back to the tax relief point that Holly was talking about earlier, it’s yeah, you’re so right. It should be shouted from the rooftops. Where else in the world will you get 25% instantly on the money you put away? That’s an amazing return.

PHILIPPA: Unless it was some crazy scheme where your money would be very much at risk.

MARTIN: Yeah, exactly right.

HOLLY: And blow up horribly!

PHILIPPA: Exactly. Terribly bad idea if someone’s offering you 25%, I’d think largely, you have to be asking some questions about that, don’t you?

The case for personal pension saving

PHILIPPA: OK, if you’ve signed up for your or you’ve been signed up for your workplace scheme, what are the arguments for setting up a personal pension as well?

MARTIN: Yeah, really good question. The benefits could be that you may want to diversify, not have all your eggs in one basket. Although that said, most plans that you’d invest into in a pension are diversified anyway. You put money...

PHILIPPA: When you say diversified, you mean?

MARTIN: Having money in the US markets, having money in UK markets, in emerging markets, Asian countries, African countries. It’s good to have that spread.

PHILIPPA: Pension funds don’t just invest in stocks and shares, do they?

MARTIN: That’s right. It’ll also be bonds. There’ll be some money held in cash as well. Commodities, property, pretty much anything you can put money into.

PHILIPPA: Commodities being things you make stuff out of, copper, gold, that sort of thing?

MARTIN: Oil.

PHILIPPA: Yeah, all that sort of thing. They have this very diverse, to use your word, range of investments. That essentially is all about insulating you from risk, isn’t it?

MARTIN: That’s right.

PHILIPPA: If something goes badly, hopefully something else is going well.

MARTIN: Yeah. It’s important also to have a look at the type of investment plan you’re putting your money into. So not all plans are like that. Some will just be 100% company stocks, and that’s OK, depending on your risk profile. If you want that, you can have that. Some people don’t want that risk. They want it 100% in bonds. That’s OK. Maybe two years ago it wasn’t OK. Bond markets were interesting.

PHILIPPA: Personal choice.

MARTIN: Yeah, personal choice. Exactly. That’s the point of diversification. So, we got into this point also from your question about why would you set one up?

PHILIPPA: Yes, why would you have one as well as a workplace pension? It’s all money out of your spending pot every month, isn’t it?

MARTIN: Yeah, that’s right. So, one of the things you can do by having a personal pension on the side is that if you do move employers, you can just have that with you all the time. So, roll that employer pension into your personal pension. Next employer, go to their scheme, leave them, roll it into your personal pension again.

PHILIPPA: And this brings us to a point we make so many times on the podcast, but it’s worth saying, again, you need to understand what your pension is all about. Ask your employer, don’t you? Get them to tell you because they hand you a bunch of stuff on day one. You don’t read it; you forget about it. Most people have no idea what their workplace pension is investing in or what they’re getting or what it’s worth. But your employer has to tell you all this stuff, don’t they?

HOLLY: And it’ll be, there’ll be a website. I mean, I can’t... Some of the websites will be pretty dodgy. You’ll be looking at it thinking -

PHILIPPA: “What does this mean?”

HOLLY: “This was built in 1994”, but there’ll be a number there. It’ll tell you how much you’ve got in it. It’ll tell you what the fees and charges are, and it’ll tell you where your money is invested.

PHILIPPA: So that’s definitely worth doing. We always want to know where our money is and what it’s doing. I think that’s the lesson here, isn’t it?

HOLLY: And how much it is. Just getting that number is vital. It’s a first step, really, in sorting it out. We talked about jam jars earlier. It’s just working out what you’ve got in every jam jar before you work out what to do with it.

PHILIPPA: So, we’ve said lots of great things about pensions, but I’m going to say, tell me about the downsides. The first one that comes to my mind is you can’t get the money, can you? Not until you retire.

HOLLY: It’s locked away.

MARTIN: That’s true. But it’s actually not locked away that long. It’s 55 right now before you can draw down from a pension, but 57 in a couple of years’ time. And it’ll keep increasing, likely. People are living longer, so it makes sense that you can’t access your pension for a little bit of time. Interestingly though, [in] the UK, 57 is actually quite young. In Australia, it’s 67 before you can access.

PHILIPPA: Is that right?

MARTIN: Yeah. There are benefits here to putting your money into a pension scheme. The other benefit is that the first 25% that you do draw down is tax-free [capped at £268,275]. That’s pretty cool.

PHILIPPA: When you say draw down, you mean take out?

MARTIN: Take money out of the pension. The main downside is locking it away for a while. But honestly, like I said, it’s quite young still. If that’s the only downside and you get 25% free money instantly.

HOLLY: Hang on, Martin, I’m going to cut in. 57, there’ll be -

PHILIPPA: OK, Holly, go for it.

HOLLY: Well, to me, it might not have seen that long away. She blushed! Thank God this is a podcast, not telly.

PHILIPPA: Full disclosure, Martin is the youngest person in the room.

HOLLY: Philippa, how do you know? But I think for people, particularly people in their 20s, 30s who are thinking about buying a property, you’re cautious about locking your money away into a pension. And this is where I think for people under 40, an alternative is the Lifetime ISA. This is a vehicle where you can pay in up to £4,000 a year if you’re under 40, and the government will match that with up to £1,000 every year. So that’s a total of £5,000, you could save there. There are catches with that. You have to spend that money either on buying a first property, or if you change your mind and decide not to, you can then use that for retirement. If you change your mind and take the money out sooner, you get clobbered with punitive rates. So, you have to be pretty damn sure that you’re either going to buy a property or use it for retirement. But that’s a vehicle that does give people who are saving for a property a bit of flex. It’s an alternative to a pension. There are pros and cons to both. But particularly, I think for self-employed people who don’t have those workplace contributions it’s an interesting tax wrapper to have a look at.

PHILIPPA: Yeah, it’s a fair point about the employer’s contributions. If you’re not getting those, it’s a bit of a more of a straight question where you want to put your own money, isn’t it, Martin?

MARTIN: Holly’s right. Lifetime ISAs are quite beneficial because you do have that option to either take it for retirement or for a first property. But I think there’s caps as well to that. So, it could make sense to have both.

PHILIPPA: Yeah, we’re back to the both, aren’t we? We’re back to the do it all.

HOLLY: More jam jars.

PHILIPPA: More jam jars.

HOLLY: Kitchen’s getting very busy, Philippa.

Final thoughts

PHILIPPA: I know, but I’m thinking, is this the lesson from this podcast? That’s what it is. However much you’ve got or however little you have, don’t imagine that it just needs to go in one place.

HOLLY: And I think that’s really key. And it’s that visual, what do I want this money to do for me? And there’ll be different things, different time frames. We’ve talked about the three to six months of disposable income. That’s one jam jar.

PHILIPPA: The safety cushion.

HOLLY: Then the furthest, longest one down the track is the pension. But there’s other pots to it. And an important message is they can all be quite small because I think for younger listeners in particular, it’s as important to get started and to set the habit as it is to think that you’re having an enormous financial impact.

PHILIPPA: Particularly with a pension, I suppose. Would we add to that, don’t ignore your jam jars, because if you’re paying tiny amounts in when you’re 22, when you’re 32, all being well, if you’re earning a bit more, you should be ramping up your jam jars and making your jam jars bigger. You can’t just keep on paying a tiny amount into your jam jars.

HOLLY: Nice tip there, pay yourself first. So, whenever you get a future pay rise, you can’t miss money you’ve never had. So, the first thing you do is set up a Direct Debit to come out on pay day so you can’t spend it and just hike it up, do it every, hopefully, year and align it to a pay rise.

PHILIPPA: So, the wealthier you get, the more you should be saving?

HOLLY: In theory. Sounds crazy, doesn’t it? But it’s true.

MARTIN: Avoid lifestyle creep. Just, I can get a nice flat white, I can go and get a better flat white, or I could just put that money away, right?

HOLLY: They’d all cost £4 in London anyway!

PHILIPPA: I think we’re going to wrap it up there. There was always so much more in these things, isn’t there, than you think about, but really helpful tips. Thank you very much.

HOLLY: Thank you for having me.

PHILIPPA: We’ll be back next month exploring the question: can money buy you happiness? I’d like to find out. Seriously, though, there’s a lot to talk about in this one. We’re really going to try and get a solid answer on it, so it’s going to be well worth listening to. Meanwhile, please leave us a rating. Write us a quick review in your podcast app. You know we love to hear what you think about every single episode. Remember, you can find us on YouTube and in the PensionBee app, too. Just before we go, always remember, anything discussed on the podcast shouldn’t be regarded as financial advice or legal advice. When investing, your capital is at risk. Thanks for being with us.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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