Finding the chase and cutting to it

I have had a pension with work since I was 18. First with the MoD, as a technician apprentice, and then with BT as a manager.

It makes sense to save for the future. But the opportunity cost of me saving £1 in 1991 as a technician apprentice was significantly more than it costs me to do the same now – partly from inflation but £1 was 22.5% of my monthly wage. It’s barely 0.01% now.

But that single £1 invested in 1991 is now worth £1,000. Which is significantly better return than inflation.

But, I’m very comfortable. I could afford to spare that money each month and lock it away for 50 odd years. What if you cannot do that?

Cash, cash ISA, baby! I cannot believe you made me say that!

Sorry 😀

A pension saves you money as you get income tax relief. But you pay management fees, transaction fees, holding fees. Not much to me, but if you’re earning minimum wage, you aren’t getting much back for your money.

Cash ISAs are great for three reasons.

1. You can access you money if you need it. Any spare money you have can be added at any time. You cannot do that with your pension.
2. Multiplier effect. You may not be able to use your £20,000 ISA limit each year, but each ISA can be added to new ones. This means if I manage to save £300 in my first year, the next year, I can add this £300 to the next ISA I start and still have my complete allowence and the interest I have earnt… which means it is all growing!
3. You and your spouse can make use of both allowences. So say one is a higher rate earner the other is on minimum wage, you have £40,000 to invest each year with no tax on your interest.
4. The other things is the £1 you save on the first day is worth the most. As a low paid earner, especially if you can start saving from the age of 16, the better off you will be in your life-time.

The £40,000 for a couple is really useful.

Given an interest rate of 4.3% per annum, it takes a single person 24 years to get enough ISAs to give an annual interest amount of £20,000.

Two people together can achieve the same thing in 12 years. Add on the full state pension, £11,502.40, and that would be an income of £31,502.40 with very little risk and no fees anywhere. It’s not a fortune, but it’s only a few thousand shy of the average wage of
£35,830 in the UK.

Plus you have £465,116.28 in savings.

In the UK, there are around 5,000 ISA millionaires. Most of them started with cash ISAs then converted them to Share ISAs. I’m no-where near there, and as my father used to say (he was a stock broker for 40 years), it’s not worth investing in shares unless you have £20,000 and ideally, you have the space to allow those assets to depreciate without it hurting.

Of course, if you have rent/mortgage to pay each month, that’s a huge ask. But it’s why those who concentrate on settling the mortgage, get such an advantage – £31,500 per annum when you are not paying any rent or mortgage is really good money – £2,625 a month.

But of course, I didn’t do that. I got the benefit of my work pension where my employer is doubling what I contribute. That’s the time when it makes the most sense to contribute to the work scheme!