Transcript: I want to save for my long-term future, what should I do?

This is an audio transcript of the Money Clinic podcast episode: ‘I want to save for my long-term future, what should I do?’

Claer Barrett
Hi, it’s Claer here. You’re used to hearing me on Money Clinic, but now you can find me in your inbox, teaching you everything you need to know about money with my new Sort Your Financial Life Out course. Over six weeks, I’ll help you to make smarter money decisions with tips on budgeting, tax breaks, property, pay rises and investing. In short, everything you wanted to know about managing your money, but were far too busy to ask. To find out more and sign up for the course, visit ft.com/moneycourse. That’s ft.com/moneycourse.

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Niamh
If I can make really good decisions now, I could potentially save myself some pain in 30 years’ time. And I would like to do that if I can.

Claer Barrett
Niamh may only be 24, but she’s trying to make a financial plan that will take care of future Niamh in decades to come. But choosing the right pension fund or investment account is not easy.

Niamh
I think I’m very overwhelmed by all the different options.

Claer Barrett
Niamh’s even wondering: should she choose a few different savings pots?

Niamh
Do I kind of put my eggs in all the baskets and maybe put a little bit everywhere and see what happens?

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Claer Barrett
Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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Coming up in today’s episode: we will be discussing how to invest for your long-term future. Something that almost all of our listeners will one day be trying to plan for. So if you wanted to start locking away some money hacks efficiently for when you retire or that rainy day in a few years’ or decades’ time, who knows? You may want to buy a super yacht. Be sure that is not an investment recommendation. Then this is the episode for you. We will be discussing everything from pension funds to the lifetime Isa, to index investments and everything in between. And I’m joined in the studio by our superstar financial experts. Holly Mackay, the founder of Boring Money. But Holly, you don’t actually think that money is boring.

Holly Mackay
Well, we’ll get onto this, Claer. I think good investing probably should be boring. It was a bit of a joke though. Hopefully my company isn’t that boring if you read our stuff.

Claer Barrett
Well, you’re certainly not. My second guest is Michael Martin, the founder of Cannizaro, the financial planning firm. Hi, Michael.

Michael Martin
Yes. Thank you. Cannizaro is a business I set up in 2022, totally authorised by the Financial Conduct Authority. And it’s, you know, just exciting to be able to give clients independent, agnostic advice on anything they wish.

Claer Barrett
Well, Holly and Michael will be sharing their pearls of wisdom in just a few minutes. But first, let’s hear more from Niamh. Now, as you’ll hear, she’s in a pretty good position financially for somebody of her age. But what she needs our help with is trying to choose the right place to invest her money for the long term. And I think we could all do a bit of a refresher on the different options. She caught up with our producer, Persis Love, speaking from her home in south Wales.

Persis Love
Do you wanna introduce yourself?

Niamh
Hi, I’m Niamh. I’m 24 and I’m an economist in the civil service.

Claer Barrett
Niamh is one year into her first graduate job and she’s in a strong financial position. She’s just got her foot on the property ladder.

Niamh
So I just bought a house with my partner, so we’re waiting to move into that. I have been set up really well by my parents, who just put a little bit away for me since I was born. So I’m now in a position where I can start thinking about how I’m going to use my income the best way to make the most out of the situation that I’ve been given. I am looking to see where I should be putting kind of extra money.

Persis Love
And what is your goal for this money?

Niamh
It’s for the long, long term. So I’m thinking about, do I want to access it earlier than the rest of my pension? But it is a . . . It’s certainly a long-term goal or working towards that long-term goal.

Claer Barrett
Niamh doesn’t have a specific amount of money in mind that she’s aiming for with her long-term investing plan, but her idea is just to skim it off her salary each month.

Niamh
What I would like to do is potentially put up to like 10 per cent of my monthly income, hold that part for the future. This 10 per cent number, for example, goes into whatever it goes into, and I pretend like I never had it in the first place, and then any extra savings that need to be done will be taken out of the income that me and my partner have elsewhere.

Claer Barrett
Niamh has a lifetime Isa or Lisa, which she opened to help save for a deposit on a house. Now that she’s achieved her property goal, she’s been wondering if that Lisa could come in handy for her long-term savings goals too.

Niamh
And now that I can no longer use that for a deposit, I’m thinking, is it the right move to continue using that for retirement? And then I did a little bit of research, and it turns out that it feels like there are loads of options. So I feel like I’ve got, like, five options.

Persis Love
What have you identified as those options?

