Q&A with personal finance journalist Holly Thomas
Are you looking for ways to make your money go further? Travel reward scheme Airmiles teamed up with award-winning personal finance journalist from the Daily Express Holly Thomas in March 2011 to answer your questions about personal finance.
With more than 10 years' experience providing advice on personal finance issues, Holly has answered your questions on a variety of topics, including how to get the most out of your savings, how to set up a pension, invest money and generally get a handle on your family finances.
Q. Fruitstick: I am self-employed (freelance) and haven't made any pension contributions since June 2009 (when I left a permanent job). I have been in my previous company pension for 13 years. How much should I be saving, theoretically, every month into a pension so I don't retire penniless? I really don't feel I can afford it at the moment, but know I should probably just bite the bullet and find a way.
A. Holly Thomas: There will always be reasons why we think we can't afford to save for retirement. But the cold hard fact is that we all need to, because state pensions alone are not enough to make ends meet. A rough rule of thumb, according to the Pensions Advisory Service, is that you should pay in half your age as a percentage of your salary to afford a reasonable retirement.
For example, 15% of your salary if you are aged 30 or 20% if you are aged 40. So the earlier you start the better. Stakeholder pensions, because of their simplicity, are a good place to begin. You don't need to part with a fortune - £20 a month is around the minimum.
Q. Goldenticket: Is there anywhere on the web that has an impartial 'Dummy's Guide' to pensions? I've got my head firmly in the sand about mine because I just do not understand them. Any advice very gratefully received. Also, if I've got an offset mortgage, is there any point in me having separate savings, eg an ISA, or does that totally defeat the reason for having the offset?
A. Holly Thomas: There is plenty of help available on the internet about pensions. A good place to start is Money Made Clear. You can also find help from Direct Gov. The basic thing you need to understand about a pension is that they offer valuable tax breaks. You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20%.
In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. You cannot access the cash until you retire.
As for your offset mortgage query, you are correct in thinking that the best place for your savings is with your offset mortgage provider. The higher the level of savings, the less interest you pay. In such a low interest rate environment, it's unlikely you will earn more interest in an account elsewhere than you will save by offsetting it. However, using your ISA allowance is important to take advantage of the tax benefits.
Q. Raiseaneyebrow: I want to get a pension (I'm self-employed) but genuinely have no idea how to get one. I don't really trust pensions advisers not just to sell me the one that nets them the highest commission. So how should I go about choosing a pension - or would I be better off with ISAs, for example? Can I cash in ISAs when the time comes and buy an annuity?
A. Holly Thomas: You are right to want to save for retirement. There is an argument for using both a pension and ISAs as homes for your retirement fund.
An ISA comes with tax benefits – no income or capital gains tax to be paid on growth – and you can access the cash whenever you want. The lure of a pension is the tax relief on contributions. You cannot buy an annuity with ISA savings – only with a pension fund.
Setting up a retirement plan without the help of an independent financial adviser (IFA) is brave because they can help you with the amount of risk you want to take, in terms of how your money is invested, and unless you are confident in being able to do this yourself you could make a serious mistake going it alone.
Finding the right adviser is very important for any matter, so perhaps consider visiting a handful and seeing who you are most comfortable with. Recommendations from friends and family might help. Search for an IFA in your area at http://www.unbiased.co.uk/.
Q. Guacamole: I have worked for the NHS since 2000 and have been contributing to its pension from the beginning. I'm currently on the 1995 section, but I have to decide whether to move on to the 2008 section by May of this year. I've read the leaflet provided and cannot see any benefit to moving on to the 2008 section at all - it's very 'give with one hand and take with the other'. I'm tempted to just ignore this is happening and remain on the 1995 section (which is a final-year salary scheme). Do you know anything at all about this?
A. Holly Thomas: Employer pension schemes are rarely straightforward, especially when changes are made. What is frustrating is that there is no provision for advice – you have simply been sent a pack of information and told to make your own decision which is an important yet difficult one.
You might help your decision by having a play around with these calculators, which will help project what you will retire on. The best thing to do is to seek advice from an independent financial adviser who can go through your financial information and expectations for retirement.
