Whilst none of us can predict what the future holds, shoring up your finances now can help ensure you’re as prepared as possible for whatever lies ahead.
One of the best ways to do this is by giving yourself a money MOT – reviewing every aspect of your finances so that you can be certain your money is working as hard as it possibly can for you.
This is more important than ever right now, given the impact that coronavirus has had on our finances. Millions of people have seen their incomes drop or disappear and stock market volatility has had a big impact on pension savings too, with those approaching retirement often wondering whether they’ll need to work for longer.
If you’re worried about your finances, or feel you have a jumble of accounts and policies that you’re not sure are still appropriate for you, here’s how to get back on track.
Review your retirement goals
Most of us have a rough idea of when we’d like to stop work, but it’s often hard to know when we’ll have built up sufficient pension savings to retire.
According to a recent survey by financial service group Sanlam, those approaching retirement aged 55-64 are the most concerned about an economic downturn affecting their ability to reach their retirement goals. More than a third (34%) fear a crash is the biggest barrier to their plans, up from just a fifth (22%) in 2019.
Separate research from banking group Close Brothers found that in the wake of the coronavirus crisis, 16% of workers are going to reduce the amount they save into their pensions, due to short term financial pressures, despite the risk that this could affect their longer-term financial wellbeing.
Understand how much you’ll need in retirement
If you do have to reduce your payments temporarily, it’s worth having a rough idea of how much you’ll need to live on in retirement and what impact this will have on your income when you stop work. Our article How much should I save for retirement? can help you work out what you should ideally be saving each month.
Check your state pension entitlement
Remember to factor in the State Pension which is currently £175.20 per week (£9,110.40 per year) based on 35 years of National Insurance Contributions.
If you don’t have 35 qualifying years of National Insurance contributions, you’ll get an amount based on the number of years you have paid in, unless you’ve got less than 10 years of contributions, in which case you won’t normally qualify for any State Pension.
You can find out how much State Pension you’re on track to receive by requesting a State Pension statement.
Track down lost pensions
It’s worth checking whether you might have any pensions you’ve lost track of which could boost your retirement savings. Find out how to do this in our guide to Tracing lost pensions.
If you’re not sure what to do with your pensions once you’ve found them there are many reputable companies and advisors who can help you decide whether to combine your pensions or transfer to a different scheme. However, it’s always sensible to be on the lookout for potential pension scams, and high charges.
Always make sure that any advisor or company you plan to use to help you with your pension is regulated by the FCA, which you can check here.
Review where your pension is invested
You should also review where your retirement savings are invested. You’ll usually be able to choose from cautious, balanced or more adventurous options, so you can find a fund which matches your appetite for risk. Remember to take charges into account too, as the higher they are, the more they’ll eat into your investment returns. You can find out more in our article Where is my pension invested?
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. This will come at a cost but you may be able to take some money from your pension to pay for it through the Pension Advice Allowance.
This allows you to take up to £500 from your defined contribution pension up to three times in your lifetime to put towards the cost of retirement financial advice. You can find out more about how the Pension Advice Allowance works here.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
Think about your options at retirement
If you’re close to retirement, start thinking about how you’ll use your pension pot to provide you with an income. For example, you might want to use drawdown, where your pension stays invested, either with your current pension provider or another provider, and you take money from it as and when you need it.
Alternatively, you might decide to opt for an annuity, which is a type of contract with an insurance company which will provide you with an income for life, or you might decide to go for a combination of these. If you’re 50 or over and have a defined contribution pension, you can get free guidance available on the options available to you from the Government’s Pension Wise service. However, if you want advice about your specific circumstances, you’ll need to seek professional financial advice.
Whichever option you choose, you can usually take a 25% tax-free lump sum from your pension once you reach the age of 55. However, there are several things to consider if you’re thinking about doing this before you retire, not least the more you take out of your pension now, the less you’ll have to live on later. Find out more in our article Should I take my tax-free cash at 55?
Look at ways you can reduce your outgoings
Explore ways you might be able to trim your other outgoings, perhaps so that you can use any money you save to top up your pension, or help build a cash buffer.
There are several ways you might be able to cut costs, including:
· Switching energy supplier. If you haven’t reviewed your energy tariff recently you could be paying much more than you need to for your gas and electricity. You can use our energy switching service, and see how much you can save in just 5 minutes.
· Reviewing your broadband deal. Data from Ofcom, the regulator for the telecoms industry, shows that around 40% of broadband customers, equivalent to around 8.8m households, are out of contract, and potentially able to make savings averaging £100 a year by signing up to a new deal. You can compare broadband deals here.
· Getting a water meter. If you haven’t already got one, installing a water meter might help you cut costs. The Consumer Council for Water has a helpful water meter calculator to help you work out whether you could save money by moving to a meter.
