‘I don’t want to fall victim to gender pension gap’: Money Diaries speaks to a 33-year-old on £36k

This is Money has launched a ‘money diaries’ series to reveal the spending habits – along with financial goals and worries – of ordinary people aged 18-35.

It launched last year and this one was written before the coronavirus pandemic – a scenario which could have a devastating impact on personal finances.  

We look under the financial bonnet and analyse spending habits over the course of a typical month, followed by tips to achieving a brighter financial future.

The series is written by Grace Gausden, who offers tips and general guidance to our readers that draw on the rest of the This is Money team’s knowledge and experience. We will also speak to financial experts to ask their professional advice when we feel it is needed.

In the fourth of our series, we speak to a 33 year-old woman from the South West, who is a teacher with significant savings – but still wants to be more financially prepared for the future.

She worries that she will fall victim to the ‘gender pension gap’ and is looking to diversify and balance her investments.  

Age: 33

Location: South West

Occupation: Teacher

Salary: £35,971

Take home pay: £2,001.56 

Outstanding debts/loans and what are they: 

– Student loan: £10,500 (£127 a month) 

– Mortgage: £212,500 (£863.10 a month repayment, shared with partner) 

Bank balance before pay day: £2,500

Accounts: 

– Lifetime Isa: £17,000

– First Direct current account: £3,369.60 

– NatWest Reward joint account: £666.02

Financial goal short-term (what would you like to achieve in a year’s time): I want to diversify and balance my investment portfolio – I am moving to a AJ Bell investment Lisa and have a Hargreaves Lansdown stocks and shares Isa – and to invest small sums more regularly. 

I have almost £17,000 remaining in a Skipton Lifetime Isa after I used £4,000 of my Lisa towards a house deposit, and I am in the process of transferring the £17,000 to an investment Lisa with AJ Bell.

I am considering investing in one of their ready-made portfolios and I intend to keep paying £4,000 a year into this account until I am 50, then withdraw when I’m 60 – assuming the rules stay the same. 

Financial goal long-term (what would you like to have achieved in 5-10 years): Over the last few years I have been focusing on saving towards a house deposit. 

Now I have achieved this goal, I am looking towards more longer term financial planning specifically so that I avoid falling victim to the ‘gender pension gap’. I aim to be self-reliant and well-informed. 

I want to have paid off as much of our mortgage as possible and to continue building up a decent retirement pot.

Financial concern, what is the single biggest financial concern month-by-month: I am concerned that I am not saving or investing as much as I need to be, in order to have a comfortable retirement.

Summary by Grace: It’s great news that you’ve recently been able to purchase your first property with your partner – I want to point out once again here, that you contacted us before coronavirus, but the below should still be broadly applicable. 

You tell me that you currently have no children. 

Now that you no longer have to worry about saving for a deposit, you are focused on saving as much money as you can for the future with the aim of retiring early or going part time at some point. 

Increasing your pension contribution is something you are interested in doing and you added that you already overpay by 10 per cent on your mortgage in order to reduce the mortgage term. 

One way you are looking to increase your income is by diversifying and balancing your investment portfolio. 

The only outgoing debts you have is your student loan and your mortgage, with no credit card debt to speak of, meaning you are relatively free to use your money as you please. 

In keeping with trying to save, your spending is quite minimal with your main purchases being on food shops and petrol.  

Investment

You have said that you are looking to diversify and balance your investment portfolio. 

At present, you have a stocks and shares Isa and are also looking to move your Lifetime Isa into an investment version. For the tax year 2020/2021, the Isa allowance across all Isa products is £20,000.  

You opened a Help to Buy Isa with Halifax in December 2015 and saved £200 each month which was topped up with 25 per cent government bonus and a further 4 per cent interest. 

Then you opened a Lifetime Isa with Skipton, as soon as it became available in June 2017, and saved the maximum £4,000 a year and transferred your Help to Buy into your Lisa. Before you withdrew the funds for your house deposit, you had around £20,800 in your Lisa. 

If you are planning to invest for the long-term, are comfortable with making monthly payments and are comfortable with the risk you are taking, then you can invest wholly or mostly in shares. 

However, when your investment assets grow, or if you are concerned about being fully exposed to the stock market, then you should hold other asset classes – this has been highlighted by recent events.

You will also need to maintain the balance between diversifying your portfolio and not having so many separate funds that it becomes unwieldy and difficult to manage. 

Diversification is widely cited as the most important factor of successful long-term investing. I asked some experts, who gave this advice before the pandemic. 

All that said, it might be worth considering whether it is worth shifting the money in your Lifetime Isa into your pension, as you will benefit from employer contributions as well as the same rate of government support in the form of basic rate pension tax relief.

This is especially the case if you become a higher rate taxpayer later in your career, as pension tax relief rises from 20 per cent to 40 per cent. Read our guide to Lifetime Isas to find out the pitfalls of using them for long term investing, after they have outlived their usefulness in helping you buy a first home.

Holly Mackay, chief executive of Boring Money, said: ‘If you are a higher rate tax payer, it would typically make more sense to pay into a pension, rather than a Lifetime Isa, as the tax relief will be more generous. 

‘The Lifetime Isa is also capped at £4,000 a year so won’t suit anyone wanting or able to make substantial pension savings.’ 

She goes on: ‘As you are in your 30s and saving for retirement, you can certainly afford to be at the more volatile end of the spectrum and medium-risk may in fact not be the most prudent approach.

‘In your Isa, with over £8,000 so far, your balance is high enough that you might want to consider introducing just a few more funds to diversify. It’s generally sensible to make sure you have a mix of styles, sectors and geographies.

‘The six funds you hold, for example, do have quite a high allocation to the UK. I calculated that your Isa is about 47 per cent invested in the UK which is very high – if this is not an active decision you may want to increase your global exposure. 

‘As a beginner, you could consider a ready-made portfolio, or multi-asset fund from a group such as Vanguard, in both your Isa and Lifetime Isa or pension. 

‘Match the volatility to your expected timeframes – at 33 do not be afraid to choose a high risk option for your retirement savings, as counter-intuitive as I know that sounds.’ 

Patrick Connolly, chartered financial planner at Chase de Vere, said it makes sense to transfer from cash into stocks and shares investing as this should provide you with a better return over the long-term – however, in a Lisa, you can only tuck away £4,000 a year until you’re 50. 

‘If you want to retain your existing funds, make regular contributions and maintain a diversified approach then you should make the bulk of your monthly payment into your global funds, perhaps focusing on Royal London, and then investing a smaller amount into Fidelity Asia. 

‘An alternative approach could be to invest in an all-in-one funds, which will give exposure to stock markets around the world. Suggested funds could be L&G International Index Trust or Vanguard LifeStrategy 100 per cent Equity or 80 per cent Equity. 

‘These are buy-and-hold solutions which provide good diversification, need little ongoing maintenance and, as they are passive funds, they are also low cost.’

Even though you described yourself as medium risk, your funds are actually more high risk which is absolutely fine as long as your timelines are long, as they can be fairly volatile – as many novice investors would have found out the hard way given recent events. 

Pension 

One of your main concerns is your pension and how to boost it as much as possible before going part time or retiring early.  

The Teachers’ Pension Scheme gives you a guaranteed and increasing income for life from retirement age and since 2015, the scheme calculates the pension you will receive based on your career average earnings, so the longer your service and higher your average salary, the larger pension you get.

You are contributing 8.6 per cent towards your pension whilst your employer contribution is 23.6 per cent – a generous amount.  

Kay Ingram, chartered financial planner, said: ‘Teaching is a demanding profession, continuing until age 68 on a full-time basis may seem daunting. 

‘You can request early retirement, but the scheme reduces the annual pension you receive, reflecting that it will be paid for longer. 

‘There are several options you can choose to top up your pension now, so that you can retire earlier or go part time. Taking advice from a regulated adviser would be ideal.’  

There are several options you can choose to top up your pension now, laid out below, that allow you to retire earlier or go part time.

Buy-out: You have the option to buy out the reduction that’ll be made to your benefits if you decide to retire before reaching your Normal Pension Age. As your NPA is 68, you’ll be able to buy-out three years early and retire at 65 without a reduction.

You only have one opportunity to buy-out the reduction and this must be done within six months of you first entering the scheme. 

Contributions towards the buy-out option last throughout your career, unless you decide to revoke your election.

This is a long-term commitment and the rates you’ll be required to pay will change throughout your career.

You may already be too late to do this, but the option could be of interest to other readers. 

Faster accrual: This gives you the opportunity to pay higher contributions to increase your pension for each scheme year. 

An election for faster accrual must be made before the year it takes effect, ideally no later than January and it only applies for one year. It can be renewed each year.

There are three speeds you can choose instead of the standard 1/57th rate of your pensionable earnings. These are 1/45th, 1/50th or 1/55th. The extra you pay will be higher, the faster you wish to build up the pension.

Additional pension: This can be bought in multiples of £250 per annum, index linked, so increases every year until retirement age. 

To buy additional pension you can pay a one-off lump sum or have deductions made from your salary. 

The maximum additional contribution period is 20 years. The cost of Additional Pension is reviewed after each scheme valuation, every four years, so this could cost more, or less over time. 

You will also need to keep up the regular payments into the scheme. This could be a problem if you go part time later, as the cost of the additional pension will not reduce with lower earnings.

Additional Voluntary Contributions: You could make AVC savings which would not build up extra benefits from the Teachers Scheme but would build up a pension pot based on the investment returns.  

The fund could be accessed by you from age 55 onwards. 

Up to 25 per cent of the fund may be taken as a tax-free lump sum which could be used to buy a guaranteed income, either for life or a fixed period.

An alternative is to draw the cash and income you need directly from the fund on a flexible basis. 

However, if you were to draw out more than the 25 per cent tax free lump sum while still working and building up your Teachers Pension, your future pension savings and those of your employer could be heavily taxed. 

Phased retirement: You can take up to 75 per cent of your pension on two separate occasions. 

You could work three days per week receiving salary and draw down 40 per cent of pension. 

There would be a reduction in the pension payable, A rough rule of thumb is 5 per cent less pension for each year the pension is taken ahead of the normal retirement date.

Ingram added: ‘You are keen to ensure that you don’t fall behind in pension savings should you choose to take a career break or work part time. Stopping pension membership, for even a few years, can drastically reduce your retirement income.

‘To make up for the shortfall, contributions to a personal pension can be made. Even with no earnings, up to £2,880 per year can be paid into a personal pension and tax relief of up to £720 a year will be added to it.

‘Your personal contributions receive tax relief, so for every £8 you pay in, as a basic rate taxpayer you receive £2 in tax relief. Should you become a higher rate taxpayer this subsidy will double.’ 

Holly Mackay added: ‘If you are a higher rate tax payer, it would typically make more sense to pay into a pension, rather than a Lifetime Isa, as the tax relief will be more generous. 

‘The Lifetime Isa is also capped at £4,000 a year so won’t suit anyone wanting or able to make substantial pension savings.’ 

Lifetime Isa  

You are looking to move the £17,000 you currently have in a Lifetime cash Isa to an investment version with AJ Bell in a bid to make the most of your money. 

With the extra savings, you are hoping, as stated above, that you can either retire early or go part time as a teacher in the future.  

The AJ Bell website states: ‘Once you’ve invested in an AJ Bell Ready-made portfolio, responsibility for managing it rests with you. So you need to be sure you have the time, and confidence, to do this’. 

Therefore, before you decide to commit to any investments, ensure you have enough information at your disposal and are confident in your decisions.  

All charges for investing also need to be considered, as these can sometimes add up, and charges do impact on returns. 

Also, consider what was said above about Lisas, and whether they are the best vehicle to use to invest. 

Hayley Millhouse, head of adviser Services of OpenMoney, added regarding your Lisa (assuming you stick with it) and investing in general: ‘As you are not confident in DIY investing, I would seriously consider whether you have the time or confidence to manage the money you invest. I would recommend researching other options available. 

‘There are online financial guidance and advice companies that will help you make the right decisions and manage the investments on your behalf.

‘An important thing to consider for anyone designing a long-term investment strategy, is the level of risk you are willing to accept with your investment. 

‘As your Lisa funds cannot be accessed without penalty for 27 years, reviewing your risk appetite for these funds would be beneficial as you have a longer timeframe to ride out any short-term fluctuations.’ 

It is also recommended to have an accessible emergency fund available for life’s unknown moments with at least three months’ worth of essential expenditure.

Patrick Connolly adds: ‘The AJ Bell Lifetime Isa is a decent product and it has competitive charges, although it does impose a £1.50 dealing charge each time that you buy or sell.

‘If you invest fully in the stock market, you must be wary of investing just before the stock market slumps. It may therefore be a good idea to invest some of your money in shares but also some in other asset classes such as bonds. 

‘This way, if the stock market falls then all of your money shouldn’t be falling with it. The AJ Bell ready-made balanced portfolio will achieve this. It is currently invested 57 per cent in shares, 33 per cent in bonds and 10 per cent in absolute return funds. 

‘This might be a reasonable mix. However, you should be aware that AJ Bell won’t manage this portfolio on an ongoing basis and so you’ll need to review it and make any changes yourself. 

‘Alternatively, she can consider all-in-one multi assets funds such as Miton Cautious Multi Asset, Royal London Sustainable Diversified Trust and Vanguard LifeStrategy 60 per cent Equity.’ 

Bills  

From your bills, it looks like you are spending around £1,600 a year on your energy, which seems high for a household containing two people.  

This suggests that you are on an expensive fixed tariff – and could save by moving to another supplier with a cheaper deal.   

You could be saving hundreds of pounds a year on your energy bills – just by switching supplier. To see if you can find a better deal, use This is Money’s price comparison service with Compare the Market. 

All your other bills seem reasonable but it still worth using price comparison websites to see if you could save money – even if you are happy with what you are paying now.  

The above is not financial advice, but some tips for what our diary writer could do to achieve the goals mentioned.