With inflation spiralling, everything is getting more expensive. Many people’s finances are being squeezed. Money isn’t going as far as it was, which means less disposable income, and even less money to spend on the things you need.
As a result, many of us are looking at our budgets right now and searching for ways to economise. Immediate needs like keeping food on the table and the lights on come before long-term goals like investments and a pension pot.
Perhaps you could consider reviewing your life insurance policies as well, can you look to rebroke them for a cheaper option? Life insurance is very important, and you should always stop and think before cancelling any policy.
So, what about taking a break from pension and investment contributions, and life insurance payments until the economy in general and your monthly income in particular improve?
A break from contributions sounds like a great idea, especially if retirement is still a long way off – until you realise that saving tens of pounds each month now will cost you thousands in the future, and potentially cost your loved ones even more.
Small gains now may mean big losses later
Time really is money. Put cash away now, in a deposit account and it goes to work for you, potentially growing your deposits with interest year after year. This is compound interest, and means you earn interest not just on the amount you put in, but on the interest it earned in previous years. It’s clever. Einstein was a fan.
So, the sooner you put your money in, the longer it has to potentially grow, and the more you should potentially make.
But – every pound you don’t save now will mean many pounds less when you need them in the future.
If you are looking at cash ISA investment, there’s also the government limit on what you can deposit. If you don’t use your annual ISA investment allowance, which is £20,000 for this tax year, you lose it – and all the potential for growth that goes with it. And you can’t catch up later.
But things get even worse if you take a break on your pension contributions.
Miss out pension contributions now, and you could miss out on a comfortable retirement altogether. Not paying in actually costs you money not once, but three times.
First, you miss out on tax relief. As a basic rate taxpayer, tax relief means it only costs you 80p to put a pound in your pension. If you pay higher rate tax, just 60p becomes a pound by the time it reaches your pension pot.
Second, you may miss out on potential growth on the money you don’t put away.
And third, a pension is probably the most tax efficient way to make money you’ll ever come across. You should consider trying to make full use of it.
What about insurance?
Life insurance is unusual because it is something that we buy and hope we never need. You could stop paying for it each month and save a few pounds. You would never notice that it wasn’t there to protect you – but your loved ones would if anything was to happen to you.
Instead of a cash lump sum to help replace your income, they could be facing financial ruin.
What’s more, cancelling a life insurance policy because of the cost might mean short term savings – but when you come to restart your policy in the future, you may find the costs are far higher.
So, what can you do?
Big bills are coming, and nothing is getting cheaper. But if you are feeling the pinch now, think about how you will manage if you retire without the money you need. If you do need to make cuts, you might want to look elsewhere before you start cutting into your future.
Contact us at Continuum. We may be able to help you find more affordable alternatives to some of your current commitments. We can certainly work with you to help you make the most of your financial potential now, and in the future.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of an investment can go down as well as up. Capital is at risk.
Equity based investments do not afford the same capital security as deposit accounts. The Financial Conduct Authority does not regulate deposit accounts.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice.