Healthy finances in 2021: Make your money make sense

Careful financial management and planning can help to make things run more smoothly, no matter what stage of life you’re at. Whether you’ve already retired or are planning ahead for a few years’ time, giving your financial affairs a once-over is never a bad idea. As a throwback to Talk Money Week, which ran from 9 to 13 November last year, we’ve pulled together some useful tips to support you in becoming financially independent and resilient for 2021 and beyond.

The well-being trinity

Most of us have a good understanding of how to look after our physical and mental health, but how often do you consider the health of your finances? The topic of money is often a difficult one to even broach in the first place.

Quite before the coronavirus took hold in early 2020, 12.8 million UK households had less than £1,500 in savings, with some having no savings at all.1 Furthermore, UK citizens aged 65 and over are in the fastest growing age group – by 2050, it’s anticipated that those over 65 will make up 25% of the population.2

Evidently, there’s no better time to take stock of our finances with the future firmly set in our sights. The effects of the pandemic have made us all look at life in a different light, and for many that’s meant reprioritising our finances in response.

Goal-setting

While the prospect of getting on top of your finances might be a daunting one, it’s never too late to make a start. Your first step is to identify your goals for later life, including calculating how much you should look to save for your retirement.

The Pensions and Lifetime Savings Association has developed a set of Retirement Living Standards, with a view to helping people visualise their ideal future lifestyle – it also explains how much is required per year to maintain that lifestyle, broken down into three possible options: minimum, moderate or comfortable. Naturally, any pension savings plan will all depend on how close you are to retirement right now. A good starting point is to look at this by age bracket – if you’re in your 20s, the approach will be very different to that of someone who’s in their 50s.

Even once you’ve established your goals, further hurdles might present themselves along the way, such as the present market volatility due to the pandemic, for example, and so it would pay to have an awareness of the basic principles of investing. Many people might feel that now is not the time for any kind of serious financial planning, until the gravity of the COVID-19 situation has levelled off. Market volatility cannot be predicted or avoided at the best of times, though, and so long-term thinking is more useful than letting the current global crisis cloud your thinking.

And don’t forget that you might just have some money hidden away that had slipped your mind! It’s said that there is almost £20 billion in savings held in lost or dormant UK pensions pots3 – armed with this statistic, it might be an idea to track down your pension funds to consolidate them, particularly if you’ve changed jobs over the years.

Family affairs

Taking care of your own finances is just the start, as those of younger and older family members might need some attention too. It’s wise to start the conversation about savings with your children early on, as the sooner those good habits can be adopted, the better their financial prospects will be.

On a practical level, you can also support your children by investing money on their behalf – this gives them a helping hand and is another way of involving them in thinking about money management and planning ahead. Did you know that you could even start a pension for your child?

Another way that parents and grandparents choose to assist younger family members is to help them get on the housing ladder. So much so, that the ‘Bank of Mum and Dad’ is the UK’s eleventh biggest mortgage lender.4 As with all forms of financial investment in your children’s future, this can nevertheless present its own risks in terms of your own financial security, therefore always speak to a financial adviser when you’re considering offering your help.

However you mean to support the younger generation, remember that the girls in your family are likely to come up against obstacles that won’t affect the boys, such as the gender pay gap, the cost of taking time out of work to raise a family, plus a longer life expectancy. In this respect, it might seem fair for parents to level the playing field by investing more for the female family members.

For those with elderly parents, it can understandably be difficult or feel insensitive to raise the subject of what happens to their finances once they die; however, planning their legacy is crucial, so as to limit uncertainty and disagreements later down the line. In light of coronavirus, many people are more aware of the importance of protecting themselves and their family, and so accounting for any financial risks is another vital factor that comes into the equation.

Some people may find themselves in a ‘sandwich generation’ – in other words, bringing up their own children and caring for their parents at the same time. Especially in the current COVID-19 times, this can cause a lot of financial, emotional and time pressure, so keep the lines of communication open with your family, and find ways to navigate choppy waters.

Hardworking women

The previously mentioned challenges facing females make it all the more pressing for them to save wisely for their retirement. Indeed, women, on the whole, don’t see themselves as investors, even when they have a workplace or personal pension – this mentality needs to change in order to maximise their pensions.

As for priorities, these too can differ between men and women. Two-thirds of women5 believe in the importance of making a positive social impact with their investments, and indeed pensions meet this precise need. With more women breaking the glass ceiling than ever, it is predicted that women will own as much as 60% of UK wealth by 2025.6

Yet even high-earners can end up financially insecure if they don’t keep track of their money, missing out of tax allowances or ending up with a pension pot that does provide them with the lifestyle they desire. Furthermore, women have been more at risk of losing their job or receiving a pay cut during the coronavirus crisis7, so they should ensure they’re still paying enough into their pension.

Keep up the conversation

Many people used to have a somewhat limited, but straightforward, choice when it came to retirement – nowadays there are a lot more decisions to make and scenarios to take into consideration, all with the ultimate aim of making your pension as sustainable as possible.

Making informed decisions about your retirement is all the more significant because life expectancy has increased, and we’re inclined to underestimate how long we’re likely to live. A study by the Institute for Fiscal Studies found that, on average, people in their 50s and 60s miscalculated their chances of survival to age 75 by about 20 percentage points.8

The majority of people continue to invest during retirement, often through drawdown arrangements. Once you’ve retired and start drawing money from your well-earned pension pot, you become subject to a new set of financial risks, such as longevity and inflation risks, sequencing risk and pound-cost ravaging. Moreover, your risk tolerance changes, and so understanding the implications of this and undergoing a financial check is of the utmost importance.

Whatever stage of life you’re at, your Wellesley financial adviser can carry out a financial health and work with you to carefully manage and plan for all of life’s big moments. Get in touch today on 01444 244551 to start feeling financially empowered.

Sources:

1 The Money Charity, The Money Statistics, October 2020
2 ONS, Overview of the UK population, August 2019
3 Pensions Policy Institute, Lost pensions: what’s the scale and impact?, October 2018
4 Legal & General, Bank of Mum and Dad, 2019
5 WealthiHer Report, 2019, 2,500 people surveyed
6 Centre for Economics and Business Research, 2005
7 University of Cambridge, Women bear brunt of coronavirus economic shutdown in UK and US, April 2020
8 Institute for Fiscal Studies, Subjective expectations of survival and economic behaviour, April 2018