Niamh
So I think I can pay extra on my mortgage. So I can overpay my mortgage. I can put it into the Lisa to the value of 4,000. And to get the 25 per cent, I can invest it in something like a retirement fund. Like an index that’s specifically for my age group. And I can put it into a private pension, or I can put it into my additional voluntary scheme, contribution scheme at my employment currently.

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Claer Barrett
So what would Niamh like to ask our experts?

Niamh
My main question is: at the age of 24, having just bought my first house, what should I be doing to best prepare for the long-term future in terms of my retirement? And I would like to know what you feel is the best option to give me the best success right where I am currently.

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Claer Barrett
OK, so Holly and Michael are here with me in the studio to throw in their two pence worth on what’s the best way for Niamh to start contributing towards her long-term investment goals. Holly, I’ll start with you. Just overall, what did you make of what Niamh had to save?

Holly Mackay
I’ve got a bit of an inferiority complex here. She’s very organised.

Claer Barrett
She’s very on it. Isn’t she? 

Holly Mackay
. . . and really on it. I think she’s outlined the main options really clearly. One thing I’d say is I don’t think she has to make it. It’s not one is the right answer and all the other options aren’t. I think it’s some sort of a blend, which I can sort of come on and talk to. I think the two things I think about when I’m making decisions like this, I call them the two T’s. It’s timeframes and tax. I’m assuming, because she’s 24, maybe I’m going to get even more of an inferiority complex, that she’s a basic rate taxpayer. That won’t be true for everyone, but I’ll assume that.

Claer Barrett
So earning less than £50,000. Basic rate. More than that would make you a higher-rate . . . 

Holly Mackay
 . . . a higher rate taxpayer. The reason I say that, Claer, is pensions get more appealing for higher-rate taxpayers, which we can talk about later. So as a rule of thumb I think what needs looking for is a balance of flexibility today. Because she is just 24 and life doesn’t always go to script. Retirement is a long way away. So the downside of locking it away into a pension is a lack of flexibility. But you do get juicy tax perks. So as a long-term accumulation vehicle, I think it’s probably better than anything out there. So I would say I’d look at a balance and a blend between the pension, but something like an Isa, which is shorter term and more flexible.

Claer Barrett
Brilliant. So Michael, for Holly it’s all about the blend. What does she have to think? 

Michael Martin
To sort of echo what Holly said, I would agree. My sort of view on pensions and Isas are that they’re the yin and yang of investment . . . of the investment world. Isas, the best thing about Isas is you can get your hands on your money. The worst thing about Isas is you can get your hands on your money.

Claer Barrett
Why do you say that?

Michael Martin
Because temptation. It can be temptation. And if you give someone temptation to get your hands on your money, it’s quite tricky. Pensions: the worst thing about pensions is you can’t get hands on your money. The best thing about pensions is you can’t get your hands on your money. So you can’t access it. It’s tied away. It’s long term. And that’s the thing. Isas: you can access, but it’s a temptation. Niamh is 24, and the best thing she has on her side is compound interest.

Claer Barrett
Explain to us what that means.

Michael Martin
And compound interest is the eighth wonder of the world, to quote Einstein, which is if you invest, your money grows, and then next year you get growth on your growth and you get growth on your money. In the third year, you have growth on your money, on your growth and your growth, and it keeps on going.

Claer Barrett
I mean, and this is an important point to make for people who are listening and have that inferiority complex of saying, well, I’m not as on it as Niamh, even if you have only got small amounts of money to throw in, and even if you’re only doing that through your auto enrolment pension in your workplace, the younger you start, the better.

Holly Mackay
I think for someone in their 20s, I think we have to be very realistic about how many people in their 20s can afford to set away these chunks of money till they’re 60, till they’re 70. I think the best thing that everybody can do, though, is to get the habit. So to open up a pension and you can set something up with £100 and just leave it. But at least then you’ve taken that first step and you have a pension.

Claer Barrett
Right. We’re going to run through those five options Neamh has identified in detail now. Now we’re going to start with a lifetime Isa or Lisa. Holly, could you explain to our listeners in a nutshell what one is. It’s been in the news a lot recently.

Holly Mackay
A lifetime Isa is basically an account. You have to be under 40 to set one up, and you can only use it to do one of two things: either that’s buy your first property or use it to fund your retirement. Now, the juicy bit, Claer, about an Isa is we get a government bonus, we get a government top-up. So for every £4 we pay in to a lifetime Isa, we get an extra pound from the government. So we can get up to £1,000 a year in a little (inaudible) bonus back from the government, which is nice. The downside about this is you have to be really sure you’re going to buy a property, or really sure you can set the money aside for retirement, because if you want to get your hands on that cash earlier, they clobber you with some hefty penalty fees.

