The Personal Finance Hub

Ok, so everyone is going mad about Crypto, Bitcoin and the 5,000+ other digital currencies which have suddenly been found down the back of the sofa 😉 However, Crypto currencies and Bitcoin are a conversation for another day, as being very honest (and call me old fashioned), they are not currently a topic The Personal Finance Hub is comfortable discussing as an investment decision, given the associated risks and volatility. If you are interested to learn more, then bang Crypto into a Google search and you will find plenty of videos, podcasts and click bait content to keep you going.

Fortunately for us, while perhaps less “glamorous”, there are plenty of “traditional” investment products to keep occupied with. While it’s fair to assume everyone will understand cash savings products, there is significantly less awareness of ISAs and Pensions, both in terms of what they are and their core benefits. There are however two consistent points which connect the three:

1. Savings, ISAs and Pensions have a strong interplay with taxes and while taxes are dull, they are actually one of the most important considerations in investment product decisions.
2. Getting familiar with all three and thinking about them as a portfolio of investment decisions, such as when is the right time to use each of them and their respective benefits, will be key to well balanced finances for the majority.

Savings – perhaps the simplest investment product you can find and generally low risk / low return. Put money into a bank account and let it accrue interest – simple right?! Savings products range from instant access (equivalent to your current account), where you can withdraw the funds instantaneously, through to fixed term products of 1-5 years, where your money is locked up for the products fixed term period. Rewind 12-18 months and there was little rationale to advocating longer term savings products (mainly due the level of return relative to holding cash in a current account). However with interest rates now increasing to 4%+ there are now plenty of attractive products out there which make fixed term products attractive. Cash savings will always have a place in your personal finances to varying degrees.

ISAs – tax efficient savings or investment products. It is really important to get clear on what exactly an ISA is. From my experience, people hear the term ISA and think they are just a form of cash savings account – WRONG – this is just one form an ISA can take! In the most simple form, an ISA is the term given to different savings or investments which have been put into a “Tax Wrapper” – that is, if the value of the investments increase or dividends are received, there is no tax liable from either Income or Capital Gains Tax. The current ISA allowance is up to £20,000 per tax year and the reason for allowance is to incentivise people to save and invest long term. This distinction of a “tax wrapper” is key as an ISA and the “ISA wrapper” can be applied to several products, specifically:

• Cash ISA – this is a savings account within an ISA wrapper
• Stocks and Shares ISA – this is investments in funds, shares and bonds but within the ISA wrapper
• Lifetime ISA – Thinking of buying your first house? The Lifetime ISA (LISA) lets you save up to £4,000 every tax year towards a first home or your retirement, with the government adding a 25% bonus alongside any interest earned
• Innovative Finance ISA – the newest and perhaps most risky but in essence captures assets in the peer to peer space

Pensions – the financial term which makes most people (particularly “millennials”) fall asleep and want to avoid discussion at all costs. Simply, a Pension is the money you take from your salary (tax efficiently) which will eventually form the “pot of money” to live on in retirement. “Retirement” – ahhh I’ve done it again – another term which exacerbates the boredom on this topic and alienates people from taking an interest in their Pensions seriously. Never mind a 21 year fresh out of University, how do you get a 32 year old (a lot of my pals) to think about something which they won’t use for another 32 years, when they are focused on buying a house, nursery costs or paying for an over priced wedding! Well that’s the challenge – to make Pensions both as simple as possible and, crucially, to ensure the value of actively managing a pension from a young age is understood. Maybe a name change would help? Check out the “Pensions – is it time for a rebrand article?”.