Savings accounts

Regular savings accounts are easy to open and understand, but pretty dire as far returns go. It's difficult to find anything that gives a return higher than inflation. The advantage of a savings account is that cash in savings is generally easy to get hold of and has predictable value. Whilst the nature of the value of money is a complex and malleable thing, you pretty much know what £1 is worth today, what it'll be worth tomorrow and what it'll be worth next year.

Pensions

Pension[...]]]> The array of investment options available for sensible long term savings for the average person is broad and overwhelming. For people earning more money than they really know what to do with, this is a basic overview of the options and thought processes involved in deciding where to put one's money.

Savings accounts

Regular savings accounts are easy to open and understand, but pretty dire as far returns go. It's difficult to find anything that gives a return higher than inflation. The advantage of a savings account is that cash in savings is generally easy to get hold of and has predictable value. Whilst the nature of the value of money is a complex and malleable thing, you pretty much know what £1 is worth today, what it'll be worth tomorrow and what it'll be worth next year.

Pensions

Pensions are a form of retirement fund, which are subject to tax relief by the government. The rules around pensions are incredibly complex and subject to change by governments in future, but the basic idea is that you can't access the money until later life.

For basic rate taxpayers, for every pound you pay in, the government will pay 25p into your pension.

But this isn't the whole picture, because when you come to claim the pension later in life, it will be classed as income, and you will be charged tax on it. Quite what this means depends on exactly how much you're claiming and your other income, but, generally, you'll be paying less in tax than you claimed in tax relief, so it's a net positive for you (but probably not 25%).

Workplace Pensions

Most people in the UK are now required by law to be offered a workplace pension by their employer, and the employer must pay 3% of your salary into it as long as you agree to pay 5% (or, more accurately, the total value must be 8%, of which at least 3 percentage points must be paid by the employer).

What this means is both easy and hard to summarise here.

Firstly, it means that you're getting 3% of your salary as free money, so you should absolutely pay in the minimum required to get your employer's contribution. That's the easy bit.

Beyond that, it depends on your pension provider and their options, which is controlled by your employer. For example, my previous employer offered a People's Pension workplace pension. PP accounts have a 0.5% annual charge on them, which means that every year, the pension fund takes 0.5% of your fund's value as payment for managing the fund.

0.5% sounds like a small number when you consider it as an absolute percentage, but when you look at it as a proportion of the likely annual growth, things look less rosy. If you assume your pension will grow by about 5% per year from market conditions, then that 0.5% is a whopping 10 percent of your yearly growth.

Therefore I did not increase my payment into my People's Pension fund beyond the minimum, because I had a self-invested personal pension (SIPP) which was much more attractive.

Self-Invested Personal Pensions (SIPPs)

Self-invested personal pensions are like a workplace pension, except that they don't involve your employer. You just put money in, and the government adds the 25%.

The advantage of a SIPP is that you get full control over the choice of platform and fund, which means that you have more options and may be able to find a better deal than your workplace pension.

It's worth considering platform and fund fees very carefully; fees can easily wipe out a significant percentage of your potential returns on your investment. You could potentially lose out on years' worth of growth by unnecessarily incurring high fees.

ISAs

ISAs are investment accounts that protect you from having to pay interest on your savings interest. In the age of ultra low interest rates, this isn't really a concern for many people, but even cash ISAs are still worth considering, because, you never know, maybe one day interest rates will go up, or you might inherit money, and you find yourself paying tax on interest (which is usually taxed via PAYE income - which means the bottom line on your payslip goes down. Very frustrating!). It's best to start building your ISA early, because there are limits on how much you can move into an ISA per year. Currently this is a very generous £20,000 per year, but only a few years ago it was nearer to £5000. Governments can and almost certainly will change this in future.

Money inside an ISA is likely to be a long term investment, but, unlike pensions, there are no inherent restrictions on withdrawing money from an ISA (though the exact account you have may have restrictions or notice periods).

Cash ISAs

Cash ISAs are similar to cash savings accounts. In my opinion, with interest rates so low there is little reason to invest in a cash ISA over a Stocks and Shares ISA, except as a way of holding stable cash versus potentially volatile stock.

Stocks and Shares (S&S) ISAs

Stocks and Shares ISAs are an easy way into the stock market. The mechanism is similar to how SIPPs in as much as you choose a platform and fund, and the same considerations as to fees applies here too. As with pensions, investments in the stock market generally work best as long term investments. The common strategy is to feed money from income into the fund regularly (e.g. monthly) rather than waiting and depositing a larger sum infrequently.

Lifetime ISAs

The Lifetime ISA is available to people between the ages of 18 and 39, although you can continue paying into it until your 50th birthday.

Up to £4000 per year, for every pound you put in, the government will add 25p. This sounds very similar to a pension, but the money is tax free when you come to claim it. The Lifetime ISA is therefore better than a SIPP.

Lifetime ISAs can be either cash or stocks and shares.

Conclusion and priorities

This was a very superficial overview of the more obvious options available for the investor who wants to see their savings begin to work for them.

A basic strategy for saving and investment could look like this:

1. Take the 5% workplace pension (for the free 3% employer contribution)
2. Put £4000 (if possible) per year into the lifetime ISA (for an immediate £1000 return from the government) in a stocks and shares account
3. A small amount of money goes into easy-access cash savings accounts (or ISAs, if you can find an easy access account), for easy access should you need it
4. The remainder of (unspent) income goes roughly evenly between a S&S ISA and a SIPP, as this diversifies you against pension and ISA tax regulations that may potentially change against your favour in future.

Why did I pay off my student loan early?

The advice for choosing whether to pay off a student loan early is confusing, because it depends on your personal situation as well as the exact loan you have. Pre-2006 loans are different to 2006-2012 loans, which are very different from post-2012 loans.

Personally for me, the choice is easy:

• Over the course of my life, I will pay back my pre-2006 loan in full.
• My plan 1 loan has an interest rate of 1.75%.
• I have money sat in savings accounts accruing interest at rates of less than 1.75%
• I am paying tax on my interest from savings, so my return rate is actually less than the advertised rate.

So essentially I'm being taxed twice. Once on my income in the form of a student loan, and again on my savings. Therefore I can reduce my tax rate by paying off the loan.

Should you pay off your loan early?

Not necessari[...]]]> I have just paid off my student loan early.

Why did I pay off my student loan early?

The advice for choosing whether to pay off a student loan early is confusing, because it depends on your personal situation as well as the exact loan you have. Pre-2006 loans are different to 2006-2012 loans, which are very different from post-2012 loans.

Personally for me, the choice is easy:

• Over the course of my life, I will pay back my pre-2006 loan in full.
• My plan 1 loan has an interest rate of 1.75%.
• I have money sat in savings accounts accruing interest at rates of less than 1.75%
• I am paying tax on my interest from savings, so my return rate is actually less than the advertised rate.

So essentially I'm being taxed twice. Once on my income in the form of a student loan, and again on my savings. Therefore I can reduce my tax rate by paying off the loan.

Should you pay off your loan early?

Not necessarily, and quite likely no.

The student loan is quite unusual as far as debt goes in that it's quite cheap (the interest rate is low), and, depending on your exact loan, it may get written off after a period of time.

The newer loans (2012 onwards) are not designed to be paid off for most people, and effectively act as more of a graduate tax rather than a debt. For many people, it may be more expensive to pay them off early than to simply accept the higher tax rate.

For loans between 2006 and 2012, the choice is more dependent upon your personal situation. If you are earning a lot and have spare cash, it probably makes sense to clear your student debt, unless you have other more expensive debts (like credit card debt), which you should clear first.

It's a complex situation with many variables, and to run through all the considerations would take some time.

Martin Lewis has some discussion on the matter, though it's not exhaustive.

How do you do it?

Unfortunately, you have to phone up the Student Loans Company to request a settlement figure. They won't necessarily have an up to date account of your balance, because they don't receive PAYE deductions directly - it goes through HMRC, and there may be a delay in the SLC receiving the information from HMRC.

You will need:

• Your Customer Reference Number
• Your "secret question" answer
• Any recent payslips - potentially up to the last 12 months - to advise them of any payments since they were last informed by HRMC.

Contact information is on the gov.uk website

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