As well as life cover, you can purchase critical illness policies that pay out a lump sum if you have a serious illness, such as a heart attack or cancer, and survive for a month. A huge range of prices exist for policies with standard terms, so never, ever go for the first quote you get and be careful of exclusions. Knowing what’s covered can be a minefield so taking expert advice first is worthwhile.
Some policies, known as income protection plans, promise to pay a monthly sum until your normal retirement age or for a shorter set period if you can’t work due to illness or injury. These policies can be expensive. Also be aware that although some policies pay out if you’re unable to do your own job due to illness, less generous ones only pay out if you can’t do any job at all.
Your pension plan is an investment for your future but with tax relief in the here and now. This means that, if you’re a basic-rate taxpayer, you pay £80 for each £100 that you get in investment going into the plan – a pretty good deal. If you’re a 40 per cent taxpayer then the setup is even better because you only have to pay in £60 to get £100 into your account, thanks to government tax rebates.
Those with larger sums and a do-it-yourself attitude to investment can opt for a self-invested personal pension (SIPP) where the holder gets to choose what goes in. You can start a SIPP with anything from £5,000, although £50,000 is a more normal minimum. However, on the downside, the costs can be high and if your strategy goes wrong, you have only yourself to blame.
Chapter 14 contains loads of hints and tips on how to deal with your pension, whatever the level of involvement you want.
The roof over your head is probably your biggest monthly outlay, whether you rent or buy. And it’s also likely to be your biggest investment if you own your own home. So don’t begrudge what you spend on it. In the long run, your home should build up to be a worthwhile asset. (At the very worst, it’ll shelter you from the elements!)
The best way to save money when it comes to home-owning is paying it off early. Imagine I say to you, ‘Want an investment that pays up to 80 times as much as cash in some bank accounts but is absolutely safe and totally secure? And what about a 100 per cent guaranteed return that can be higher than financial watchdogs allow any investment company to use for forecasting future profits?’ Sounds like a snake-oil salesman scam, doesn’t it? But if your first reaction is, ‘You’ve got to be kidding’, then you’re wrong. Paying off mortgage loans with spare cash offers an unbeatable combination of high returns and super safety.
To see what I mean, take a look at the following mathematics. In this particular example, I’ve used interest-only figures for simplicity, although anyone with a repayment (capital and interest) loan will also make big gains. And, again for simplicity, I’ve assumed that the interest sums are calculated just once a year. Six per cent is at the higher end of mortgage interest now. But it’s very possible that over the life of a mortgage six per cent will be at the low end. That said, here’s the scenario:
If you rent, always look at what it would cost each month to buy the same property – assuming you can find enough for a deposit. Purchasing incurs substantial costs, such as stamp duty and legal fees, so you have to factor those in if you can afford to buy, but don’t intend to hang around for long in any one place. Whichever – buying or renting – works best for you, putting aside any cash you save through your choice for the future is always a good idea.
Homes have generally been a good medium- to long-term investment. They’ve beaten inflation over most periods and more than kept up with rising incomes in most parts of the country.
Some areas have seen spectacular gains. But even in the worst parts of the country, you’d have been very unlucky to lose over the long run, even counting the big price falls of the early 1990s and, more recently, the collapse in values following the 2008 financial crisis.
Whether the next decade will see the spectacular gains of the first years of the century is impossible to say. But homes should continue to be a good investment and at the very least keep up with rising prices over time.
However, although your home is the essential roof over your head, never see it as a conventional investment, no matter how appealing any price rise may be. Buying and selling costs a fortune – legal fees, estate agent charges, removal vans, stamp duty – as well as taking up time and requiring saintly patience. You don’t need to own shares or bonds or hedge funds. But you do need somewhere to come home to.
Someone with a standard mortgage and with £100,000 outstanding at 6 per cent pays £60 a year, or £5 a month, in interest for each £1,000 borrowed. On the £100,000, that works out to £6,000 a year or £500 a month.
Now suppose that the homebuyer pays back £1,000. The new interest amount is £5,940 a year or £495 a month.
Compare the £60 a year saved with what the £1,000 would have earned in a bank or building society. The £1,000 could have earned as little as £1 at 0.10 per cent. And even at a much more generous 3 per cent, it would only make £30 – half the savings from mortgage repayment.
‘But you’ve forgotten income tax on the savings interest,’ you rightly say.
Ah, but the money you save by diverting cash to your mortgage account is tax-free. It must be grossed up (have the tax added back in) to give a fair contrast. Basic-rate taxpayers must earn the equivalent of 7.5 per cent from a normal investment to do as well. And 40 per cent taxpayers need a super-safe 10 per cent investment return from their cash to do as well.
Now where else can you find a 7.5 per cent a year guaranteed return, let alone a guaranteed 10 per cent a year? Nowhere.
