Blog Archives - Learn with Octopus Money

Another year goes by, and another Autumn Statement has been delivered by Chancellor of the Exchequer Jeremy Hunt, as he sets out his update on the UK’s finances. Among all the jeers and cheers, there are vitally important updates which have a serious impact on our wallets, and by extension, our life plans.

While much has been said about growth forecasts of the UK economy and where the government will spend its money, we focus on the most immediate impacts to our everyday savings. This was not an overly dramatic budget for personal finance, with no major changes to ISAs, tax relief, or income tax rates. This autumn, it’s Pensions and National Insurance Contributions stealing the limelight.

State Pension

State Pension increases have been held at Triple Lock, increasing by 8.5% this year. This equates to a much needed extra £900 per year for pensioners.

Workplace Pensions

A big change around workplace pensions. Employees will have a legal right for new pension contributions to be paid into an existing pension pot, as opposed to being forced to open a new one. This will help to reduce the risk of people losing pension pots by making it easier to keep track of their pensions, as well as the headache of pulling them all together.

National Insurance Contributions

Class 1 NICs are paid by any employed person earning between £12,570 and £50,270 per year at a rate of 12%. Mr Hunt has reduced this to 10%, resulting in an extra £450 per year for someone on a £35k salary. Another sweetener is that this will come into effect in January of next year, as opposed to the usual wait until April 6th 2024.

Self Employed Changes

Class 2 self-employed NICs have been abolished, saving around £150 per year.
Class 4 self-employed NICs will be reduced to 8% from 6 April 2024.

Personal Tax and Savings

There was a lot of pre-budget speculation about whether we’d see any major overhauls to ISA and LISA rules. But the only change has been to allow UK residents to open and pay into multiple ISAs of the same type every year from April 2024.

Consumer Prices Index (CPI) inflation has halved year on year from over 11% in October last year to 4.6% in October 2023. While this is welcome news, it doesn’t necessarily mean that prices will decrease, just that prices are increasing at a slower rate.

The Chancellor also announced a Back to Work Plan intended to reform the welfare system and boost the workforce, a 6.7% increase in Universal Credit and other benefits in line with September’s inflation figure, an increase in Local Housing Allowance to the 30th percentile of local market rents, an increase in the national living wage to £11.44 per hour, and a freeze on Alcohol Duty until 1 August 2024.

Welcome (and long overdue) news was that the 0% rate of VAT on feminine hygiene products has finally been expanded to include period underwear. (Thanks Marks & Spencer and WUKA!)

They say size doesn’t matter.

But when it comes to your pension pot, it absolutely does. Because the size of your pension pot determines the type of lifestyle you’ll be leading in retirement.

Here are 5 mistakes that 99% of us are probably making when it comes to our pensions.

Not thinking through the amount that you want to have in retirement

The Pensions and Lifetime Savings Association categorises pension lifestyles into three types: minimum, moderate and comfortable. Depending on what your ultimate retirement goals are, you should figure out approximately how much money you’ll need each year in retirement. Once you have this figure, you can see if you’re on track or not by checking your workplace pension pot and your National Insurance (NI) contributions.

Not getting your State Pension forecast

Your State Pension is going to fund your retirement, at least in part. A lot of people wonder if they’ll benefit from this by the time they reach retirement age. And it’s true that policies may change in the future. But we still need to plan for it, and the NI contributions are coming out of your monthly paycheck regardless.

It might be helpful to think of the State Pension as a type of diversification of your funds. It’s no different to money coming in from a different income stream. And a huge benefit of the State Pension is the triple lock, which means that the amount pensioners receive increases in line with inflation each year.

So once you’ve worked out how much money you want to have in retirement, you’ll need to check your State Pension forecast.

You can check your State Pension forecast online by signing in with Government Gateway. Or you can get this information from the government’s Future Pension Centre. You’ll need to phone them up and give them your National Insurance number, and they’ll pop a pension forecast in the mail for you. Once you receive that, you’ll know if you’re on track for a full State Pension or if you need to think about plugging any gaps.

Overlooking the value of your employer’s matched contributions

The State Pension alone isn’t enough, especially if you want to have more than a minimum lifestyle in retirement. So you will likely need to supplement with a workplace pension and/or a private pension to have the kind of lifestyle you want.

