It’s all getting a bit serious...houses and grown up stuff
The thought of saving for a pension, in fact anything other than a house deposit, is probably not on the agenda. With mortgage lenders requiring high levels of deposit cash to allow you to borrow enough to be able to buy the house you want sure seems like a never ending conundrum. Sure, the bank of Mum & Dad (or the other bank of the grandparents) may have alluded to some funds being available when needed, but rent costs are still making it a problem to put some serious funds away to be able to finally call a place a home. You even have to park part of your social life to make these house plans come to fruition and that is sheer hell in reality.
You’re working hard in your job and hope to make the next pay grade up soon, but workplace pension costs may eat into this future potential increase. Inflation is low and you’re getting no real return on your savings and house prices seem to be ignorant of real inflation rates, just climbing all the time, way more than you earn in interest. HELP!
With all this noted, and with a wise head on your young shoulders, there is still some financial planning that you need to think about for the future.
Start to understand mortgage types and terms
Making a home will invariably mean achieving mortgage finance and understanding the terms and options for these loans might well be useful in advance of signing on the dotted line.
A great website to help look at what’s what, including the all-important affordability, is the Money Helper website.
They also detail a great guide to buying, moving and budgeting costs here.
Early budget planning
For your own reference, let alone a mortgage lender’s requirements, prepare a budget planner to check real income and outgoings to see that all of your money is going where you expect it to ensure that when you do secure your new home, that it will be yours... and affordable.
Check what protection you’ve got from your employer, both in the scenario of death or ill health. You are likely to be asked this when you apply for a mortgage so it’s an important topic and should ensure that any debt, such as the mortgage, can be repaid if you die and still leave some cash for your partner and children, or future children, to allow them to make ends meet thereafter, especially if you are the main income earner.
Cost of life cover for non-smokers is cheap at this age, so it’s well worth a review to see what you need.
Also check the ill health position if you are unable to work. How long will you be paid?
There are various covers and some life covers feature the addition of Critical Illness Protection. This can pay out a lump sum on diagnosis of a serious condition, but check the plan benefits to make sure it meets your requirements. Other protection plans might include income replacement as the benefit. Standard Statutory Sick Pay is not high, so make sure you have enough cover to protect the family in the event of accident or illness.
Savings tax allowances
We’ve mentioned poor savings rates, and the tax being deducted from any interest does not help. There are some opportunities, such as tax efficient ISA allowances which might keep the Chancellor’s opportunity of reducing your overall returns to a minimum. The allowance for this tax year (2023/2024) is £20,000 and you might want to use cash ISAs to build up savings, especially if you are going to access them in the shorter term (under 5 years hopefully!).
You might also want to consider saving into an existing Help to Buy ISA or opening a Lifetime ISA (LISA) as possible ways of saving for your first home or for the longer term. Have a look at these options here and here.
Pensions auto-enrolment...you probably should be in!
Your employer will offer you a workplace (auto enrolment) pension and you should seriously consider staying in this, or joining it if you're not automatically enrolled. Both your employer and the Government pay in, as well as you, so it's usually equivalent to 'free money'.
Pensions only need two things, namely money and time. If you start early, the opportunity to build a good size pot for your future is usually in your favour!
We hope you have been inspired to take action for your financial planning from the notes above. This SaidSo free guide is for guidance only.