Q&A on saving and investing with Nutmeg
Whether you're looking into saving for your newborn or your retirement, the world of investments can be full of jargon. To help make sense of it all, a financial expert answered the money-related questions on the minds of Mumsnetters
Lisa Caplan is the Head of Financial Advice at Nutmeg; helping customers make the right decisions about their finances. She's a Chartered Financial Planner and lives in north London with her husband and three children. See what advice she had to offer in response to Mumsnetters' questions below.
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Want answers on a specific topic? Take a look at the following:
Q: What's the best investment advice for two young children when we only have a small amount to put aside each month? (foxessocks)
Lisa Caplan: In investing, size doesn't matter. I have found that almost everyone thinks their investment is smaller than other peoples. Everything helps, and the earlier you can put it aside the better. Just make sure there are no entry costs. Two children will already cost enough!
For many pension savers, research has shown that the money they save in the first ten years of saving will generate more market returns than the following decades of contributions combined – that's because of compounding returns.
You should make small, steady contributions. Make it into a habit that you don't even think about. It should be as natural a part of your financial life as paying the gas bill - something you just do. This helps you overcome the temptation to invest and withdraw as the market rises and falls, a behaviour that can lead you to miss out on market gains.
Make sure that before you start investing you've left a buffer of cash to dip into in case of disaster. At Nutmeg, we generally recommend three months' worth of expenses, held in cash in the bank.
Q: I've got a three-month-old baby and am interested to know how best to set him up for financial ease in the future. What's the best approach to saving for him, how do we avoid his savings getting taxed and can we keep his money locked away to make sure it doesn't all get spent at a bar once he is 18? (BelOfTheBall79)
Lisa Caplan: If you want to apply some kind of control over their expenditure, you have two options - unless you're quite rich, in which case you might consider a trust fund.
First option: pay into your child's pension. He won't be able to access that until he's 55, so he'll hopefully have gone through the midlife crisis before he has access to it. That's the safest option.
Second option: you can keep it in your name, for instance in an ISA, and dole it out to him as and when you see fit. Bear in mind that, if you die, it'll be subject to inheritance tax.
On the other hand, if you want to give your son flexibility, and rely on parenting and good luck to prevent him from spending it in the bar, you can invest through a Junior ISA. That'll be his as soon as he turns 18.
The best thing you can do is teach him the value of money and the importance of saving. That more than anything will help him to financial ease in adulthood.
Q: What percentage of an income should always be invested? At the moment I encourage my kids to put 50% away but what would be reasonable for them as they grow up? (Kriek)
Lisa Caplan: Disposable income in the UK for 20-29s has been stagnant since the early 2000s. Many young people face a cocktail of stagnant wage growth, rising house prices, and rising living costs – especially in the wake of Brexit and the weakened pound. Earlier in 2016, a YouGov survey commissioned by Nutmeg revealed that 25% of 18-24-year-olds are saving nothing but would like to save, while a further 29% of the same age group say they save infrequently (eg. when they can afford it). That's over half of 18-24-year-olds not saving or saving infrequently.
So the vast majority of people in the UK can't afford to put aside anything like 50% - but if you can, definitely do.
If you're trying to find the level that's appropriate for you, try not to think of a given percentage, but to save whatever you can, keeping three months' cash in reserve, and investing the rest. Take what you are able to save in a good month as a target, and build on that target over time.
Of course, remember to pay off any expensive (eg. non-mortgage) debt before investing or holding excessive savings in cash.
Q: Is it better to save for a child in an ISA in their own name or should I just add savings for them to my own ISA? (CopperPan)
Lisa Caplan: Unless you're hitting your ISA limit, it doesn't make much difference. If you're hitting your own £15,240 limit then placing the money in a Junior ISA for your child will solve that problem for you - the money will go under your child's ISA allowance of £4,080.
The main advantage of keeping it in your name is that you retain control. The main disadvantage of keeping it yourself is that if you die, inheritance tax will be levied on it before it can be passed to your child. You also miss out on the juicier rates that are sometimes made available exclusively to children by the banks - rates they hope will land them clients for life. I wish I could get the interest rates available to my own children.
