Published: August 2024
When I started in financial services or, some might say fell into the profession, nearly a decade ago I, like many others, had little to no experience with much of what comes from working life and earning a real salary. However, I was in the fortunate position of being in a job where plenty of this is factored into the day to day and so I was able to learn from colleagues and qualifications and do so quickly.
Whether you yourself are venturing into the world of work or your family are, the non-financials, such as figuring out the commute to the office, alongside the financials, such as student loan repayments, can both be daunting. However, a few hints, good support and clear explanation can help greatly and can often be carried forward into later life.
Student Loans
In England, 37% of students leave school and head to university1 and so a significant number of us will have student loans and will be servicing this debt for many years. The repayments come directly from your earnings once they exceed certain thresholds (ranging from £21,000 to £31,395) dependent on your repayment plan; the repayments being 9% or 6% of income above the threshold.
Something that not many may know is that the repayments are calculated based on your weekly or monthly earnings and so could be affected by one-off bonus payments. You do have the ability to request a return of repayments should your earnings for the year not exceed the threshold, despite higher earnings in a given month which led to an automatic repayment.
Universities can charge up to £9,250 each year for tuition (up to £9,000 in Wales), however, the impact of interest on student loans is often not given the attention it deserves. Subject to the plan you are on, interest rates on student loans have been as low as 0.9% but now range from 6.25% to 8%2, with the rate setting based on the Bank of England’s base rate or inflation (RPI). An interest rate of 8% can greatly extend the length it will take to repay the loans.
Whilst you may not have the ability to make any repayments over and above the automatic repayments, this may change as you progress through your career and so it is important to be aware of where your balance has got to.
Pensions and Auto-Enrolment
At the start of your career, you likely have upwards of 40 years until retirement and possibly longer. Saving into your pension, which in most cases can’t be accessed until at least 57, may not seem to be a top priority. However, the earlier you save, the greater flexibility you should have in retirement.
Employers are all required to offer a workplace pension scheme and, in most circumstances, auto-enrolment rules apply. This requires employers to pay a minimum of 3% of qualifying earnings into a pension scheme and for employees to ensure at least 8% of their salary is contributed overall. This usually means that employees pay in 5%. Some employers will offer to “match” contributions should employees wish to pay in more than the minimum contributions and some may offer additional savings or incentives. An employer pension contribution is a key benefit that, usually, does not cost an employee in any way and therefore understanding the maximum possible benefit is crucial.
Furthermore, your workplace pension could be placed in a default fund or “lifestyling” fund and, either of these may not be the most appropriate option for you, particularly as you begin to build on your pension savings. The default might not be the right level of risk and equally it may not take into account your personal morals, but an “ethical” option may be available. A “lifestyling” fund adjusts risk as you get older and closer to retirement and may shift the investment risk in a direction which doesn’t match your long-term needs.
Reviewing the investment options both at the start of and throughout your career could make a significant difference to your ability to meet your retirement objectives. We view our ongoing relationships with our clients as integral to our business and are here to help them along their pension and investment journey. As part of this, we also run cashflow modelling to assist with our assessment of the investment strategy, but also as a good way of seeing the effect of extra contributions and the need to save more for the future.
It is never too early to start planning for your future or indeed too late if some of the items raised here have struck a chord with you later in life. If you would like to speak to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk.
Sources used:
1 CBP-7857.pdf (parliament.uk) – page 4
2 Repaying your student loan: How much you repay – GOV.UK (www.gov.uk)
If you would like to talk to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk.
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Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority does not regulate estate planning and tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