Q. DailyDaisy: I haven't made any National Insurance contribution for about six years (went freelance and then stay at home mum). I've read that this will effect any state pension entitlement in the future. Can I make up the contributions? Is it worth it?
A. Holly Thomas: You're right, National Insurance contributions do affect your State Pension entitlement. Women born on or after 6 April 1950 need 30 qualifying years.
At present, only 70% of women have full NIC records which is why many women collect a reduced state pension. The Government will allow you to buy extra years of National Insurance. But depending on how many years you think you might accumulate, you'll need to consider carefully whether you need to top up at all.
To confuse things, all this may change because the pensions minister has announced that the State Pension system in Britain is to be overhauled. Details are yet to be revealed, but whether entitlement will be based on National Insurance Contributions (NICs) paid by the individual hang in the balance. National insurance contributions explained.
Q. Makemineapinot: I have a frozen private pension, a company pension from my last (part-time) job with a local council. Now I have moved jobs. I am working eight hours and am paying into the new local government pension. Should I keep my other two pensions frozen or transfer them into the new scheme? I really don't earn much in this job at the moment that's why I thought it was best to keep them frozen.
A. Holly Thomas: Many people have built up a confusing mix of different company and personal pensions during their working life. You could make life simpler by consolidating all your pensions into a single pot, but there may be penalties for moving your money.
Pension transfers are tricky and require the help of a professional. To find an independent financial adviser (IFA) in your area who specialises in pensions, visit http://www.unbiased.co.uk/.
Q. Maiakins: I'm another worried person, as I have no pension. I work freelance and am in my mid-30s. My husband has a small pension, to which his employer contributes a bit too. What would be the benefit of me having a pension? I put any extra money into the savings bit of our offset mortgage instead, into my personal ISA, and into the kids' Child Trust Funds. Is this wise? Or should I have a pension of my own as well (not that I could afford to put much into it!)?
A. Holly Thomas: You are wise to use up your ISA allowance and offset savings against your mortgage too, but there are important tax advantages of saving in a pension. Plus, the earlier you start saving in a pension the better, since there are more years to accumulate growth. Stakeholder pensions are low-cost and flexible, and you can stop and start contributions without penalty. But there are many other options you would be best placed to discuss with an IFA who can take into consideration your mortgage and other commitments. Don't delay!
Q. Goldenbeagle: I am 53, have been working since I was in my early 20s, no career break, and have had my NI contributions contracted out since 1994 to Scottish Equitable (now Aeon?) policy that was originally set up as a pension against my mortgage. I now have a repayment mortgage but still pay the Scottish Equitable policy. Should I still be contracting out? The only other savings I have towards my pension is an Legal & General Endowment, also set up against my original mortgage. As long as I stay in work I don't need the two policies to pay the mortgage off at end of term.
A. Holly Thomas: Contracting out of S2P (the second state pension which used to be called SERPS) relates to the earnings related part of your state pension. It means that part of your National Insurance contributions are diverted into a private pension rather than you building up extra earnings-related pension payable by the Government. The question of whether you should be contracted in or out depends upon a number of different issues including attitude to risk and the age you plan to retire.
Essentially, you are hoping that the investment returns on your Aegon pension plan will provide you with a better income in retirement than from the state. If you compare these potential benefits on paper, the vast majority of people should be contracted in not contracted out. You can contract back in by contacting Aegon and asking them to do so.
The L&G endowment is a savings plan rather than a pension and will provide a lump sum at maturity. You should check how much income your Aegon pension will provide and what is available from the state, using a pension forecast. If there is a shortfall between what you are predicted to receive and the level of income you need, you have a decent amount of time to top-up and make up the shortfall.
Q. Nowit: We are about to come to the end of a fixed-rate mortgage five-year plan. Our percentage rate will drop along with our payments, but in this climate, do you think we should try and get another fixed rate or cross our fingers and stay with our current lender?
A. Holly Thomas: You are among thousands of homeowners facing this exact dilemma. When your current deal ends you will automatically start paying your lender's Standard Variable Rate (SVR), which, depending on your lender, might be a very cheap option. Some are as low as 2.5%. It's very difficult to second-guess the market, yet we do know that there is only one way interest rates can go - and that's up.