Make sure you log in to your workplace pension and check your monthly pension contributions. If you aren’t already, make sure you’re taking full advantage of your employer’s matched contributions, because those contributions are tax-efficient and it’s free money! It’s also super satisfying to see that pension pot grow over time.

Not using pension contributions to reduce your net income (if you need to)

If your career progression or your annual bonus has taken your salary into the higher tax band of 40%, you might want to consider putting more into your pension to reduce the amount of taxable income you get. This will also allow you to retain more of your child benefits, which you might otherwise lose access to by being in a higher tax bracket.

Not keeping track of your pensions

There’s around £26.6bn worth of lost pension pots in the UK according to the Pensions Policy Institute. Since auto-enrolment made contributing to a workplace pension easier, if you’ve had a few jobs, and you haven’t kept track of your pensions, some of this money might be yours. You can use the government’s Pension Tracing Service as a starting point to find any lost pensions you might have.

By consolidating all your pensions in one place, they’re not only easier to keep track of, but you’ll also get the benefits of a larger sum of money compounding over time.

Investing should be as boring as watching paint dry.

We’ve all seen the headlines where someone goes from relative obscurity to being a millionaire seemingly overnight because of one lucky investment.

‘Get rich fast’ schemes and scams attract people for a reason – we know what we want and we want it NOW.

But that’s not the reality for most investors. In fact, most wealthy people get rich slow.

Even Warren Buffett, one of the world’s most well known and successful investors, who began investing when he was 11 years old, didn’t become a millionaire until he was 30 years old. Read that again. That means he was investing and making money moves consistently for 20 years to get to his first million. And then he didn’t become a billionaire until he was 50.

But those stories don’t get as many clicks…

Here are our 3 tips for how you can make your money grow without putting it all on the line.

Be in it for the long run

Humans aren’t great at planning for the long-term and for the future. You might think investing for 20 or 30 years to become a millionaire takes too long. But to get the State Pension (currently £10,600 per year in the 2023-2024 tax year), you’ll have to have worked and contributed to your National Insurance record for 35 years.

It’s easy to feel confident when our investments are doing well and we’re in the green. But as soon as the markets start to drop and the numbers in our account go red, we want to cut our losses and may be tempted to sell. This can happen even to the most experienced investors with nerves of steel. But your losses (like your gains) aren’t actually realised until you sell. So if you ride out the headlines, you at least have the chance of seeing your investments recover. Whereas if you sell, you definitely don’t have the chance of seeing your investments recover.

Of course, sometimes selling in a market downturn might be necessary or the right thing to do. It all depends on your personal circumstances and what you’re investing for.

Diversify. Diversify. Diversify.

People who are new to investing often think that investing is the same as gambling. This is usually from stories of people who have lost everything by betting everything on one stock or maybe cryptocurrency. People looking for excitement may try to ‘beat the market’ by day trading or throwing everything into alternative investments. In doing this they take on too much risk – more than they can handle – and if things don’t go well, they can end up with nothing, or worse, in debt.

This is where diversification and understanding your risk profile comes into play. Index Fund millionaires – people who have become millionaires simply from investing in low-cost index funds – exist for a reason. People who consistently invest in low-cost, diversified funds that track the market regularly outperform day traders and fund managers in the long run. Index funds and Exchange Traded Funds (ETFs) aren’t seen as very exciting, but they’re an excellent way to achieve long-term financial goals like financial independence.

Automation is your best friend

Money is closely tied to our emotions and our self-worth.

If you’ve ever bought something with the intention of wearing or using it ‘one day when,’ or thinking ‘I’ll be happy when,’ then you’ll know the feeling of spending money being tied to how we feel about ourselves.

We might spend more money when we feel down or sad. We might spend more money in the hope that it will make us a different person, and make us happy. This is where many of us might stumble in our budgeting or when it comes to investing.

We can be our own worst enemy when it comes to our future finances.

This is why paying yourself first by setting aside a certain amount of money to invest each month is so important. Make it automatic by setting up a direct debit into your investing account every payday.

We’ve said it once and we’ll say it again. Investing should be as boring as watching paint dry.

Go get your excitement doing the things that bring you joy instead.

*With investing your capital is at risk. Your investments may go down as well as up, and you may get back less than the amount you invested.

Spooky season is officially here!

