Accumulation stage (30s-40s)
Some of the areas you may wish to discuss with an adviser could be:
- Your pension: If you have been in full-time employment for several years, you should be part of a pension scheme. Now is a good time to look at increasing your contributions if at all possible: remember, any money you put into a pension benefits from income-tax relief, and the earlier money is in a pension, the more potential it has to grow.
- Other investments: While you may be using a savings account to help you build up a lump sum or deposit on a house, investing in the stock market or other assets could be more suitable for medium-term goals such as covering any future education costs for your children.
- Tax and inheritance planning could be important, to ensure you are shielding your income, savings and investments from unnecessary tax.
- Income protection is crucial to ensure you are not plunged into financial crisis should you suffer illness or be unable to work for any reason (see below).
- If you have had children, you may well wish to speak to an adviser about Junior ISAs and other savings and investment products for your little ones (see below).
Buying a house
The average age of first-time buyers in the UK has crept up over recent decades – unsurprisingly given the consistently strong growth in house prices – and stands at 31 today¹. A key issue for many is the ability to build up enough of a deposit to secure a mortgage on a desired property. The better the state of your finances, the more chance you’ll have of being accepted for a mortgage. If you can clear or bring under control any outstanding debts before you apply, you will have a greater chance of getting the loan you want.
Parental assistance could be another way of getting onto the property ladder at an earlier stage. Aside from them lending or giving you money to boost your deposit, you could ask a parent to act as a backer for a guarantor mortgage. This means the bank or building society takes into account the parent’s income or savings when deciding how much it can lend you and at what rate.
¹ First-time buyers face highest deposit in a decade, Halifax, 12 Sep 2019.
Buying a home and, specifically, taking on a mortgage is a major commitment and it is well worth thinking about what would happen in financial terms if you or your partner died or became unable to work through illness. Life insurance policies would ensure that the surviving partner would be able to stay in your current home by covering the cost of the remaining mortgage loan – but until you have children, you may consider this type of cover unnecessary.
You may alternatively look at insurance that protects you against illness and being unable to work. Critical illness cover means you get a pay-out if you suffer from certain types of serious health problems, such as cancer. Income protection insurance, on the other hand, will pay a certain level of income over a fixed period if you are unable to work because of an accident or sickness. These types of policies can ensure you can continue to meet important financial commitments such as mortgage repayments in difficult times but check first what your employer’s sickness policy is to ensure you are not over-insuring yourself.
Now is also the time for you and your partner to draw up wills so that surviving family members would be in no doubt about what happens to the ownership of your assets and property if you were to die.
Balancing income with a growing family
New parents face higher living costs as well as the potential loss of income during a maternity period or as a result of one partner giving up work (or working less) for a while. It may be that the main earner now has a high enough income to cope with these financial pressures, but there are other ways to ease the burden:
- Remortgaging: If you do not need to move house as a result of having children (see below), you may be able to reduce one of your main outgoings by switching mortgage deal. If your loan’s initial fixed period has come to an end, and if your property’s value has risen since it was purchased, you may be able to move to a deal with lower monthly repayments. You could also switch to interest-only for a short period, if you get permission from your lender and you are aware that you will still need to repay the capital; or take a payment holiday if also permissible (and usually only if you have made overpayments in advance).
- Cashing in savings and investments: If you already have money invested in deposit accounts or the stock market, you could now think about using some of that cash to cover living expenses for a period, though this should not be to the detriment of your longer-term financial and investment goals and ideally wouldn’t compromise a ‘save today, spend tomorrow’ mantra.
Saving for your children
You may be considering sending your children to fee-paying schools. In addition if they wish to continue into higher education and go to university or college, the introduction of tuition fees means that undergraduates face debt running into tens of thousands of pounds. In either case, you should think about putting in place a long-term savings or investment plan to help cover these expenses.
The government incentivises long-term saving for children with the Junior ISA (a type of Individual Savings Account) scheme. This allows you to put up to £4,368 in the 2019-2020 tax year into a cash savings account or a stock-market-linked fund, with the returns – in the shape of savings interest and investment growth – permanently free of tax. If you are already maximising your own ISA contributions (currently limited to £20,000 a year), a Junior ISA may appeal.
You should bear in mind that, while a child can take control of the account when they are 16, they cannot access the money in a Junior ISA until they turn 18, and at this point the ownership of the money is transferred to that child. In legal terms, it is then theirs to do with as they wish and they will be under no obligation to use the cash sensibly, for example to cover tuition fees.
Saving for school fees requires a different approach because the money will be needed sooner. But as you are likely to be putting money aside for several years, you should consider the higher returns that stock-market investments can offer – perhaps by investing tax-efficiently through a standard ISA.
Important information: Columbia Threadneedle Investments does not give investment advice. If you are in any doubt about the suitability of any investment, you should speak to your financial adviser. Data as at 30 September 2019 unless otherwise specified. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at Risk. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable, but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com
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