Inflation. It seems to be all anyone’s been talking about since last year. But what is it exactly, and how does it impact your day-to-day life?
Understanding inflation will help you take the steps you need to understand your money and make sure you’re future-proofing your money for ‘future you’.
Healthy economies grow over time, so in economics terms, a ‘recession’ is a decline in economic activity.
In the UK the definition of a recession is: two consecutive quarters of negative economic growth. So if the economy gets smaller for 6 months in a row, that’s a recession.
Fun fact for your next pub quiz: US economist Julius Shiskin coined this definition of a recession in 1974.
What usually happens in a recession is that a country’s GDP (Gross Domestic Product – which is used as a measure of how rich a country is) goes down. Unemployment goes up, manufacturing goes down and spending goes down. What that means is…fewer people in work and less general spending, which means less demand for goods and services so companies have less incentives to manufacture products.
Recessions can happen for a number of reasons. They can be caused by a sudden economic shock, like the recent Covid-19 outbreak in 2020. They can be caused when governments have too much debt, or when asset bubbles are created and burst (for example the housing bubble that popped in 2008 or the dot-com bubble of 2000). Too much inflation or too much deflation (like Japan faced in the 1990s) can cause recessions. And even new inventions and technological change can cause recessions.
Because global economies and supply chains are so closely linked these days, recessions can affect many countries all at the same time.
A recession isn’t the same as a depression. These tend to be more severe and last longer. A depression can last for several years. A recession usually lasts for a few months or a year or two.
Interest rates are usually higher in a recession. This is great news for savers, as you’ll get more money in interest in your savings accounts. It’s bad news for borrowers, like anyone with a variable-rate mortgage or credit card debt, as it means your monthly repayments will increase.
Higher interest rates mean people are encouraged to save rather than borrow or spend. This means less money is circulating in the economy, which impacts individuals and businesses.
Because people spend less money on goods and services, businesses have less money coming in. So they tend to look at reducing their costs. This can mean laying off staff or hiring freezes, so unemployment is usually higher in a recession.
Stock prices tend to go down in a recession, so if you invest in the stock market, you might see the value of your investments decreasing.
Because economies have cycles of growth, recessions happen in cycles and are a normal part of any economy. Cast your mind back to 2008 and 2020 – this isn’t your first recession rodeo, and it won’t be your last. But the good thing is that recessions always come to an end.
The thing is we never know how long one will last. The Bank of England and other financial institutions have predicted that the UK will be in recession in 2023 and that it’ll last until mid-2024. But economic forecasts aren’t set in stone. So no one knows if this will happen or not, or how long it will last if it does.
The most important thing to remember is that recessions are a totally normal part of any economy. There are some things you can think about to prepare for any kind of recession, like paying down debt and making sure you have an emergency fund to fall back on.
Your emergency fund is typically 3 to 6 months of living expenses saved in a bank account that you can easily access – this will save you a lot of stress. You might also want to check and update your budget to make sure it still works for you. If you’ve been thinking about changing jobs, you might want to put that plan on hold for a bit, or be prepared for finding a new job to take longer than when the economy is growing.
Recessions can be unpredictable, but we do know that they happen in cycles, so you’ll probably experience at least one in your lifetime. They’re never fun, but they do pass. Having an emergency fund and being aware of the money coming in and going out of your accounts (aka a budget) will go a long way to helping you weather the storm. All storms in time blow themselves out, and any recession will too.
One of the first steps to take before you start investing is to determine your risk profile.
To check your risk profile, it’s helpful to complete a risk profile questionnaire. As an Octopus Money client, you can head to Propeller to log in and fill out yours.
Risk profile questionnaires are made up of questions that help you identify the risk required to reach your investment goals, your risk capacity and your risk tolerance.
Based on your result, you’ll know your risk profile. And this will help you choose a portfolio with the right balance of assets for your goals. It’ll also give you an idea of how much return you can expect.