Now that autumn is in full swing, with Halloween fun, indulging in all the pumpkin spice lattes, and getting in our annual Hocus Pocus and The Nightmare Before Christmas marathon, we wanted to talk about some of the scary money facts we’ve come across recently. Because the last thing we want is for money issues to freak us out.

According to a poll by Royal London, 33% of employees have considered reducing or completely stopping their pension contributions because of the cost of living crisis.

We all know how powerful an employer match in a workplace pension is (it’s free money!). This stat is doubly scary because it impacts both your present and future finances. If at all possible, we suggest continuing with your pension contributions.

Research by charity Christians Against Poverty has revealed that 25% of adults in Britain would struggle to pay an unexpected £200 bill .

The cost of living crisis has caused a debt crisis for many. While they might be tricky to build up, this stat highlights the importance of a rainy day fund. We hope they won’t happen, but we can be prepared for them if they do. Emergency funds are tricky to build up, but once you’ve got one the work a treat in emergencies! (see what we did there). Having one keeps you financially fit and able to cope with unexpected expenses. To start yours, look at your outgoings and put an achievable amount away each month.

Women are retiring with £123,000 less in their pension pots than men, on average (Scottish Widows Women and Retirement Report, 2022).

There are many alarming gender gaps when it comes to money. This includes a Wage Gap, an Earnings Gap, a Wealth Gap, an Investing Gap, a Divorce Gap, and a Grooming Gap (yes, we googled it too). But the most staggering is the Pensions Gap. There are many reasons for this, including women doing the bulk of unpaid care work, and taking career breaks to start a family. This is also known as the Motherhood Penalty.

4. Unfair VAT rules on women’s essential hygiene products still exist in 2023

Some progress has been made on this — the UK government abolished the ‘Tampon Tax’ in 2021, meaning consumers no longer have to pay VAT on period products like pads and tampons. But, period underwear is still taxed at 20% because current VAT rules classify them as clothing.

5. We haven’t felt the full effect of the cost of living on our mortgages yet

50% of people are currently avoiding remortgaging with a new lender, which is an all-time high. Experts say this is likely due to a fear of failing affordability checks. However, with 1.6 million fixed-rate deals due to end in 2024, we’re only just seeing the start of remortgaging pains. And it’s not just homeowners who’ll bear the brunt of this – there’s evidence to suggest it’ll trickle into the rental market (sorry).

These money facts might not make you feel great. We get it. But knowing they exist in the first place will help you plan for them, which means you’ll still be on the way to achieving your biggest money goals.

The Pink Tax.

Sounds really cute, right?

But actually, it describes how companies charge female consumers more than male consumers, sometimes for the same item. For example women’s razors are more expensive than men’s razors. This also starts really young, with toys and children’s clothes.

Percentages differ in different countries, and the numbers can change year on year with inflation, but the trend sadly stays the same

So while it’s not a literal tax, the overall effect is similar to being taxed just for being a woman.

Women already face so many obstacles around money. This includes: a Wage Gap, an Earnings Gap, a Wealth Gap, an Investing Gap, a Pensions Gap, a Divorce Gap, and a Grooming Gap. H When you add in inflation and a cost of living crisis on top of everything, it paints an even more difficult financial picture.

So if you’re a woman, how can you beat it?

Men’s products.

Consider buying products targeted at men. Let’s be honest, if a product targeted at a man will do the same job and meet your needs, for example soap, shampoo, fragrances or deodorant, that might be an option for you.

Cashback

Using cashback apps and sites will help your money go further. If you’re shopping online anyway, use this tech to your advantage (sometimes it’s as simple as adding an extension to your browser). It might seem like small amounts, but they’ll add up over time.

Budget

Over the long term, make sure you have a budget so that you can spend mindfully on the things that spark joy while still smashing your money goals.

Emergency Fund

You’ll also want to keep putting money aside into your emergency fund if you don’t have a fully funded one yet. This will allow you to leave situations that are no longer serving you, whether it’s a job or a relationship.

Investing

Once you’ve got your emergency fund in order, think about investing. While the value of your investments can go up or down and you may not get back what you put in, this is by far the best chance you’ll have of growing your wealth and beating inflation in the long run.

Talk about it

And (most importantly) – talk, talk, talk. Have conversations about this issue with the women, and men, in your life. Knowing it exists is a great start to helping women make those very important purchasing decisions.