Seeding Change

Forging a Path

Sprouting Plants

Introduction

A sprouting plant – no longer a seed but some way off being fully grown, this stage of your life can feel a little like limbo.

We have grasped the basics of financial confidence, and most of us have turned our thoughts to saving for the big purchases we’ll make – such as a wedding, our first home, or new business idea. Our financial commitments at this stage in our lives tend to be fairly concentrated on ourselves, although planning for a family may be just on the horizon.

It is the perfect time to take stock of your circumstances, particularly if you have recently switched career, or started earning more than you were before.

Higher income, higher savings

Changing jobs, or a recent promotion? This is usually the moment in our financial journey where we feel like we’re beginning to thrive.

A higher income allows for more luxuries – but also the opportunity to consider saving more than you may have been previously. By this stage, you have most likely learnt how to effectively budget, have a little put aside for a rainy day, and have the freedom to start thinking about large purchases and how you want your future to look.

A consequence of earning more also means potentially more tax – some of us might have crossed over into the Higher Rate or Additional Rate tax thresholds.

Maintaining your existing emergency savings and keeping back cash savings for shorter term needs should still be one of your financial priorities. But surplus income can also be invested to make your money work harder than the interest rates that may be offered by deposit accounts.

Introducing investing

Aside from contributing to a personal workplace pension, you may never have invested your savings before.

A good place to start is with ISAs, or Individual Savings Accounts. Each year, you can save up to £20,000 within an ISA, and any growth or income received within the account is tax-free. Withdrawals from your ISA account are also tax-free when you come to access funds.

There are four main types of ISA account available, including Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs and Innovative Finance ISAs.

Cash ISAs will have varying interest rates, depending on the type chosen. Some will come with restrictions on when you can access your money – the longer the term of the ISA account, generally the higher the interest rate.

Stocks & Shares ISAs allow you to invest within stocks and investment funds, and typically offer the potential for a higher degree of capital growth than cash savings.

Lifetime ISAs are more restrictive – the maximum you can invest in a Lifetime ISA each year is limited to £4,000, and you must be over 18 but under 40 to open a Lifetime ISA. Contributions can be made until age 50 and the government will add a further 25% bonus to your savings, up to a maximum of £1,000 per year. You can only access savings from your Lifetime ISA if you are purchasing your first home, aged 60 or over, or terminally ill.

An Innovative Finance ISA allows you to invest in peer-to-peer lending, where you agree to lend money directly to borrowers and businesses in return for a set amount of interest. While the principle is similar to a Cash ISA, Innovative Finance ISAs are riskier.

You can spread your annual ISA subscription across one of each type of ISA if you wish, as long as you do not exceed the annual ISA limit.

There are other, if slightly less tax-efficient, investment accounts that you can also invest within, such as a General Investment Account. Like a Stocks & Shares ISA, you can invest in stocks, funds and investment trusts, but will have to consider capital gains and income tax on the growth and income from your investments.  

Considering investment risk

Whether it’s an ISA or an alternative investment account, it is important to understand the timescales of how long you expect your money to remain invested.

For shorter term goals, for example, if you need the funds within the next year or two, keeping your savings in cash may be a better idea, as fluctuations in investment markets may mean you get back less than you invested. This is important – if you have worked hard to save up for your dream property deposit, you do not want your savings to suddenly fall and put your goals out of reach.

A good rule of thumb is a minimum time period of 5 years if you are looking to invest in stocks and shares. You should also consider how much risk you want to take – which will also be dependant on when you need to access your money.

Pensions on the other hand, offer an opportunity to take a higher level of risk than you may do with your short-term funds. Given that you cannot access the funds until your minimum retirement age, or potentially longer if you are not planning on retiring until after 60, they offer a very long investment timescale – which means more opportunity for higher returns and enough time to recover if the markets should drop.

While taking slightly more risk when you are younger does drive long-term growth, you should consider investment risk carefully. A good question to ask yourself is ‘What would I do if my investments fell by a certain amount?’

At Path, we’ll discuss your preferred risk approach with you in detail before making a recommendation – and you can change this at any time should you wish.

The Gender Pay Gap

Climbing our career ladder and becoming successful gives us a huge sense of fulfilment. However more than three out of four reporting UK companies pay their male staff more than their female staff [1].

The Gender Pay Gap has been decreasing slowly, from 17.4% in 2019 to 15.4% in 2020 – the gap remains high however, when taking into account part-time work, roles which are usually staffed by women at a much lower hourly median pay. The sectors with the worst Gender Pay Gaps are in some cases relatively typical – for example, construction, finance and insurance – and in some cases, surprising, such as the education sector, of which only 9% of reporting companies pay women more, or the same, as men.

While the Gender Pay Gap affects our lives on a day-to-day basis, lurking in the background is a further consequence of pay inequality – the Pension Gap. Women’s personal pension savings are likely to be 11% smaller by retirement age, than those policies held by men [2], affected by the likelihood of women to undertake lower paid, part-time roles or leaving the workplace to concentrate on raising a family.

Taking action and choosing to invest early is therefore essential for female financial independence in future.

Goals based investing

There is a common misconception that women do not like to invest or are more risk-averse than men.

Female investors are much more likely to invest with specific goals in mind – for example, providing for their children’s future, education, and achieving financial security for their family, not only themselves. Women will take a lower level of risk if their goals can be achieved by sensible growth, rather than choosing a higher risk strategy that risks potential detriment in future.

Representation also matters – gender diversity across the finance industry is incredibly low, with women representing only 17% of FCA-approved individuals in the UK [3]. This figure has remained largely the same since 2005. Finding a female financial planner, who understands your wider personal goals, rather than product, profit and performance led male counterparts, is very difficult.

At Path, we are already ahead of the industry average, with 30% of our adviser qualified staff identifying as female. And we’ll continue working on improving this figure in future. 

Getting married and impact on finances

There is significantly less pressure today to tie the knot than years past – some of us may never get married, based on personal choice rather than ‘unfortunate’ circumstances.

While married couples and those in civil partnerships are no longer seen as one taxable entity, choosing to get married does have an impact on our personal finances, whether that be applying for joint loans and mortgages, marriage and inheritance tax allowances, the impact on gifting and ensuring Wills are up to date.

Marrying someone doesn’t immediately mean your become financially associated – however taking out joint mortgages or loans together will, and those associated with you can have an impact on your credit score and ability to get credit in future.

However there are still some financial benefits in getting married – the ability to gift assets to one another with no tax consequences, and clever structuring of your savings and investments between the two of you, can help to improve your combined wealth in a tax-efficient manner, in both the short and in the longer term.

It is important if you have an existing Will to understand that this will become invalid on marriage or civil partnership and you will need to set up a new Will that details how you wish for your estate to be distributed. Delaying writing a new Will does leave you open to the risk of passing away ‘intestate’ and your estate distributed in line with the Rules of Intestacy.

[1] https://ig.ft.com/gender-pay-gap-UK/
[2] https://www.unbiased.co.uk/news/financial-adviser/women-and-investing
[3] https://www.fca.org.uk/publication/research/research-note-gender-diversity-in-uk-financial-services.pdf

Seeding Change - Forging A Path