You just need to decide what you can afford. If you do decide you want a fixed-rate loan for the security of knowing how much you owe each month, you should secure one as soon as possible because lenders are putting prices up factoring in the expected increase to the Bank of England base rate. It's also worth considering fixing for five years because while a two-year loan is cheaper, you will need to remortgage when rates are climbing.
Make sure you use a broker who can find you a deal from across the market rather than your bank, which can only offer you a mortgage from its own limited range. There are some brokers that do not charge a fee for advice, such as London & Country Mortgages.
Q. Cornerstone75: We are currently renting and letting our previous home, which we had outgrown. We want to sell up and buy a permanent place in the next few months. We are about £15k in debt for various reasons (studies, childcare costs etc) and we are thinking of selling our property and using some of the proceeds to clear the debt. This would obviously then affect our deposit for a new home. Would you agree this is a sensible option or would it be better to attempt to get a bigger mortgage when we buy and cling on to every penny of the deposit?
A. Holly Thomas: Paying off debts should be a priority because they will be costing you a fortune in interest. If you have the opportunity to pay them off, it's definitely worth seriously considering. Remember, while it will cut your deposit, any debts will also be factored in to any mortgage offer from a bank or building society and will reduce the amount they will lend you. It's also worth noting that the interest rate you're paying on the £15,000 is likely to be more than any rate on a mortgage.
Q. Amidaiwish: Where do I start with ISAs? What are the different ones, pros and cons? If I invest in a fund, is it better to go for a simple FTSE tracker with low fees rather than a managed fund. This is all a mystery and, meanwhile, we have the money sitting in a savings account doing nothing. Also, my husband is an HRT and I am not earning. I have been led to believe there is no benefit to investing in a pension rather than other investments any more. In fact, as we will be forced to buy an annuity, then pensions are the least attractive/flexible option. Is this correct? (My husband is 39, I am 37.)
A. Holly Thomas: First, ISAs. There are two types of ISAs to choose from: a Cash ISA and a Stocks and Shares ISA. Cautious investors can simply use Cash ISAs as a secure place to hold cash, with no risk to the money. The more adventurous can invest in the stock market through a Stocks and Shares ISA in the hope of achieving higher returns.
The main attraction of an ISA is that there is no capital gains tax or income tax to pay. You don't even need to declare your ISAs on your tax return. Within each tax year the Government allows you to save a set limit. Choosing a Cash ISA is simple – you opt for the one offering the highest interest rate.
The Stocks and Shares ISA requires more thought, since there is a risk to your money. Whether you choose a managed or tracker fund depends on your attitude to risk, which is why it's important to get advice from an IFA.
As for pensions, there are valuable tax breaks on your contributions that you don't get elsewhere. You pay income tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
The rule forcing you to buy an annuity will be scrapped in April, but unless you have an enormous pension fund, buying an annuity is likely to be the best option for most. If having your money tied up bothers you, saving in an ISA is a sensible alternative, as long as you leave the money untouched until retirement.
Q. Cradlecap: My son aged three was entitled to a Child Trust Fund, my daughter was born on 1 January this year so is not eligible for one. I believe the junior ISAs that will replace the CTF won't be available until the autumn. What can I do with her money? I have a lump sum of £300 and want to put in £10 per month. Ideally, I would like it linked to shares rather than a savings account.
A. Holly Thomas: If you are investing for children, you could be putting money away for anything up to 18 or even 21 years. Over such a long period, stocks and shares are likely to outperform cash. Your money will be exposed to the stock market for a long time, and equities tend to outperform over longer time periods.
There are plenty of children's investments on the market including Aberdeen's Investment Plan for Children, or the Children's Investment Plan from fund manager F&C. Baillie Gifford also offers a Children's Savings Plan with a choice of eight investment trusts, and the Jump scheme from fund manager Witan is also popular.
Your lump sum meets their minimum investments, but they ask for at least £25 a month. However, you do not have to invest through a specialist children's plan. There are thousands of other investment funds to choose from, and you can choose the one you like best and designate the money for your children.
Q. Lemondifficult: How can I get fuel cheaper? Kerosene, gas oil, diesel - they're killing our family spending. I can cope with the electrics, I know how to turn off lights and so on, but what can we do about cooking/heating/getting to work? We're rural so really have no choice about getting a bus. I'd love to get a more efficient boiler (though ours is really not bad) but we can't afford it.
A. Holly Thomas: Oil prices are hitting everyone's finances hard, but there are some things you can do to help. Making your home as energy efficient as possible will go a long way. The Energy Saving Trust offers a free Home Energy Check that could save you around £300 a year off your energy bills.
There are grants and offers available to help pay for cavity wall insulation and loft insulation - you can search grants and offers database online or call 0800 512 012.
Finding the cheapest station in your area can be done with the help of Petrol Prices. Tap in your postcode and the site will show you the address of the cheapest places to fill up.
There are grants available for help with the cost of replacing your old boiler for a more energy-efficient one, depending on your circumstances and level of income. To see if you qualify for help, have a look at the Energy Saving Trust database.
Q. Southlundon: I buy my two-year-old son's clothes for nursery from Primark because they are so cheap, but I feel horribly guilty when I do because I don't trust their ethics record. Trouble is, my husband's just been made redundant and charity shops are few and far between where I live and often don't stock my son's size. How else can I buy cheap clothes but also keep my conscience clear?
A. Holly Thomas: Finding affordable children's clothes is a worry for many parents at a time when everything is so expensive. Look at the Mumsnet Talk section For Sale / Wanted for any bargain items of clothing. Freecycle.org is a good place to look too as it will help you save money and live a greener life by stopping others from binning unwanted goods. It works by joining a network in your area and looking out for things people are literally giving away. Once you've finished with them, you can freecycle them on. Make sure you take note of the common-sense advice about not going into strangers' homes alone or letting them into yours, to collect things.
You could also try eBay for bargain items, as well as Gumtree. And keep an eye on your social networks. The other day, a friend of mine posted on her wall that she was giving away a pile of children's clothes that her little ones had grown out of.
Q. Ethelina: We will shortly be going down to one wage, as I will not be returning to work from maternity leave. Can you suggest a good budget planner to allow us to plan for day-to-day outgoings?
A. Holly Thomas: Budget planning is an excellent discipline. You'll be able to work out exactly where your money is going, and it will also help identify where any cuts or savings can be made. Have a look at the planner on Money Made Clear. You will need payslips, bank statements and household bills to start with. Good luck.
Q. VickieBee: Can you please explain the changes to Child and Working Tax Credit from April? Will we all be much worse off than last year, all other circumstances remaining unchanged? (income, childcare costs etc). There is no info available on HMRC website, it just lists changes to the elements which means nothing to most people.
A. Holly Thomas: Tax credits cause confusion because they are incredibly complex. If you qualify, payments are made straight into your bank account and the family element of tax credits can amount to £545 a year for those on household incomes of less than £50,000. However, this will change in April 2011 when only those on less than £40,000 will qualify.
The website is huge so you may have not seen the other changes that are detailed on the HMRC website here or you could phone the tax credit helpline on 0845 300 3900. It is a possibility you will be worse off because the Government is trying to make substantial savings. However, it is crucial that you double-check your award because if it's incorrect and they pay you too much, they ask for the money back.
Q. sobloodystupid: My husband works part time (not through choice) and will soon be made redundant. He will do all childcare if he can't find work, as I work full time and am relatively well paid. How do we work out if it is better financially that he doesn't work?
A. Holly Thomas: Childcare can be incredibly expensive and many families opt for one parent not to work. You both need to sit down and work out how your finances will look in the two different scenarios. Include all of your outgoings by going through your monthly spend on bank statements and bills.
If your husband chooses to be unemployed then your household income will drop and you might be eligible for tax credits and other benefits. If you already receive these then it's likely your awards would increase. Find out all the information and map out how you stand. When you've got the figures in front of you it should be clear, from a financial point of view, the best option.