Generally, there are three risk profile categories:
In case you’re wondering, there’s no right or wrong risk profile to have. Your profile just depends on your personal situation, your personality and what you’re comfortable with.
As we know, investing can be a great way to grow our money in the long term.
And one of the most important elements of investing is managing your risk.
Risk is the chance that an investment will lead to financial loss either because it doesn’t provide the expected return or because you get back less than you contributed.
Each asset class is typically associated with different levels of risk, but also a corresponding expected return. Assets with higher risk tend to be more volatile and go up and down more over time. But they also tend to have the highest potential returns. Assets with lower risk are usually less volatile and go up and down less over time. But they also have lower potential returns.
With investing, there’s no way to avoid risk altogether. But one way you can minimise it, is to have a diversified portfolio. In other words, don’t put all your eggs in one basket.
If you didn’t have a diversified portfolio, you might be investing all your money in one company, like Apple for example. This would be pretty risky as all your money depends on Apple doing well. But if something happened to the company, you’d lose all your money.
So diversification helps you manage risk and reduce volatility. Through diversification, you spread your money in your portfolio across different types of assets with varying degrees of risk so that you reduce your exposure to any potential losses.
If you own a piece of many different types of assets and one of them doesn’t work out, this will have a smaller impact on your total portfolio than if you had just invested in that one asset alone. But, no matter how diversified your portfolio is, you can’t completely eliminate risk.
Your risk tolerance is how much risk you’re comfortable taking in your investment portfolio. It tells you how comfortable you are with the value of your investments going up or down.
For example, once you’ve reached a comfortable income/savings/investment level you might want to speculatively invest in emerging technologies or companies – knowing that they might not succeed but that if they do, you could increase your small investment. So in that case you’d have a higher risk tolerance on those specific investments.
Putting it into a real-world perspective, let’s say you’re planning a holiday and you’d like to try some outdoorsy activities. If you decide to go for a walk in the country because that’s something you’ve done before and you know you like it, it’s quite a low-risk choice. But let’s say you want to try something new, maybe something more adventurous and something you’ve never done before, like mountain climbing – that could sound really exciting to you. But it would mean you’d need to have a higher tolerance for potential risks and be prepared for them.
You can find out your risk tolerance by answering a risk profile questionnaire. Based on your result, you can feel more comfortable choosing the right investments for you. And you can make sure that your portfolio carries no more or less risk than you’re happy to accept.
If you’re an Octopus Money client, you can login and complete your risk profile here.
A fund is just money that’s set aside for a specific purpose.
In investing, a fund lets you pool your money with other investors. Then that money is invested in assets like shares, bonds, property or other assets. The pro of this is that you can benefit from buying a lot of investments in one go instead of buying them one by one.
When you do this, you’ll own a number of shares based on the amount you invested. If the value of the investments in the fund goes up, so does your share of the fund (yay!). But if the value of the investments in the fund goes down, then the value of your shares will go down too.
Funds are generally managed actively or passively.
Actively managed funds have fund managers who are in charge of managing and investing your money for you. Their main goal is to outperform the stock market and get you better returns on your investments. But this isn’t guaranteed. Actively managed funds usually have higher fees because someone is managing your money for you.
Passively managed funds are also known as index funds or tracker funds. All they do is track a specific segment of a financial market, which is called an index. For example, a FTSE 100 Index tracks the top 100 biggest companies listed on the London Stock Exchange. Awesome, right?
If picking stocks for your portfolio seems overwhelming, funds can be a great option to get started with. You get to spread your money across several different assets, companies and industries. This means that you also reduce your risk. Passively managed funds have lower costs as well, which makes them super popular with new investors.
One of the most common questions people have about their pension is, ‘well, when can I even access it’?
It can feel a bit strange to lock money away for such a long time for ‘future you.’ But this is actually one of the best things you can do for yourself to make sure you have enough money later to live the life that you want!
