The content of this blog is intended to be used and must be used for informational purposes only. It is very important to do your own analysis based on your personal circumstances before making any decision or investment. You should take independent financial advice from a professional or independently research and verify any information that you find.
I have been wanting to look into retirement savings and pensions for a long time. Initially I was only planning to do some very basic reading to familiarise myself with this topic, hopefully to take better decisions and make arrangements for my own future. However, after a quick survey among my colleagues that revealed many are not sure where to start, I decided to gather my research in this blog post.
Before we properly dive into exploring many available options, here are some of personal details that will affect a potential retirement plan:
- Employment status (employed / self-employed)
- Debts (mortgage, student loan, overdraft, other loans)
- Country of residence
- Owning vs renting a property
A few words about the above and why they matter.
Employment status: some options may not be available depending whether you are employed or self employed.
Debts: for a better picture of how your finance may look like when you retire you need to be aware of any loans you may still be paying.
Country of residence: I will be looking at the British system, as I assume I will be here for some more years to come. I hope my citizenship (I am a Polish and EEA national) will not be something I will have to take into account, but with Brexit looming around the corner I will definitely keep any eye on possible changes in the pension system that could affect me.
Owning vs renting a property: accommodation is usually one of the biggest expenses in any personal/family budget, and the decisions you make now will have big impact on your financial well-being for decades.
As they say “change is the only constant”. Even if you are not quite sure how your career will look like, where will you live or in which country most-of-the-rest of your professional life will take place, go and start with what you have and where you are now. Your age is one of the most powerful factors in this equation: firstly, this is the only one you cannot change; secondly – the earlier you start the more you can do, while the later you begin the less risk you can afford to take.
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Now for a brief overview of available options:
- State pension
- Private pension
- Savings accounts
- Investing in goods (antiques, precious metals, art, vintage cars, wines…)
- Investing in musical instruments
- Buying and investing in properties
- Investing in stocks and shares
- Intellectual property (compositions, arrangements, recordings and CD’s, Spotify, etc)
This list is non-exhaustive and, as you will see while reading further, some of the items on the list may cross boundaries between themselves: for example you can invest in stocks and shares (7) as part of your private pension (2) or savings account (3).
1. State pension
For those born after 6th April 1953 (women) and 6th April 1951 (men) the rules of the so called “new State Pension” apply. How much can you hope to receive? Let’s imagine that you are about to retire right now (September 2018) and that you have worked and paid your National Insurance contributions (when you’re self employed you pay this as part of your taxes through Self Assessment) for at least 35 years. Under these conditions, the amount you would receive per week would be £164.35 (about £714 per month), which is the full amount of state pension.
Depending on whether you have made any National Insurance contributions before 6th April 2016, your pension will be calculated slightly differently, but generally speaking it will be a proportion of the number of years when you will have contributed.
To request your pension statement you can either do it online at the UK Government website, or call the Future Pension Centre helpline: 08007320175 (free of charge) and after listening to some of Vivaldi’s Four Seasons you will be able to request a statement to be sent to you by post.
2. Private pension
Some of the terminology used here can be rather confusing – I hope you’ve got your cup of coffee nearby as you are in for a longer read. Below you will see some of the most commonly used terms you may find, starting with (surprise!):
Private pension: this term encompasses all types of pensions other that state pension. Quoting gov.uk: “private pension schemes are ways for you or your employer to save money for later in your life”
There are two main types of private pensions:
Defined benefit pension: this term most often applies to some of the workplace pensions (see later) which take this form. They are also known as ‘final salary’ or ‘career average’ pension schemes. Your pension depends on the scheme’s rules (often calculated based on the number of years you worked and your salary), not on your contributions or investments.
Defined contribution pension: your pension pot depends on how much is paid in. Contributions may either come only from you (which will be the case for people who are solely self-employed), or from you and your employer (if you are employed, or partially employed). Depending on the scheme you are in, the money is usually put into investments and you may have a say in how it is invested. Sometimes these schemes can also be known as ‘money purchase’ pension schemes.
There are two main types of defined contribution (DC) pension schemes that I will explain nearer the end of this section: Stakeholder pensions and Self-invested personal pensions (SIPPs)
Reading further, you may also see some of the following terms:
Workplace pension: all employers must provide a pension scheme to their employees, and you will be automatically enrolled if:
(i) you are classified as “worker”,
(ii) are aged between 22 but have not reached your pension age yet (for women born in 1987 it is currently 68 years), and
(iii) earn at least £10,000 per year.
It may happen that you fall under this type of scheme even if you are self employed, for example if you are employed as a visiting music teacher or a member of peripatetic staff at a school (rather than working for them as a self employed teacher and issuing invoices for the lessons that you teach)*.
Personal pension: this term is often used interchangeably with defined contribution pension. Some sources treat it as only one of the forms a defined contribution pension can take, and in this case it may be also known as ordinary personal pension. Other sources use the term “personal pension” when they mean “pension that you arrange for yourself” as opposed to the “workplace pension” where your employer offers you to join a pension scheme arranged by them. However you may also stumble upon the information stating that “some employers offer personal pensions as workplace pensions” (after gov.uk). Used in this context, the term “personal pensions” would mean a group personal pension.
Group personal pension: also known as GPP. It is a type of defined contribution pension and workplace pension. Your employer chooses a pension scheme provider for you, but you will still be signing a contract individually with this provider.
NEST (National Employment Savings Trust): since 2008 all employers are obliged by law to provide a workplace pension scheme for their employees. NEST is a pension scheme set up by the government in order to help smaller companies meet that obligation and is run on a not-for-profit basis. Anyone (including self-employed) can join. As in a stakeholder pension scheme (below), you may put your money in their default fund or choose from the range of available funds.
Stakeholder pension: it is one of the two main types of defined contribution pension schemes. If you would like your retirement savings to earn some interest and hopefully not only get ahead of inflation but also give you a decent return, your money needs to work very hard (so later in life you won’t have to). A stakeholder pension may be a solution if you would prefer the pension scheme provider to invest the money on your behalf.
When you join a stakeholder pension scheme, your money would normally go the their default investment fund. Then it will be invested in a variety of stocks, shares and other assets that the pension provider deems best at any given moment.
The default fund offers some gains, but also some risk of loss. Depending on your preference, you may choose from other funds. Each stakeholder will offer you a different set of options, but usually there will be a higher-risk fund which is meant to give you a chance for higher returns (however with higher risk), as well as a lower-risk fund if safety of your capital is of higher importance to you than potentially higher, yet risky gains.
A stakeholder pension scheme must meet certain standards set by a government, such as limited charges, flexible contributions, low minimum contributions, charge-free transfer. Each scheme also must offer a default investment fund where your money will be put into if you do not make any other decisions regarding investing them.
Self-invested personal pensions (SIPPs): the second on of the two main kinds of defined contribution pension schemes. This scheme is aimed towards people who would like to have more flexibility and control over how their money is invested. There is no default investment fund here, and you personally decide which assets you would like to invest in. These schemes may also have higher charges than stakeholder pensions. Taking all these into account, they tend to be more suitable for those experienced in investing; however you may also pay for an authorised manager to invest for you. Depending on the SIPP, they may include “unit trusts, investment trusts, government securities, insurance company funds, traded endowment policies, some National Savings and Investment products, deposit accounts with banks and building societies, commercial property (such as offices, shops or factory premises), individual stocks and shares quoted on a recognised UK or overseas stock exchange” (after the Money Advice Service).*After accessing my Teachers’ Pension account, I discovered that the service time is worked out based on the hours worked, and not on the time spent in employment. Therefore after 18 months of teaching once a week, my service time totals 11 days – which means I am not eligible for receiving pension. Therefore I suggest you make some calculations based on the number of hours you teach before the employer puts you on the scheme. It is possible that it is more economical for you to receive your whole salary every month rather then agreeing for pension contributions to be deducted and then having to apply for repayment of the contributions (which is the process I am considering to start now). [edited 24-10-2018]
3. Savings accounts
Low interest rates (oscillating around or even below 1%) on most savings accounts combined with inflation at 2.7% (data from last August) mean that the money put in there is losing its value over time. However, the recently introduced Lifetime ISA (Lifetime Individual Savings Account) may be an interesting option despite its still-below-inflation interest rate, thanks to the 25% bonus paid by the government. With maximum contribution per year set at £4000, for each year when your allowance has been fully used you will receive additional £1000. You may choose from two types of LISA’s: cash LISA’s (which works similarly to a savings account, when you receive a certain rate of – usually low – interest) and investment LISA’s (where your money may perform better, but there is also a risk of loss).
Money in your LISA (your contributions, bonus and any interest) can also be spent on your first property. After the purchase, you can still contribute to the LISA as part of your retirement savings while receiving the bonus.
There are some limitations you should be aware of:
– you can only open a LISA if you are less than 40 years old;
– you can only contribute (and receive the bonus) until you turn 50;
– unless you use the money to buy your first property, you must wait until you’re 60 to withdraw the funds – otherwise you will need to pay penalty charge of 25%
– you can only get the bonus on your contributions: if you choose a Lifetime Stock and Share ISA, your stock and share growth/loss will not affect the bonus.
Important: unlike pension schemes, savings in a LISA affect your benefit entitlement. If, for example, you became unemployed you may need to withdraw your LISA savings (and pay the 25% withdrawal charge) before you’d be eligible to claim some means-tested benefits. In effect you’re left with nothing for your retirement – so consider this carefully and always have a plan B.
4. Investing in goods (antiques, precious metals, art, vintage cars, wines…)
You may want to consider not depositing all your money in the banking system. We all remember rather too well the financial crisis of 2008 and we could possibly name another few that happened in the recent decades. Investing in goods is an idea worth considering If you are a keen collector and do not mind parting with your precious objects at some point later in your life. To hope for a good return of your investment you need to have extensive knowledge of what you are investing in, which brings us to the topic of…
5. Investing in musical instruments
“How many harps is too many…?” – that’s one question asked by all partners, spouses, boyfriends/girlfriends and relatives of a harpist. (My husband’s version of this question: “How many more harps to conquer the world?”). The answer is: “never too many!”, as long as you put them to good use – and you can do this long before your retirement.
Many teachers rent out instruments to their students. Having a spare lever harp suitable for a beginner means that you can deal so much easier with the initial enquiries. If a student is keen to start right away and they don’t have a harp, renting through a harp maker may mean being on the waiting list until an instrument becomes available. Some people may be put off by several weeks – and sometimes months – of wait (this also means the same number of weeks/months of potential income from lessons lost to you). Being able to offer them a harp from day 1 (while they wait for another instrument from a manufacturer) means they can start making progress quicker.
Another option (possibly to use later in life) is gradually selling your instruments as you decide to work less or retire from teaching.
One thing worth remembering is that the net worth of the harp may not necessarily grow a lot over the years, while we always have our old friend – inflation – with us. Therefore it is worth considering adjusting the rental fees in line with CPI (Consumer Price Index). The annual percentage change in CPI is used as a measure of inflation. Therefore, increasing/decreasing your fees in line with CPI ensures (at least in theory) that the net worth of the money you receive remains constant from one year to another, despite the numerical value of your fees going up/down.
6. Buying and investing in properties
Buying a property does not always work out cheaper than renting, especially if you were to get a mortgage (as opposed to being a cash buyer). It depends on the area where you would like to live in and its ratio of rents to house prices, the length of the mortgage and many other factors. You should carefully consider all these before making the huge commitment of taking out a mortgage and buying a property, as this will affect your finances for many years.
Buying your first property (which is likely to become your home and main place of residence) is not really an investment. However if you manage to pay off its cost completely before you retire, it may mean lower expenses later in your life (remember you will still be liable to maintenance costs).
Acquiring another property and renting it may bring you some income, especially if you choose to increase the rent in line with the CPI (Consumer Prices Index).
7. Investing in stocks and shares
If you are not too sure about parting with your hard-earned money and handing them over to the staff of a pension fund, perhaps you should start learning about investing yourself. After all, who is the person with the most incentive to make your retirement savings grow?
Investing is a vast topic, and one where learning from your mistakes may cost your dearly. Therefore, you want to make sure that you are prepared and that you have all the skills and resources that you will need.
If you speak Polish, I highly recommend you familiarising yourself with a brilliant post about preparing for investing written by financial blogger Michał Szafrański (as well as the rest of his blog). For English speakers I gathered some of the most important questions he recommends you ask yourself before investing:Do you know how much you earn and spend each month?
