Pensions

Pension Prompt


I recently had a conversation with an older friend (he's 26) who told me that he didn't have a pension. This surprised me as naively I just assumed many working people put money each month into a pension. This conversation prompted me to do a quick poll of relatives and friends. I was quite surprised to discover how few people seemed to invest into a pension.


What is a Pension?


Firstly I think I should quickly outline what a pension is. A pension is a means by which you can invest tax-free income that comes out of your gross monthly salary. The pot grows over time as you add to it and gains capital growth. The (simple) end result is that once you have reached the age of 55 you are able to retire from work as you use the pot to buy an annuity which will provide you with an income for life. For more information on annuities, read my previous article on the subject.


Why you should invest into a Pension


There are several reasons to invest into a pension. The first is that the state pension is only £144 per week and you need to be 65 if you are a man or 62 if you are a woman to claim. This is not ideal for someone looking to retire early or to retire on a relatively large salary or both. This is one extremely good reason to invest in a pension.

A second reason to invest in a pension is that the Government encourages you to look after yourselves in retirement. As a result the Government tops up your contributions relative to the amount of tax you pay. If you are a basic rate tax payer and pay 20%, for every £80 you invest into a pension the Government will top up your contribution by £20, paid for out of your tax contribution. Likewise, if you are a higher rate tax payer and pay 40% on your marginal income, then for every £60 that you put into a pension the Government will contribute £40! Think of it as free money. It means that once you invest money into a pension it has already grown in size and that's before any capital gains!

A third excellent reason for investing in a pension is that if you work for a relatively large Company they may have a policy of matching your contribution up until a certain percentage of your gross salary. Just as before this is free money. Do not pass up the opportunity!

My personal pension story so far


I am no expert on pensions - I'm only 23! Most people my age cannot fathom thinking about something so far into the future. It is my goals to become a multimillionaire that drives me to consider these things. It is just one of a portfolio of investments that I intend to have throughout life.

I currently put aside 6% of my gross salary into a pension. That's about £135 per month. My employer generously matches up-to-a 6% contribution so that adds another £135 to my pension. The Government then tops up my contribution by £33.76. After excluding fees my total pension contribution is about £297 per month.

I am young. I have a lot of time ahead of me. I reasoned that I also had plenty of time to make a mistake when it came to the sort of investments that my pension should be allocated in. I've split my pension contribution between 3 different funds. 40% of my pension goes into a standard UK equities-bond split fund. Here, the fund manager divides the money in such a way: 60% into bluechip stocks and 40% into bonds. The other two funds that make up an even split of the remaining 60% of my pension contribution is split between an Emerging Markets equity fund and an Far East equities fund. This clearly makes my portfolio a risky one. I feel that I can mitigate this risk with time on my side and will reduce the amount of risk in about a decades time.


My pension results:


Thusfar, in the 5 months that I have been contributing towards a pension I have put in £675 into my pot from my own money. Through the various forms of topup this has resulted in a contribution of £1,483.9 which has grown in the last 5 months due to the investment vehicles by 4.6% into £1,552.6. It also means that for 6% contribution of my gross salary, I am virtually springboarding my contribution into a 14% gross salary contribution.

My intention is that by the time I am 60, assuming various levels of growth in salary and pension I intend to have a pension pot of about £825,000 in today's money. Assuming I take 25% of this out as a tax free lump sum this will leave me with a pension salary of about  £30,000 (a very rough estimation!) in today's money - not to be sniffed at in retirement. Of course, along side this I intend to have other investments with which to top up this salary.

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Utilising Investment ISAs

March is time to use your ISAs!


As many readers are well aware, in the UK the ISA season is upon us. Savers are rushing to use up their tax free savings allowance before the new financial year begins on April 6th. I recommend reading some of my previous articles for more information on ISAs.

Savers don't use their tax free allowance 


The amount you can save in this tax efficient wrapper is £11,280 for 2012/2013, only half of which can be in cash. Many online trading platforms offer ISA trading accounts. Any money that you put into this account is sheltered from all taxes: income tax and capital gains.

The best way to use an ISA


Once money goes into an online ISA stocks and shares trading account it is sheltered from tax unless you decide to take your money out and use it elsewhere without ISA status. This means that you can buy and sell shares as many times as you like whilst it remains within the ISA trading account.