Claer Barrett
And also the cap on the value of the property you can buy: £450,000. When we mentioned this on many shows previously, it’s caught people out. Lots of pressure on the Chancellor ahead of the budget in March to do something about that. Now, of course, she’s used her lifetime Isa to buy the house, but she’s still got the account. Now, technically she could still use that to invest money into. You can either do cash or stocks and shares in your lifetime Isa, just like an adult Isa account, you’ve got those two options. If she were going to continue to use it to invest and get that 25 per cent top-up, what would the pros and cons be to doing that?

Michael Martin
Well, the disadvantage is she’s 24, so she’s got to wait 36 years until she can get her hands on the money. You know, I’ve been thinking about this over the last couple of days. I just find the penalty quite annoying. This is literally a penalty. Say, do not do this. If you do this, we’ll take 25 per cent of everything you come up. That just doesn’t sit well with me. For some reason, I’ve never particularly liked that, the absolute rigid nature of it.

Claer Barrett
But there’s a big group of people who don’t tend to start pensions until much, much later in life. And that’s the self-employed. Now, if you’re self-employed and listening to the podcast and you’re under 40, the lifetime Isa could be a really great vehicle for you to use, like a pension.

Holly Mackay
You’re right, Claer. I mean, I used to be self-employed and I was guilty. It was mostly just the admin. I had to set up the pension and do all the research, and it was just another thing on the to-do list. I think in a lifetime Isa, it was particularly compelling for the self-employed, because it gives them two things that you can do with the money. They’re getting that government bonus as well, and they can use it for retirement, but they can use it for something sort of more immediate, like buying a property if they need to. So I think it’s particularly interesting for the self-employed.

Claer Barrett
And final tip on the lifetime Isa: although you have to be under the age of 40 to open one, you can still pay in up to the age of 50. So if you’re 39, get on with it. Open one up for a quid to just leave open the option.

Holly Mackay
For a quid, yeah. 

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Claer Barrett
OK, so we come on to overpaying the mortgage. Now, lots of listeners in isolation are thinking about overpaying the mortgage at the moment, because we’ve seen rates really shoot up in the past two years. They might be looking like they’re coming down a bit now, but nevertheless, people are still anxious to get the home loan paid off. What are the pros and cons to this?

Holly Mackay
I think it’s very dependent clearly, Claer, on what someone’s current deal is. So I was looking, I’ve got a fix that’s got about another year or so left to go, and then I’m probably in a world of pain, but for another year I’m on an incredibly low rate, so why would I overpay that? I’m getting sort of very cheap interest rate on borrowing that. I do think in the UK we have a particular emotional attachment to overpaying the mortgage. I know when I was sort of growing up, it was something my parents always instilled in me as good financial behaviour. But debt is a bit like fat, you have good fats and you have bad fats, and I tend to think of mortgage payments as more, you know, the avocado fat rather than the bowl of chips fat.

Claer Barrett
A great New Year analogy.

Holly Mackay
It depends very much on what Niamh’s current rate is. But I think sometimes we tend to overestimate sort of the financial wisdom of overpaying a mortgage above and beyond other longer-term savings vehicles like the pensions we’ve mentioned, which have such great tax reliefs, they’ve become incredibly compelling. At the end of the day, people have to sit down and look at the rate they’re paying and make their own individual call on that.

Claer Barrett
And of course, you can use mortgage calculators online that will tell you how many years you could shave off the mortgage if you were to overpay and what the potential interest rate savings could be.

Michael Martin
Yes, exactly. I’m going to disagree with you on this one, Holly. I would say if you do only have like 18 months left in anyone’s term, then no, don’t overpay it but put it into a bank account, which will probably keep giving you about 5 per cent even net of tax. It will give you a beneficial rate. Keep that money in cash for when your fixed rate comes to an end and then repay it. And that will hopefully be able to give you a larger loan to value, which will mean you may have a better rate. End of the world is the world, I would rather pay off my mortgage (inaudible).  I’ve always liked people paying off mortgages, to be honest. And I know it might be because I’m Scottish (inaudible). I don’t . . . to me it feels like you’re borrowing to invest, which I would just rather people pay down their mortgage or got a mortgage on to a point where it was no longer something they thought about. And whatever level that is, that’s absolutely fine. And it’s different levels for different people, but it’s just to a level where it’s just think, no matter what happens, I can now pay that and I’ve got no risk and I’ve got no, it will not keep me up at night. So it’d be interesting to see what Niamh’s sort of hurdle rate for that is. But this is probably not going to be her last house. She’s 24. It’s her first house. 

Claer Barrett
Very good point.