Check out our article Fifteen ways to cut costs for plenty more tips on reducing bills.
Take charge of your debts
Do you know how much interest you’re paying on your credit card debts or personal loans? If the answer is no, you should get in touch with your lenders and find out how much you’re being charged.
Once you’ve done this, try to focus on paying off your most expensive debts first, and look at ways you might be able to reduce the amount of interest you’re paying.
For example, balance transfer cards offered by M&S Bank and MBNA charge 0% interest on credit card balances transferred across to them for 28 months, enabling you to repay what you owe without paying interest on top. Remember to factor in balance transfer charges though – M&S Bank has a 2.85% balance transfer fee, and MBNA’s is 2.90%.
If you have several different debts you’re paying high rates of interest on, another option you might want to look at is remortgaging to consolidate your debts. Remember, however, that by consolidating, what used to be unsecured debt is now debt secure on your property. Also, if you are spreading the cost over a longer period, even on a lower rate, it may ultimately cost you more in interest, unless you make mortgage overpayments.
Check your mortgage
With interest rates at record lows, there’s never been a better time to see whether remortgaging could save you money.
Lots of people stick on their lender’s standard variable rate after rolling over onto it after their initial mortgage rate finishes, but might be able to trim hundreds, if not thousands of pounds, off their annual costs by remortgaging to a cheaper deal.
Someone with a £150,000 10-year repayment mortgage on an SVR of 4% would currently be paying £1,519 a month. If they remortgaged to a best buy two-year fixed rate deal at 1.14%, their monthly payments would fall to £1,323, a saving of £196 a month or £2,352 a year. Even if you factor in a £999 arrangement fee, that’s still a saving of £3,705 over the two-year fixed rate period.
Another option worth considering if you have a decent amount of savings in place is making mortgage overpayments so you can reduce the overall amount of interest you pay and clear your mortgage sooner.
For example, if you have the same £150,000 repayment mortgage with 10 years left to run and are paying an interest rate of 2.5%, you could knock five months of your mortgage term and save £783 in interest if you made monthly overpayments of £50. This rises to nine months of your term and £1,505 less in interest if you made £100 monthly overpayments. Most lenders allow you to repay 10% of your mortgage balance penalty-free year year, but if you want to make bigger overpayments check you won’t incur any early repayment charges.
Review your protection policies
By the time we reach our fifties, sixties and beyond, many of us have a mish mash of protection policies, which might include various life insurance policies taken out each time you’ve taken out a mortgage.
It’s worth checking exactly how much cover you have in place, and whether it’s enough to provide your loved ones with financial security when you die. The amount of life insurance you’ll need depends on your circumstances and what you want to achieve.
A good starting point is to think about how much cash you’d need to pay off any debts that you might leave behind when you die. You should also think about how much money your dependents might need to feel financially secure if you’re no longer around to provide an income. Find out more about life cover in our article Why life insurance matters.
It’s also important to review any other forms of protection you might have, such as accident, sickness and unemployment cover, that could prove useful if you lose your job.
Bear in mind that if you want to buy a new accident, sickness and unemployment policy now, most insurers have withdrawn unemployment cover, which means they will only provide cover for accidents or sickness, others have temporarily suspended sales of this type of product altogether.
Make your savings work harder
If you don’t already have one, it’s a good idea to have a cash buffer in place so that if you lose your job or have any unexpected expenses to cover, you’ll have some savings to fall back on.
Savings returns are pretty dismal at the moment, but you should still try to seek out accounts with the best rates of interest, so that the purchasing power of your money stays as close to rising living costs as possible.
Ideally you should check how much interest you’re earning every few months and transfer your savings to an alternative account if higher rates become available elsewhere. This might feel like a hassle, but over time it can prove well worth it. You can work out how much extra interest you’d earn by switching savings provider using the Which? savings booster tool and you can see the current savings best buys at savings website Savingschampion.co.uk.
Extending your mid-life MOT into other areas
Money may not be the only aspect of your life you’re keen to review. You might also be thinking about your health and ways you can maintain or improve it, and your career and whether it’s likely to continue in its current form, or you’d like to consider a change of direction.
The Department for Work and Pensions (DWP) offers an online mid-life MOT here, which includes how to get a free health check and skills assessment. Here at Rest Less, we’ve got loads of resources which you might find useful too. Our Healthy body section has lots of articles on keeping fit and staying healthy, and there are plenty of tips and jobs advice in our career advice section.
Have you given yourself a money mid-life MOT, or is it something you’re considering doing? If so, we’d be interested in hearing from you. You can contact us at [email protected] or post a comment in the box below.