Why You Need to Start Planning for the Future Now

Written by Karen Bryan

The ‘Preparing for the Future’ infographic from AXA Self Investor highlights a rather alarming lack of financial planning in the UK. I appreciate that it can seem hard enough to stay afloat in the present, never mind thinking about preparing for the future. However, time passes quickly and it’s prudent to get to grips with your finances right now.

axa-self-investor-preparing-for-future-infographic-fullFirst of all, you need to set a target for the amount that you can afford to save every month. Work out a realistic budget, categorising each item as essential or discretionary. See if you could earmark a bit more cash to save by earning more, reducing living expenses, using cashback cards (but repaying the balance in full each month) and cashback websites when making purchases. Then you need to decide where you are going to put the cash that you will save up each month.

One good way of saving for the future is to use tax-free Individual Savings Accounts (ISAs). There are two types of ISAs – a Cash ISA and a Stocks and Shares ISA.  But 74% of  those polled in the survey didn’t know the annual ISA limit, which is £15,240 for the tax year from 6 April 2015 to 5 April 2016. You can split your annual allowance between the different two types of ISAs. A fixed rate Cash ISA could give you a guaranteed return over a few years.  A Stocks and Shares ISA has the potential for a higher return, but you could also lose money if the stockmarket hits rough times, plus there will probably be some annual management fees.

According to the survey, 56% of interviewees thought that buying investments is too complicated. This could explain why 53% felt in control when choosing a savings account at a bank or building society, compared to only 22% feeling in control when choosing an investment. I think that’s quite realistic, as your capital up to £85,000 per financial institution is guaranteed under the Financial Services Compensation Scheme (FSCS) in a savings account. Also, if you select a fixed rate savings account, then you know what your return will be. It’s no surprise that with the low interest rates on offer to UK savers, only 10% are happy with the return from their savings. That can make the possible higher returns on an equity based investment more alluring. But when investing in the stockmarket, you could lose your capital, and you don’t know what the return will be.

With regard to retirement planning, 14% of those who took part in the survey are not currently doing anything to prepare for retirement. I suppose that could be due to a mixture of perceived lack of available cash, plus younger people thinking that retirement is a long way off. Travel is high on the list of retirement ambitions, with 43% mentioning this. If you want to have enough disposable income to pay for travel, after paying for basic living costs, you are going to need a lot more income than will be provided by the UK State Pension. One way to secure a higher income in retirement is to pay into a pension; this also has the benefit of tax relief on payments into the pension plus a 25% tax-free lump sum once you are aged 55+. Perhaps a high proportion of the 9% of interviewees who believe that they will never retire are people who don’t intend to build up a pension. It could also be that they enjoy their jobs and prefer to keep working, at least part time.

Only 2% of interviewees mentioned that supporting their parents will be a financial burden. I think that this could be an issue for a much higher percentage of people. If you are relying on receiving an inheritance, the amount you receive could be seriously eroded if your parents need to go into a care home.

Hopefully with some planning, the effects of compound interest and diversification between the different types of savings vehicles, you will secure your financial future.