Right now, the earliest you can access your workplace or personal pension is at age 55. This is also known as the normal minimum pension age (NMPA). The government sets this number.
But from 6 April 2028, the normal minimum pension age will increase to 57. So after that date, the earliest you’d be able to get money from your workplace or personal pension would be when you turn 57.
When it increases, you still might be able to access your pension at 55 if your pension scheme has a protected pension age (lucky you!).
You’ll have this option if all the following apply:
The rules around the protected pension age can seem a little complicated. But basically, if you were paying into a defined contribution pension before 3 November 2021, it’s likely you’ll be able to claim your pension at age 55. But if you change jobs and start paying into a new pension scheme, the earliest you’ll be able to access your pension money is age 57.
If you transfer your pension, you could also have a protected pension age if you transferred:
If you transfer your individual pension savings from a pension that has a protected pension age to one that doesn’t, the protected pension age might still apply to the transferred pension savings. But, this will depend on the terms of the pension you’re transferring into.
So it’s always important to make sure you know the minimum pension age and read the terms and conditions carefully before transferring or starting a new pension.
It might be possible for you to access your pension before the minimum pension age if you get ill. But you’ll need to check with your pension provider to make sure.
If you’re offered the option to transfer your pension to allow early access, it could be a scam. And it would mean that you could lose your pension money or receive an unexpected tax bill.
Scammers are relentless so it’s always important to be cautious when it comes to your money.
In the UK, the State Pension age is different from the normal minimum pension age. The State Pension age is currently 66 years old. So if you’ve made at least the minimum amount of National Insurance contributions (10 years), you’ll be able to claim your State Pension from that age.
But, the government is planning to start gradually increasing the State Pension age from 6 May 2026.
Whenever something major happens with the economy, especially if it causes financial turmoil (like the UK’s mini-budget in September 2022), a question you might be asking yourself is “how safe is my pension?”
Overall, pensions are safe as they’re often covered by the Financial Services Compensation Scheme (FSCS) and the Pension Protection Fund.
There are two types of workplace pensions – Defined Benefit and Defined Contribution – and then there’s the State Pension. You can also have a private personal pension, like a SIPP, a self-invested personal pension. Personal pensions are like a supplement to your workplace and State pensions.
In this kind of pension scheme, your employer has agreed to make sure there are enough funds for the pension scheme to pay you the benefits you’ve been promised.
If something happens to your employer (if they go bankrupt for example) and the scheme doesn’t have enough money to pay your benefits in full, then the Pension Protection Fund will step in to protect your benefits and cover the costs.
The Pension Protection Fund usually pays 100% compensation if you’ve reached the scheme’s pension age, and 90% compensation if you’re below the scheme’s pension age.
There are different rules for public sector schemes, where the Government usually makes sure the scheme has sufficient funds to pay your benefits when you retire.
Most employers use a pension provider to hold your pension benefits. This means if your employer goes out of business, you won’t lose your benefits.
Pension providers should be registered with the Financial Conduct Authority (FCA). This means your benefits are protected if the pension provider goes bankrupt.
If it’s unable to pay your benefits in full, you can get compensation of up to £85,000 from the Financial Services Compensation Scheme (FSCS).
Some employers set up their workplace pension under a Trust. If your employer goes bust, the scheme may use some of your money to run it. Your benefits will remain secure though.
One key thing to remember is that the value of your investments can fall or increase in value. And each person bears the risks of this happening to their investments. So any compensation that’s paid out won’t cover investment losses, it’ll just cover the amount of money that was in your pension. So let’s say for example, you put £10,000 into your pension fund. But the investments hadn’t performed well so the total amount in there was £9,000 when the pension provider went out of business. In this case, you’d get £9,000 back, which is the value of your pension fund, not the £10,000 you put in.
The State Pension is money you get from the government when you reach the State Pension age. The State Pension age is currently 66, but it’ll increase to 67 by the end of 2028. There may be additional increases after this as the UK population ages.
You’ll need 10 years of National Insurance contributions to get the minimum State Pension, and 35 years of National Insurance contributions to get the full State Pension.
One last thing to add is on pension scams.
Scammers are going to scam, and there are a LOT of scams out there. They often try to get you to transfer your pensions somewhere else. And they’ll usually approach you with amazing promises of guaranteed returns.
Before transferring your money anywhere, take a step back and do some research. Legit pension providers won’t be sending you messages or emails out of the blue asking you to move your money over.
Be sure to check the FCA website for guidance on avoiding scams. It’s a great resource that can help you stay informed and up to date so that you can protect your very important pension savings.
A salary sacrifice pension is where you agree with your employer to give up part of your salary so you can get extra employer pension contributions. It’s sometimes called salary exchange.
First, your employer reduces your salary by an agreed amount. And then pays that same amount – plus your company’s normal employer contribution – into your pension each month.
The main benefit of a salary sacrifice pension is that it reduces your employer’s and your National Insurance contributions. This is on top of the normal income tax relief you receive on your pension contributions.
As both employer and employee National Insurance contributions are calculated based on this lower salary, you both pay less National Insurance (it’s a win-win!). Income tax is also calculated based on this lower salary, which means you’ll also pay less income tax.
Some employers also share their National Insurance savings with their employees. This means for the same amount being paid into your pension, your take-home pay is likely to be slightly higher.
If you do choose Salary Sacrifice for your pension, it’s worth knowing:
Because it does reduce your salary, there are some things to consider:
– any employer benefits based on your salary, for example Life Insurance or Critical Illness cover, could be based on the lower salary. You should check with your employer if you aren’t sure.
– if you’re applying for a mortgage or loan, the lower salary could reduce the amount you can borrow.
– it might impact your entitlement to certain State benefits, like Statutory Maternity Pay.
Before opting for Salary Sacrifice, it’s best to make sure you check that it makes sense for you and your individual situation.
Some employers do allow you to ‘sacrifice’ any bonuses they give into your pension. This is called ‘bonus sacrifice’ and means that your bonus is paid into your pension instead of being paid into your bank account together with your salary. You can also get an additional contribution from your employer to match this.
The biggest benefit of putting your bonus money straight into your pension as an employer contribution is that you won’t pay National Insurance or income tax on it. Because of this, the whole amount is added to your retirement pot, which means more money for ‘future you’.
Not all employers offer this, but it’s worth asking your employer if they do.
In a nutshell, auto-enrolment is when your employer automatically adds you into a workplace pension scheme without asking you in advance.
It’s actually been happening for a while now, since October 2012.
Before October 2012, employees had to take action to join their workplace pension scheme. But with auto-enrolment, you’re already opted-in. A huge benefit of auto-enrolment is that more people are automatically saving for their retirement than ever before. And that’s a big money win!
Your employer will tell you when you’re auto-enrolled. Though paying into a pension scheme is a great way to save for your future, you do have the right to opt-out.
If you opt-out:
Whether you work full-time or part-time, your employer has to enrol you in a workplace pension scheme if:
Your employer has to make sure a minimum of 8% of your ‘Qualifying Earnings’ is paid into the pension scheme.
This minimum is generally 5% from you (which includes tax relief) and 3% from your employer.
The minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 (in the tax year 2022/23). This slice of your earnings is known as ‘Qualifying Earnings’.
Some employers apply the pension contribution to the whole of your earnings, not just to your Qualifying Earnings. If you’re not sure how your pension contributions are calculated, you should check with your employer.
If you don’t meet the age or ‘Qualifying Earnings’ criteria, you can still ask to join the scheme!
“I can think about my pension later…” “The government will sort it…” “The world’s going to end before I even reach retirement age…” “Pension? What pension?”
Sound familiar? If so, you might want to reconsider. We’re busting the top pension myths in this webinar so you can have your dream retirement on your terms.