If you have money to save it’s important to find the right place for it to help achieve your short and long-term goals. Savings, pension plans and investments can all offer a different mix of flexibility, accessibility, potential for growth and tax benefits. Here’s what to consider.
Save for your future. It sounds such a simple, sensible plan. But when it runs up against reality, there’s a lot to unpick. How far in the future are we talking? What do we need to fund along the way and how might these priorities shift over time?
Sometimes it’s hard to see past your immediate needs, but it can help to think of saving not as a cost, but rather an investment in opening up your choices in the future. Once you’ve identified how much you can afford to put aside for your future at the end of each month, it’s about striking the right balance between those important short-term goals and saving towards your life after work. Savings, pension plans and investments can each be great for trying to build up a pot, but they’re all very different and can help achieve different goals. It’s about horses for courses.
The big money milestones can come thick and fast through your 20s and 30s and by the end of their 40s many people will have bought a house, started a family, reached their earning peak and made plans for life after work.
Most of us will be planning and saving towards some goal, whatever age and stage we’re at. But our customer surveys have shown how much our savings priorities shift over time.
Those aged 25-34 say the biggest financial pressure they have is paying rent or a mortgage, followed by saving for a big purchase. For 35 to 44-year-olds this has shifted to saving for retirement, followed by paying rent or a mortgage and then providing for the family.
The upheaval caused by coronavirus may have changed your situation too. There’s a huge range in how the lockdowns have affected us all financially, from those facing difficult times being out of work or furloughed to those who may be working from home, spending less and finding they have some extra money to save. Our recent survey found that 59% of our customers actually found they were able to save more in lockdown than they usually would.
If the first thing you need is a bit of a savings cushion to cover an emergency or some spending within the next five years, then saving into a bank, building society or Cash ISA (individual savings account – more on this below) could give you the instant access you need and provide relative security for your money. You may also be able to get some interest on the money you save and in most cases you won’t pay tax on it.
However, with interest rates generally low at the moment your money could lose value over time because of the impact of inflation. So, if you’re thinking of longer-term goals, you might want to look at other options. You can read more about this and the other pros and cons of saving and investing in our article.
A pension plan can be a great, tax-efficient way to save for your long-term future. These days employers usually have to set up a workplace pension for you if you’re eligible and usually both you and your employer will contribute. At least 8% of your qualifying earnings will be paid in, with a minimum of 3% coming from your employer.
A great benefit of saving into a pension plan is that you get tax relief on what you save too, which gives your savings a further boost. You can find out more about how these tax benefits work here.
Usually you can access money from a modern, flexible pension from the age of 55, although this is due to rise to 57 from 2028. But it’s up to you when and how you take your money. Some people take their money but keep working, others take some or all of it and retire and others leave their pension savings untouched – or a mix. Starting to take money from your pension plan may reduce how much you can save in future, so do get financial advice if you’re unsure. There’s likely to be a cost for this.
You can check if your pension investments are on track using our simple pension calculator, and if you’re a Standard Life customer and you’re not already benefiting from online servicing you can register here.
Find out more in our article 7 numbers that explain what’s so good about a pension plan.
Chances are you’ll have some savings goals you’d like to hit long before retiring.
Perhaps you’re working towards something bigger like a home, education fees or a family wedding. The tax efficiency and flexibility ISAs offer can make them a great way to save for this kind of spending.
Cash ISAs let you earn a bit of interest on top of your savings, and usually allow you quick access to your money. Or for longer-term goals – generally five years or more – there are Stocks & Shares ISAs where your money is invested. You can find out more about how ISAs work on the Government website.
There are different types of ISA available, which are designed for different saving goals. For example, the Lifetime ISA can be used to save towards your first home or for retirement. You can find out more on the government’s Lifetime ISA page. Or, if you’re saving on behalf of children, a Junior ISA might be suitable. You can find out more about Junior ISAs and some of the other options available on the Money Helper website.
Still wondering about the best place for your money? Take a look at our at-a-glance guide to check what both pension plans and Stocks & Shares ISAs can offer.
It’s worth bearing in mind that whatever saving mix you choose isn’t set in stone, you can adapt where and how much you’re saving and investing as your needs and priorities change.
There’s a lot to think about so it might be worth considering taking professional financial advice before making any decision. If you don’t have your own adviser, you can find one in your area at unbiased.co.uk. There’s usually a charge for getting advice.
Pension plans and Stocks and Shares ISAs are investments. They can go down as well as up in value and you could get back less than was paid in.
Tax rules and legislation may change and your individual circumstances and where you live in the UK will have an impact on the tax you pay.
The information here is based on our understanding in August 2021 and should not be taken as financial advice.