How much do you earn on average each month? (With irregular income, you may take your annual earnings from last year Self Assesment and divide by 12.) How much do you need to spend each month? If you have any bills to cover less frequently (eg. car insurance paid annually), take the latest receipt, divide by 12 and add to the rest. Is your income higher than your expenses? Do you know how much money you will have left after paying for everything you need to pay?
If your answer to either of these is “no” – you shouldn’t start investing. Do you have any savings at all? Do you have at least £1000 put aside for any unexpected expenses?
Again, if your answer is no – don’t start investing. Start saving little by little until you have at least this small “emergency fund” on the side. Do you have enough savings to be able to live without your regular income for 3-6 months?
After building your emergency fund – this will be your next task. Have you got any unpaid debts? Mortgage may be an exception (depending on your conditions).
You shouldn’t start investing until these are all paid. If you can pay them off on time or earlier than initially agreed with the lender – this may be one of the best things to invest in. Do you feel secure with the amount of money you have at the moment?
This depends on your individual situation and feelings. Some people feel fine with only very basic savings, others will never get this feeling regardless of the numbers on their account. If you belong to this second group – perhaps you should not start investing.
Paying off your debts and building savings funds may take some time. The best use of this time will be to start learning about investing and doing as much reading as you possibly can.
Some websites and apps offer free demo versions of investing accounts – they will almost never give you the accurate results, but you may still want to play with them and learn through experimenting before you decide to make your first investment.
8. Intellectual property (compositions, arrangements, recordings and CD’s, Spotify…)
Even if you are not into composing, I am 99% sure that you have already either arranged song requests for weddings or pieces for your students. Why not putting them out there for other harpists to buy and use? Nowadays you don’t have to publish a physical copy of music and you can start from as little as putting that one-page arrangement online. There’s no limit to how many people will buy your piece, and you only have to do the work once to keep benefiting from it, which makes it a great example of scalable income (and you should definitely read more about the latter).
9. Bonus! The best possible investment for you…
…is YOU. Regardless of interest rates, inflation, any financial crisis or (however unlikely) war or natural disasters – you will always have access to the skills you have learnt.
Some ideas to get you started on the skills you may want to acquire:
– new language
– CPR (cardiopulmonary resuscitation)
– basic home repairs
– basic car repairs
– photography, and
– picture editing
– …anything else you find interesting and fun!
Which brings me onto the subject of your health and well-being. Especially for us, musicians, these aspects matter SO MUCH, as they are what keeps us going in. Personally, I find these three crucial:Mindfulness; Physical activity – for me it’s yoga, running and cycling, but find a sport that you love and it will keep you entertained for a long time! Time off from work – time for hobby, time to socialise, time to go on holiday.
You made it to the end of this article – well done!
As you can see, it is a vast topic and there are many aspects worth exploring when considering your retirement. The I-have-no-idea-where-to-start feeling can be rather overwhelming! Baby steps method here will be as helpful as with any other big project, so try to think of one thing you can do right now to understand your options better.
I can tell you that my homework for the next couple of months is going to be:Request my state pension statement (1) – done. No surprises here – the statement said that I need to work and contribute to National Insurance for 32 more years to be entitled for the state pension. Find out more about the workplace pension scheme (2) at all the places where I used to be employed, including the conditions on withdrawing the money – done. I will also update any personal details that they may need to get in touch with me – done. Reading more about savings accounts and LISA’s (3) and finding the best way to organise both my “safety net” and any future savings – done. I’ve decided agains using a LISA as a mean of saving for my retirement. Instead, I set up a pensions scheme with NEST (2). Keep saving (3). My goal for now will be to have 3 month worth of my monthly expenses; then increase this financial “safety net” to 6, and later hopefully to 12 months worth of savings. Sell one of my harps – done; then upgrade (5). Read more about investing (7), and I will start from Benjamin Graham’s The Intelligent Investor. Find out how to put online the few arrangements of songs I have done so far and make them available to buy (8) – done! You can buy my first arrangement here. Keep running! (9)
How about you? I would love to know:
1) Which of the 9 options you will start exploring first?
2) What is one thing you can do today to improve your retirement prospects?
Let me know in the comments!