The UK capital gains allowance is £10600. My view is that if you're buying shares (eg growth shares) with a view to making a capital gain there is no point in wasting any of your £11280 stocks and shares ISA allowance on these sorts of investments. It is unlikely that unless you are investing large amounts of capital or manage to invest in a multi-bagger (a share that double or triples in value) that you will surpass the capital gains allowance when you come to selling. Instead, you should use your ISA allowance to invest in high yielding dividend stocks or in shares you intend to hold for long periods of time (decades). This way, your dividend income is tax free.

Some investors would argue that why should you be picky about what goes into a stocks and shares ISA, just throw everything in unless you're wealthy enough to be able to invest sums greater than the ISA limit each year (in that case you would obviously want to be selective about what you prioritise for ISA status). However, I would disagree. The shares you are looking to put in an ISA trading account are going to be long term stocks with decent dividends. Ideally you want to be buying into these sorts of investments at the right price. This will require patience and a stockpile of cash ready to invest in your ISA. This will also require watching many high yielding stocks for a while. Do not feel the pressure to put everything in at once. Put shares into your ISA when they reach the right price.

How I use my ISA


I had been watching shares in Morrisons for quite a while. When they fell from about 340 pence to 260 pence, and considering their plans for the future and a current PE (price to earnings ratio) of about 8, I felt that it was time to inject £1000 into my stocks and shares ISA to make this investment. In the meantime I will enjoy a 3.8% tax free dividend income whilst the capital gains grow.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Keep a sell list

Investors keep a watch list


I recently read about a quick but unintuitive investing tip that I'd like to share. Most investors keep a watch list of shares that they are tracking to take advantage of big price movements. This article was recommending that investors also keep a list of shares they've sold previously.


Why would you keep a list of shares you've already sold?


The simple reason for keeping a 'sold' list is to help investors learn from their mistakes. By knowing at what price and on what date you sold certain shares that you used to hold allows you to keep track of whether your decision was a good one. As a result of analysing whether your decision was good or not you should improve as an investor.

The sort of analysis that makes keeping a 'sold' list worthwhile, should go as follows: about a year ago I sold my shares in Aviva at a loss. I had originally bought the shares at 370pence. My original purchase of the shares had been with a view to selling them at about 500pence, whilst enjoying the higher than market average dividend in the meantime. Today the share price is about 350pence. Even with an additional years investment within Aviva the share price will still not have reached, what I and many others, considered at the time, it's underlying value. I will continue to watch this share.

Why does it matter what happens to previously held shares?


The record allows you to gauge the quality of your sell decisions. Are you selling too early? Did you get out of a toxic stock in time?

Furthermore, if your decision was a good one, you made profit on the company that you bought into for various value reasons, and then the company has a large drop in share price, this may indicate to you that there is value to be found again in the company. In which case, it is probably a good time to buy.

So my advice is that all investors should keep a quick excel spreadsheet of all previously sold shares. Makes a note of the price at which the shares were sold and the date. But most of all remember to learn from your previous trades!

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Saving money on your holiday

A quick tip to saving money on holidays:


I don't ever profess to be an expert on saving money. This blog was simply a place to document my experiences so that I and hopefully others can learn from my mistakes and also my successes. However, I am quite proud of the money my girlfriend and I recently saved on the holiday we booked for the summer.

After deciding on our destination we shopped around on the Internet using multiple comparison website to see which could give us the best deal for our preferred hotel in our preferred resort. We noticed a few hundred pound differences between quotes and picked the cheapest (obviously!). The cost was £1500 (there about) for two of us for two weeks, bed and breakfast in a 4 star hotel and flights included. Not too bad.

Holiday cashback is king!


Then we used the well known cash back site: Quidco to go through their site to the comparison site that we had chosen to book our holiday with. They were paying 3% on holidays on holidays booked via Quidco on this particular site. That's £45 straight away.

Furthermore we paid for the holiday using my 6% cash back card and so earned another £90 on top. £135 is nothing to be sniffed at and it really didn't take any effort. It's really this straightforward. For minimal effort, an extra £135 cash was generated. Anyone with a half decent credit rating can do this!

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Disclaimer

Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter