Chapter Ten

SAVING

Do I hear a wry laugh? Perhaps you think, fat chance I have to save money. I struggle hard enough to rake up sufficient for day-to-day living. Well, if cash really is that tight, see my advice in Chapter 7. For most people, you may  be surprised to discover that you are already saving hard, whether you like it or not. Or someone else, like your husband or the state, is setting cash aside on your behalf.

The whole welfare state could be described as one vast savings scheme. You pay your National Insurance contributions while you earn and claim your old age pension years later.

PENSION SCHEMES

It may seem daft to be thinking about your pension when you are in your twenties. But there will never be a better time. Remember, most women face 22 non-earning years to provide for and life expectancy is going up all the time.

By and large, the state pension offers a very good investment. (Except for married women lucky enough still to pay contributions at the 'reduced rate'. You are outside the state pension scheme;  stay that way girls. Resist all arguments to persuade you to change to the full rate. The extra pension you would receive one day is peanuts compared to the extra contributions you must pay now. Perhaps you are worried about not getting a pension in your own name. If so, pay the extra you would otherwise pay to the state - the difference between ordinary and 'reduced rate' - into a private pension scheme.)

Why is the state scheme good value? Because the government simply grabs all it can today from those working and hands it out to pensioners, etc. Private schemes will demand much larger contributions to provide you with the same rates of pension as the state pays.

Why? Because they must invest your personal contributions between now and your retirement to earn you the pension. They cannot simply dish out your contributions to other customers today. The pension  companies must invest the bulk of your money in safe, reliable concerns. These probably pay less. (I consider safe investments in Chapter 13.)

If you are sick or registered as unemployed, the government pays your state pension contributions for you. For a full pension, you need thirty-nine qualifying years - that is, thirty-nine years when contributions were made by either you, your husband on your behalf or the government. If you only managed thirty, you will get just over three-quarters (30/39ths) of the pension, and so on.

You can easily find out how many qualifying years you have built up to date. Write to the DWP  pensions department, Newcastle upon Tyne. Quote your full name (and previous names if any), address and date of birth. Allow them a month or two to reply. On the net, www.thepensionservice.gov.uk/

Sometimes you can catch up your missing years by paying voluntary contributions. This is normally well worthwhile, because the contributions are tiny for the extra pension you receive. Again, if you ask, they will explain how.

All employees and self-employed people must join the government's DWP scheme, and employers must add hefty contributions too. But the old age pension level falls far short of average earnings. So many employers arrange a pension scheme for their workers to bridge the gap.

If you are one of the lucky ones and your job provides an occupational pension, fine. Better still if it is non-contributory (your employer pays all the contributions). The opposite is a contributory pension where your contributions are taken out of your wages.

Luckiest of all are those who can look forward to a non-contributory inflation-linked pension, as in the Civil Service. The pension you receive is increased each year in line with the cost of living index (see Chapter 17 on inflation). In practice, this means you receive a larger pension than you otherwise would. Ever since index-linked pensions started, prices have constantly risen.

My father-in-law retired from the RAF at 55.  He started to draw his RAF pension straight away. Some of this colleagues were promoted, received higher pay and continued to work until 60. Yet the pension they received then was far lower than his. Why? Because it was inflation-linked. In the extra five years the others had worked, their pay rises even after promotion had been lower than my father-in-law's increases for inflation.

So, when comparing salaries, bear in mind pension rights.  A job with a lower salary can in fact pay you more when you take this into account. There are several questions that you need to ask.

EMPLOYERS' PENSION SCHEMES: SOME QUESTIONS AND ANSWERS

HOW MUCH ARE MY PENSION RIGHTS WORTH?

You know broadly how much pension you will get (say, half your salary). Ask a pension sales agent for a quotation to give you the same size of pension as this. The contributions they will quote will show you roughly the size of  your hidden salary.

WHAT HAPPENS TO MY PENSION IF I CHANGE JOBS, OR IF MY EMPLOYER IS TAKEN OVER?

Many people, especially women, lose out drastically on changing jobs or through company take-overs. When you leave, are your pension rights lost? If so, forget about any pension. You receive nowt. Are they frozen? If so, you will get something when you reach pension age. Keep all your documents in a safe place (like the bank) and make sure the pension people know your latest address and any change of name.

IF I RESIGN, CAN I CLAIM BACK MY OWN CONTRIBUTIONS OR ANY MADE ON MY BEHALF BY MY EMPLOYER?

Often the pension-scheme organizers will try to dissuade you from claiming back contributions. They tell you you will only receive peanuts after tax has been paid. This is rubbish. I claimed back my employer's contributions when I left teaching and again when I left the Civil Service. The tax was a mere 10 per cent - far less than the 30-odd per cent I was paying on my salary.

Claiming back your contributions gives you flexibility. A lump sum in your twenties may be far more useful to you than a tiny pension forty years on that you might even forget to claim. Alternatively, you could use the money to buy extra pension rights with your new employer's scheme. Then again, you could pay for a new private scheme of your own.

CAN I TRANSFER MY PENSION RIGHTS TO MY NEW EMPLOYER?

In the jargon, is your pension fully 'transferable' or 'portable'? In the past, people were often unwilling to move jobs to where they were needed, because they lost out so badly on their pension rights. Governments have tried to improve this in recent years. They have not yet succeeded enough for me to give any general advice. You can only find out about your own particular scheme and plan accordingly. (If you think you are still getting a raw deal, ask your union or the Citizen's Advice Bureau.)

HOW CAN I INCREASE THE VALUE OF MY PENSION?

Perhaps your job carries a pension but you have not worked there for long. Now you are approaching retirement and worried about your small pension. You can usually buy 'back-years'. This means that you volunteer to pay extra contributions now. These are called additional voluntary contributions or AVCs. When you retire, your employer calculates the amount payable to you as though you had been working for them for years longer. This way you receive a bigger pension.

It is worthwhile? Each case differs. You need to compare what you have to pay with what extra you should receive. Then decide if instead you could do better by investing that money yourself - say, in the building society. Chances are you could not do better, because pension schemes get favourable tax treatment. They keep more of what they earn from investments. Besides, savings in a pension scheme grow 'out of reach'. You will not be tempted to spend them as you might if you knew they were sitting there in the building society.

Not every employer is obliged to offer a pension scheme and some that do are hardly generous. So, to help the lower paid, your state pension will be made up of two parts - a basic pension, which is what we have been talking about up to now, and an additional state pension (previously called SERPS and now called a state second pension). You can find out all about this from a DWP office or www.thepensionservice.gov.uk/

WHY SHOULD MARRIED WOMEN BOTHER ABOUT A PENSION SCHEME AT ALL?

Married women will share their husband's state pension and any pension from his work or which he has paid into - as long as the couple are still together when they reach retirement age. Sad to say, no one can guarantee that any more.

Although lost pension rights should feature in any court's decision on how much alimony to award a divorced wife, they can be overlooked, undervalued or simply beyond the husband's present means to pay.  Besides, many women are married to men who leave tomorrow to take care of itself. So his (and her) pension rights may be tiny or non-existent. Perhaps he has worked abroad for many years and made no contributions at all. Those years will not count for a state old-age pension.

'Why pay for a pension?' Keith argued complacently. 'You may never need it.'

'And your widow?' I persisted. He shrugged, puffed on his pipe and gazed into space. Yet he was a happily married man.

Keith lives in New Zealand where even the government scheme was optional. Like many other professionals, never mind blue-collar men, he did not bother. At 66 he found work a strain and wanted to stop but he could not afford to. Yet he still insisted he had done the wise thing by refusing to join the pension scheme.

PRIVATE PENSION SCHEMES

If you are a self-employed person or an employee in a job with no pension scheme, you can pay for a private pension.  This earns you tax relief. In other words, you pay less tax because of the pension contributions you make. Also, you avoid a state second pension, thus cutting down your national insurance contributions.

You can start to draw your pension at 60 (sometimes even earlier) and don't need to retire to do so.  Such pensions move with you, if you change jobs. This is fine unless you happen to join a firm with its own pension scheme. Then you may have to decide whether to join the new scheme or not. Your previous contributions are not lost, but you cannot add to them. They continue to build up and will pay you a pension when you retire.

You will find hundreds of different private pension schemes and hundreds of insurance salesmen eager to explain them to you. Most pension companies pay commission to their agents. This commission is their bread and butter. Some receive little or no other wages.  Now you understand why they can pester so - no sale means no pay.

Formerly some pension companies didn't pay commission at all.  Their salesmen received a straight salary. These were called non-commission houses. I have searched so hard to find a present example for you that I think we can assume that all pension companies now pay commissions. Always ask how much is being paid. Those commissions come out of the pension contributions you pay. Clearly, the more of your contributions that vanishes in commissions, the less there remains to invest to build up a pension for you and pay administration costs.

The art of saving for a pension is to start early in life.  If you invest £100 in your twenties, it will earn you as much pension as £200 invested in your thirties, £400 in your forties or £800 in your fifties. In practice, very few people care about pensions before they reach 30, and many don't have much spare cash until they attain their fifties with the family off their hands.

Incidentally, you can buy a private pension with just one large payment instead of small regular ones over many years. Again, the art is to buy it early. Use that odd £1,000 you inherit in your thirties to buy a 'single-premium' pension and it could pay you handsomely when you retire.

SAVE AS YOU EARN,  INDIVIDUAL SAVINGS ACCOUNTS (ISAs) and SO ON

So far we have only looked at long-term saving through pension schemes, but there are other ways to choose. S.A.Y.E. (Save As You Earn) is operated by many employers and building societies. You can arrange to have a regular amount deducted from your wages and invested. A savings-related share option scheme is a scheme, set up by your employer, that allows you to save gradually towards purchasing shares in the company you work for at a discount and in a tax-efficient manner.

S.A.Y.E. has not really caught on widely because, in my view, it does not represent good value. Bear in mind that any scheme the government offers to everyone cannot be the best that is available. There are only a limited number of bargains and not everyone can enjoy them.

Every British government is always trying to persuade people to save (that way it has fewer poor people to support long-term). They lay down rules and allow the investors of any scheme which follows them to receive income tax-free. Normally the amounts involved are small. The latest scheme is Individual Savings Account (ISA), a tax-free savings account. When comparing these with other investment schemes, the tax saved is a plus but not the only factor to take into account.

OWNING YOUR OWN HOME

Another way of saving long-term is to put all your money into your home. This has many advantages. You enjoy the benefits of the money you spend on the property. The sales proceeds are tax-free. In the long run (over ten or twenty years or more) property keeps up well with inflation. Housing is a short-term investment only when house prices are rocketing. Such booms end as suddenly as they begin - as sellers who bought in the late 1980s discovered and 2005 buyers probably will too.

In practice, people change houses all the time. The average mortgage only lasts seven years or so. Never mind that most people's mortgage is for twenty-five years.

When you sell, you may find that, as an investment, many of your improvements did not pay. Fancy kitchens, lavish redecorating, landscaped gardens, sauna, anything mildly eccentric like an aviary - none of them increase the price you receive by as much as you paid for the improvement. A swimming-pool can actually reduce the value of your house. Why? It is hard work, expensive to maintain and ugly in winter.

If you have worked hard to make your house by far the smartest in the area, you will probably be disappointed when you come to sell. The price reflects the area too. This is why some people object bitterly to anything that might possibly 'lower the tone' of a neighbourhood.

What counts with a house, after 'location, location, location'  is size. Extensions, conversions, a room in the attic,  an extra garage - these all pay handsomely, at least at the lower end of the range. Or they provide you with a bigger house without the expense of moving. Up-market, your extension must look original to add value - that is, it must match your house exactly in materials and style.

The main drawback with investing long-term in your home comes when you have to give it up. This can be a problem partly because you love it so much and also because, beyond a certain age, you can no longer bear the strain and upheaval of moving. There is one way you can obtain income from your home without lodgers and still live in it. I look at this when I cover retirement in Chapter 15.

LIFE ASSURANCE (AND LIFE INSURANCE)

As well as pensions, savings schemes and your home, you may choose to make your long-term savings through life assurance policies. First, we must separate life assurance from life insurance.

You pay into a life insurance scheme year by year. If you die in that time, your dependants receive a sum of money. If you survive, what you paid is lost. What you bought was a year's security and peace of mind for yourself and your dependants - vital but not a financial investment.

By contrast, a life assurance scheme covers a fixed period, perhaps from now until you reach 60. Again, you pay regularly every year. If you die during this time, your dependants receive a sum of money.  If you survive, the policy finishes (matures) and you receive a sum of money. So it is 'heads you win, tails you don't lose'.

There are umpteen assurance schemes available and they are so long-term that it is difficult (perhaps downright impossible) to compare them to predict which will provide the biggest lump sum.

Some schemes are also linked in with a mortgage. (I look at these again in Chapter 13.) Personally, I am a bit suspicious of schemes that try to cover everything. Basically, if you are insuring your life that is one thing. Buying your home is another. If you are trying to save and invest using life assurance, that is yet another. I prefer to keep these separate and get the best terms on each. Yet a joint scheme is still far better than nothing.

Saving is like spending; it is a habit. Practice makes perfect. Remember the old saying: if you can't save on a little, you can't save on a lot. The younger you learn the saving habit, the easier it grows.

Saving also has its own pleasures. I have known clients derive great satisfaction from gloating over the balance in their building society account. Just reading out the figures gives them pleasure. Others like physically to stash up and count their cash. They bask in glorious indecision as to what to spend it on.  The choice overwhelms them. In their minds they savour each purchase in turn. They relish the bun and the penny too.

Others go too far, aiming to be the richest person in the graveyard. They scan the newspaper columns to read what others have left and foolishly snort that is less than they expected.  Little do they realize the careful tax planning which created that low figure, carrying out the deceased's wishes while minimizing inheritance tax.

So far, we have just touched on a few ways of saving. We will make a detailed review of many more - building societies, stocks and shares, etc - in Chapter 13. But enough of long-term planning, dull pensions and death-bed scheming. In the here and now, you nourish ideas, plans, projects, dreams.  To succeed, many of them involve borrowing. This is where the next chapter can help.

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