If you put it in your child's name but don't put it in a Junior ISA, bear in mind that only the first £100 of interest or investment returns will be treated as the child's when it comes to tax - you'll be taxed on anything above £100 in interest until the child is an adult. This is because HMRC does not want people to use their children as tax loopholes.
If you save through your own ISA, some providers allow you to split your investments into multiple pots with individual goals and risk profiles. For instance, you might be investing for children, for the long term, and for yourself, for a shorter time period. Having two separate pots allows you to tailor the risk settings for each, and to separate the two investments in your own mind - so you know you can dip into your savings as needed, while keeping those for your children separate.
Q: What sort of risk profile is best when investing for a child? I'm naturally very cautious, but of course that leads to very low returns currently. (CMOTDibbler)
Lisa Caplan: Sometimes it is hard to take a deep breath and think of the long term. Academic studies demonstrate that the longer you invest for, the higher the chances of a positive return. (See the chart below.) Over time, taking a reasonable amount of risk is rewarded, as long as you are willing to stay the course when markets fall - as they will from time to time. That said, you should always make sure you're comfortable with the risk you are taking.
A note of caution: people who invest for their children sometimes find they face financial difficulties, and are tempted or forced to dip into those savings. Make sure you're being honest with yourself when you evaluate the likelihood that you'll face similar circumstances.
This is particularly true for higher risk portfolios as you want to be able to choose when you take the money out.
Q: When my eldest was born, he was eligible for the Child Trust Fund. I haven't changed where it is since he was born six years ago, should I? I've heard you can turn it into an ISA now. (Sammyislost)
Lisa Caplan: This is all too familiar to me. I too have kids with an old child trust that has been on my to-do list for ages, especially as now it can be moved to an ISA! You don't necessarily need to move your investment, but the deals for Child Trust Funds are more limited as there are fewer providers. Buying and holding an investment for years is fine - but you should make sure you're getting a good deal.
Two main things to check: firstly, fees. Fees quietly eat into investment returns and rob you of your returns. Look to minimise them, but do factor in what you're getting for your money (for instance, an expert investment team) - always look for the best value.
Secondly, check what you're investing in - make sure the risk profile is appropriate. If your provider doesn’t make it clear in plain English what risk you're taking, you should consider switching.
To your second question: yes you can! And it's very easy. Just ask your provider, or if you're looking to move it, ask your target provider how to make the switch.
Q: What advice would you give about the future of trust funds and how to go about setting one up? (redbook)
Lisa Caplan: The advantage of a trust fund is that you have control of the money, and can prevent your children spending it while young and foolish (perhaps the best time to spend money?). It lets you pass money down the generations, with inheritance tax advantages.
The disadvantages are many. First, trusts are expensive to set up and run. You will need legal advice and an accountant to manage the tax. Trust tax is complicated. Secondly, trusts are heavily taxed - they are taxed more heavily than people. Thirdly, money in a trust cannot be sheltered in an ISA or pension.
As a consequence, it's generally only worth using a trust fund if you're handling a significant amount of money. Any transfers to trusts will use up your £325,000 inheritance tax exemption (which refreshes every seven years) and any transfers above that amount will be taxed at 20%.
There are far easier ways to pass money to children, while retaining some control. Many people pay into a pension for their children – that can't be accessed until they're 55. You could also open a Junior ISA, which they can access at 18. Or if they're older, you will soon be able to open a Lifetime ISA for them, too.
Q: We are due an endowment policy pay out later this month (a few thousand pounds) and have already paid off the mortgage - where should we invest this (we can put it away for over 10 years) for the best return? (healthyheart)
Lisa Caplan: A warning before I answer the first question: what is best depends on your plans and situation. You have the most important point covered: you can leave the money for 10 years which means investing in stocks and shares is a possibility. But you can never predict returns, and past investment returns are never a guarantee of future returns. But there are things you can do to maximise this.
Most importantly, make sure you're not paying too much in fees. Fees are the one part of investment return you can control, so make sure they're low. If your portfolio returns 3% but you lose 1% in fees, you've actually only made 2%.
Next, when you're looking at past performance, look at performance including fees, or 'net of fees'. Past performance gives you a guide to the kinds of risk you're exposed to and the kinds of returns you can expect to see over the long term.
Finally, whatever investment you choose, it should generally be diversified. It shouldn't be a single stock or a single sector of the economy (like property), for instance. Other considerations might apply - it can be good to have your ISA and pension in the same place, for example, so you might like to find a provider that can offer both.
Q: Are top-ups - to cover gaps regarding national insurance, due to having children and a career break - worth doing, rather than investing elsewhere? (Ness1234)
Lisa Caplan: It's worth checking your national insurance record.
You will get national insurance credits to cover the years when you were caring for children. You will be credited automatically if you are registered to claim child benefit until your youngest child is 12.
Additionally, you will get the full state pension (when you reach state pension age) if you have built up 35 years of contributions. You will not get more if you have more than 35 years. If you will have less than 35 years, it is often a good idea to top up it up. It is usually good value but whether this is right for you personally depends on your own circumstances - it might be useful to speak to a financial adviser.
Lump sum top-ups are available for older people. You can make additional contributions to cover up the previous six years, sometimes more.
Q: I have invested for my kids since they were young, and should probably (with hindsight) have taken more risks, as long term any losses are evened out and gains tend to be higher. How do you communicate to parents of young children about risk profiling for long-term investment? (InMySpareTime)
Lisa Caplan: History shows that, the longer your investment horizon, the higher your chances of a positive return. When you're investing for children, you can afford to take on more risk to increase your chances of a higher return. This is true for any investor who won't need the money in the short-term.
Independent financial advisers (IFAs) and wealth managers - like Nutmeg - will often help you think through the right risk profile for you.
Q: What's the shortest time period you would recommend investing in the stock market, rather than playing it safe with cash savings? (LittleMoonbuggy)
Lisa Caplan: Never less than three years, and then in a lower-risk portfolio. The answer depends on your situation. What will a fall in the value of your investments mean for you? If it falls, and especially if it falls steeply, do you have the flexibility to leave your money invested until markets recover?
As the chart above shows, historically it's been true that the longer you hold your investments, the lower your chances of making a loss.
Although investments aren't locked in, at Nutmeg the absolute minimum time period we will consider for investment is three years, and for these short-term investments we suggest one of our lower-risk portfolios with only a proportion invested in stock markets. A lot will be invested in lower-risk assets, such as gilts and other bonds.
As I've said above, always keep a cash buffer, and pay down expensive, non-mortgage debt first.
Q: How do you calculate how much risk would be taken for each scenario? Is there a set criteria and is this a criteria for Nutmeg or from a higher governing body? (sealight123)
Lisa Caplan: There's no agreed or official standard for measuring risk.
At different times, different common approaches have prevailed - for instance, bonds have often been viewed as safer than equities. So the more equities in a portfolio, and the fewer bonds, the greater the risk. But this doesn't always hold, and it’s not really as simple as this.
In truth it's more of a judgment call, and that's what our expert investment team is there to do. They manage 10 portfolios ranging for cautious to aggressive and dependent on your risk appetite, they will help you determine which of the 10 risk-based portfolios is best for you.
Q: Would it be safer to spread the pot/investments across several companies and to keep its total value (allowing for growth) below whatever the investment guarantee threshold is? (FlouncingIntoAutumn)
Lisa Caplan: You're referring to the Financial Services Compensation Scheme (FSCS). If the company you invest through ceases trading or is declared to be in default, the FSCS will generally cover you up to £50,000 if its investments rather than cash. It's a little more complicated than this and a full explanation can be found here.
Bear in mind two things:
Firstly, this doesn't cover you if your investments drop in value due to market movements. That's just part of investing. Generally, over the long term, a diversified portfolio of investments will recover its value.
Secondly, in most cases, your money is kept separate from the company's. Make sure the company is registered with the Financial Conduct Authority.
As a consequence, this shouldn't really be a factor in your investment strategy.
Q: After previously investing in a low-risk stocks and shares ISA and seeing no gain (small loss due to fees each month) I am unsure of the best way to invest savings. Should we look at medium-risk investment options? (icklekid)
Lisa Caplan: Certainly, if you can leave it invested for the medium-term, and if you don't think you'll need the money for a long time, you could consider higher-risk too. It depends on how much risk you are comfortable taking.
Especially at a time when cash ISAs are suffering rate cuts and when inflation is rising (eating into or eliminating all interest), investment will soon be the only way to defend or increase the real value of your money. Many of our new customers are starting to invest for the first time for this reason.
With online wealth managers, you can control your risk, and so strike a point somewhere between typical investment risk and cash risk. Nutmeg use a questionnaire to help determine what level of risk is right for you, and you can see historic performance to help you get a sense of how our portfolios have performed in the past.
Remember that stock markets do go up and down, so it's normal to see losses, sometimes for several months at a time. The important thing to remember is that the losses aren't *real* until you sell the investment and take your money. As long as you leave the money invested it will have a chance to recoup any losses.
Q: Is it better to save or to overpay on the mortgage? (Theimpossiblegirl)
Lisa Caplan: Making voluntary overpayments on your mortgage means that you pay less interest on the mortgage overall, and clear your debt earlier. One potential catch is that some lenders charge overpayment fees, although most allow you to overpay by up to 10% of the outstanding debt. Another risk is that your lender could lock you into higher payments by reducing the term of your mortgage. You should be meticulous in analysing the fine print to make sure you're not liable for any nasty surprises. I was lucky, I was able to sit down with someone at my bank who was very helpful and did a number of calculations, but ultimately there was a limit of how much I could repay without a penalty, so that's what I did.
If your alternative is cash saving, it's hardly worth it. The net returns gained, even on a high-interest savings account, are hardly worth the effort, so you should probably focus on overpaying your mortgage to bring down the overall repayment term. If your approach is cautious and your main aim is to sleep well at night, paying down your mortgage might be the most sensible thing to do. Just be sure that you will not suddenly need the money.
For higher-risk savers and investors, however, the gains from investing may well be worth it in the long term.
Mathematically speaking, creating an investment portfolio is likely to generate higher returns than overpaying your mortgage if you have a low fixed-rate mortgage, although this is not guaranteed. Taking higher risks may yield a higher return in the long term, but it's likely that you'll see more volatility in your investment.
Also, bear in mind that investing is for the long term. As a rule of thumb, you should be thinking about investing for at least as long as you've got left on your mortgage term, with three to five years as an absolute minimum.
Q: If I have several separate pensions - due to changing jobs - how can I quickly and easily work out what return I will get and whether I need to add more into my pension pot. If I do, is it best to carry on paying in or invest in property? (Lottietiger)
Lisa Caplan: Big question! Let's take it one part at a time.
A) How can you work out what you have and what you'll get?
Each pension should send you an annual statement which will include a projection of how much you'll have at retirement and what income this will buy at your selected retirement date. The pension providers have to follow standard rules about these calculations. You can add them together to get a reasonable idea of whether this will be enough. Pensions calculators can help think this all through for you.
If your pensions are all defined contribution pensions, you could consolidate them into a single pot, which makes them easier to track and value. Just choose your favourite pension provider, and transfer your other pensions into that one. In future, the government's Pensions Dashboard will make this all far easier.
Personally, after many years of filing away several pension statements each year, when I started at Nutmeg, I consolidated the ones that were not final salary (you should hardly ever move those) with my Nutmeg pension. It was more cost effective, and makes administration easier.
B) And the second question – should you keep paying into a pension, or invest in property?
Pensions are popular because they are treated gently by the taxman. Say you're a basic rate taxpayer - you earn below £43,000 each year, so your income tax rate is 20%. When you pay into your pension, the government returns that 20% lost to tax to you.
Also, if you're employed, your employer will probably match your pension contributions up to a specified limit, and that's free money. For most employers, that will be a minimum of 3%. On the other hand, you can't access pension money before you're 55.
What about property? Many people think of property as a safe investment, but it has its disadvantages. Money in property is 100% concentrated in the UK property market – it isn't a diversified portfolio. It's hard to sell in a hurry, requires a lot of upkeep, is expensive to sell (stamp duty).
Also, unless it is your own home, you will have to pay capital gains tax, and the way you used to be able to set rent income off against interest payments is being reduced.
And property prices don't always rise. In the 1990s, many people were trapped in negative equity - where the value of the house is less than the size of the mortgage. This is a very worrying position in which to find oneself.
You can find more information on investment vs property here.
As with all investing, your capital is at risk. The above answers are not financial advice and should not be taken as such. Pension and ISA rules apply.
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- The details are in plain English. No jargon.
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