Michael Martin
It’s very unlikely to be her last house unless the help her parents gave her was incredible. And therefore when she goes for her next house, if she’s paid down her mortgage, the jump won’t be quite as large.

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Claer Barrett
OK. So we’re going to move on now and talk about stocks and shares Isas. So we’ve already mentioned, these are much more flexible. The money that you put in, you can take out at any time you like. Both the best and worst feature as Michael just said. But a popular investment that many people choose to put in to a stocks and shares Isa are index funds. Now, Holly, why would you say index funds are so attractive to so many investors?

Holly Mackay
They remove a lot of the faff and the headache, I think, Claer. I think index funds are a bit like you know, they do the job of a playlist on Spotify. You don’t have to go through and sort of try and pick out the songs that you like. Someone else does it for you. You just sort of buy the average. So for me, they’re are really easy way with one purchase decision to get access to tons of investment, sort of around the world. So they’re simple, they’re cheap, they’re easy to manage. So I think they’re a really compelling way for people who perhaps don’t have the time and the energy or the confidence to get into the sort of weeds of investment markets. And so you can just buy something like, say, I’d like access to a global part of the world’s biggest companies, please. And you can do that by buying a single index fund.

Claer Barrett
Now, in terms of getting the balance, the blend right of her investments, Michael, if she was going to make regular investments into an Isa, perhaps in an index fund, is that the kind of strategy that could work out for her in the long term?

Michael Martin
I think so. The thing about — I’m going to be full of clichés — but pound cost averaging, which is paying money into a regular investment is also a fantastic thing to do. And actually you can then sort of ignore what daily markets do and what monthly markets do, because as she’s 24, though, as the market rises, she’ll be buying on the way up. But as it comes down she’ll be buying on the way down and over a 20- or 30-year period, that would be a great way to invest. She will have smoothed her investment and it’s called pound cost averaging because you’re averaging in the money. It’s a great way for her to invest so she can invest in sort of a cheap investment that’s quite straightforward. That would be up to you.

Claer Barrett
You’re not going to beat the market with a passive fund, you’re only going to do as well as the market does. But the key for me is the consistency. More years than not, you’re likely to get the market’s return. And that return, historically, has been positive. But if you go for a more expensive fund where an active fund manager picks stocks for you, they’re less likely to have that consistency of performance.

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Now next I’m going to move the conversation on to workplace pensions. Now, Holly, we both do a lot of financial events and there was one that we did for ladies a long time ago, and I remember you and me challenging the audience to put up their hand if they would describe themselves as an investor. And very few people put up their hands. And then we asked people to put up their hands if they had a workplace pension, then of course, everyone put up their hands, which is why I think they’re often overlooked as an investment vehicle, because people get distracted by thoughts of trading the Magnificent Seven, of Isas, of Lisas. But actually, as a first port of call, the workplace pension could be well worth looking at.

Holly Mackay
I think the main question we should ask about a workplace pension is, there’s a certain amount by law the employer has to pay in. What I think you really want to know is something called matching.

Claer Barrett
Do they offer extra?

Holly Mackay
Yeah. To get extra-wonga. So I think the thing you have to do is phone up HR, whoever looks after your pension.

Claer Barrett
Or ask somebody like me in the office who probably knows about the workplace pension.

Holly Mackay
Find your pension buddy. And say, is there matching here? By which I mean we can say if I pay extra 1 per cent of my salary into my pension pot, will you guys match that? If they do, suddenly that workplace pension becomes a really compelling savings vehicle because it’s like getting a 1 per cent pay rise if they say they will match that extra 1 per cent from you with a 1 per cent from them. If they have that, I think it’s very difficult to beat your workplace pension as a vehicle for saving. If they don’t offer that, then I think there are likely to be private pensions out there which are probably better, will certainly have better apps, features, functionality, sort of learning and content. So I think you’ve got to get your head around if I pay and are there extra contributions coming. If yes, it can be a no-brainer, Claer. It’s free money. If there aren’t, then I think private pensions can offer better solutions.

Claer Barrett
OK. So we’ll come on to private pensions in a minute. But Michael, just sticking with pensions in general, other than any extra top-up that you might be able to get from your employer, the other massive attraction for pensions is tax relief. Now, I’ve explained this in the FT’s How to Sort Your Life Out financial course: if you’re receiving a pound in your pay packet, income tax and national insurance is going to come off that pound. So you’ll be left with, you know, maybe, as little as £0.58 in the pound. If you’re paying that money into your pension, it goes in tax-free and it can grow tax-free. That’s the real magic of tax relief. But it’s quite difficult for people, especially younger people like Neamh, to get their heads around why it could be so valuable to them over time.

Michael Martin
I agree, and it’s free money that the government is giving us. And this is the thing: the government doesn’t give us many things. What it does give us, you should try and take advantage of. You should try and use your Isa allowance. You should try and use your pension allowance. You should try and use a dividend allowance, you should try and use your capital gains tax allowance because there’s not many things up for grabs. But I think most people would be thinking, I’d quite like a get-rich-quick scheme as opposed to a get-rich-very-very-slow scheme, which is a pension. But you will get rich for good pension contributions. But you might not get rich in a get-rich scheme.

Claer Barrett
So again, the message is very clear: if you don’t understand what the benefits are of what your own workplace is offering, ask people you work with, speak to HR so you can lay that out, along with all of the other options that you might have for investing your cash.

Now final one, of course, is a private pension. Now, Holly, you mentioned earlier, private pensions, they’re are a doddle set up. You can do it online. You can have an app. For just a pound, you can get a private pension rolling. But what should Neamh consider with that option compared to the others?

Holly Mackay
I think if she’s not getting additional perks or contributions from her employer at work, then it’s worth considering a private pension. I think when people are looking to open these up, you should look at fees and charges. Make sure you’re not paying above the odds. You need to consider as well how confident you feel about investing. If you’re not confident, pick a provider. There are tons out there. We review them all on Boring Money. She can find what’s like an investment equivalent of a ready meal, Claer. So it’s something that’s done for her, made for her. If she actually wants to sort of get a head under the bonnet and make some choices herself, then she should find a provider that offers lots of choice so she can learn as she goes. I think the key message for people is they have got a lot better. The apps are really decent now. Charges have come down and there’s some great options out there. And you can open them, as we said, with really small amounts.

So I think people, even if you’re just putting £50 in one and buying one is the best way to learn. Right, Claer? I never found all those . . . oh, you know, I set up a test portfolio. I never had the time to do that. I could never really be bothered. But you certainly learn when you’ve got skin in the game. It’s a great way to sort of get your head around this. So there’s very little to lose. If you put £50 in, £100 in and just see how it goes for a year or two. I think that’s the best, best advice I’d give to most people in their 20s.

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Claer Barrett
Well, we’ve discussed those five options Neamh laid out on the table as being things that she could potentially do with her surplus cash. I mean, I’d add to that a sixth one: a good high-interest savings account for those curveballs that we could be hit by in life where we need access to money. And as a homeowner she’s going to need money for refurbishments and boilers that break in the future and all kinds of things. But my final question to you both is: how would somebody like Neamh go about looking at all of those options and working out how to get that blend, how to balance money going into different things?

Holly Mackay
I think, Claer, it comes back to timeframes and tax, right? I think for Neamh, certainly looking at what rate she’s paying on her mortgage is critical when it comes to that decision about how much goes to mortgage overpayments. She will need flexibility. She is 24. Life doesn’t follow the script. So I think the Isa is a really appealing vehicle. And I think now sort of a need, unless she’s a higher rate taxpayer, then get started with the pension, but it is a long way off. I think, get started, get the habit.

Claer Barrett
Get comfortable.

Holly Mackay
Yeah. But to my mind, in your 20s it’s looking at that balance between the cash savings you’ve mentioned. Having six months’ worth of salary in a high interest account you can get your mitts on. An Isa for longer term investments and then what does she want to pay off the mortgage.

Claer Barrett
Michael, what would you add?

Michael Martin
So I think she should prioritise what is important for her and her partner over the coming years, and then work out which investment matches each of those. And also to follow on from what Holly said, I’m gonna, I’m going to quote Lennon, the Liverpudlian one: life is what happens when you’re busy making plans. Things happen and things are not always great. So if you’ve got a plan, review it regularly and don’t choose one. Choose six, you know, allocate a little bit of money to them all and you’ll be fine. If you allocate all the money to one, it probably won’t be a terrible decision, but it will be better if you diversify.

Claer Barrett
OK. Well, thank you so much for joining me in the studio today. Holly Mackay from Boring Money.

Holly Mackay
Thank you, Claer.

Claer Barrett
. . . and Michael Martin from Cannizaro.

Michael Martin
Thank you very much.

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Claer Barrett
Well that’s it for Money Clinic this week and we hope you liked what you heard. We’re always looking to chat with people about their money issues on the show. So if like me, if you’re interested in being part of a future episode, then just send us an email. Our address is money@ft.com. You can also take a peek at our website, ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB.

Money Clinic was produced in London by Persis Love, sound design by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music, and Cheryl Brumley is the FT’s global head of audio. And finally, our usual disclaimer. Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.