How to secure your family’s long-term finances | AD

*This is a collaborative guest post

In these uncertain times in which we live, there can be few greater concerns as a parent than securing the long-term financial future of your family. Things like owning a house, being debt free and living off a decent pension are things that previous generations almost took for granted. But today these things are hardly a guarantee, and who knows how the dynamics will shape up by the time our children are all grown up.

All we can do is take care of things at home, and do our bit to safeguard our future. At the core of this, really, is saving. But how best to do it? There are good ways and bad ways to save, and given that saving of any kind requires at least a minimum of personal sacrifice, you want to ensure that you are getting the most value from the pennies that you squirrel away.

Here are some of the more popular ways of going about saving, and the pros and cons to each…

Pensions

By April 2017, it will have become compulsory for all employers to have enrolled their staff into a defined contribution pension. The employer will need to contribute a minimum of 1% of your salary (matched by you), which essentially amounts to free money to help fund your retirement. In addition, you also get tax relief as a result of the deduction of your pension, which represents a double benefit. However, when it comes to withdrawing from your pension (from the age of 55), only a lump sum of 25% is available tax-free, and any additional drawdowns are taxed at the marginal rate.

However, pensions have become all the more flexible since April last year, given that there is no longer the obligation to convert it into an annuity. It does place emphasis on self-discipline though, as you’ll need to ensure that your pension lasts as a sustainable income for the rest of your life. To help supplement this, there are also options like private pensions and SIPPs.

Savings and ISAs

Having cash in the bank is a safe bet, given that all residents of the UK are covered by the Financial Services Compensation Scheme (FSCS). But, aside from peace of mind (and flexibility with spending), there isn’t a great deal of benefit to letting money sit in a current or savings account, especially with interest rates now becoming almost non-existent.

ISAs are a popular alternative, especially Cash ISAs which are easy to use and understand. However, they’ve also seen a decline in interest rates since the recession. Rates of 5-6% were not uncommon a decade ago, but even ISAs offering 2% these days are not easy to find.

In comparison to a pension, the downside is that ISA contributions obviously don’t offer any tax relief on your salary – only on the interest you earn. However, the good news is there’s no tax or fee involved when you withdraw from them.

Investments and alternatives

If you’ve got the appetite for it, the world of investing is potentially one of greater risk and reward. Stocks, shares, property, bonds, premium bonds – the options are endless. Yet among the growing field of alternative finance is a form of investment which is becoming increasingly popular – peer-to- peer lending. As the name suggests, this involves lending your money to fellow consumers who need a loan. The main benefit of this – aside from being incredibly convenient – is that returns tend to be in the region of 6% as a result of the interest the borrower(s) pay on the loan(s) which you have offered to them.

The risk of course is that the borrower doesn’t pay you back, and there is no FSCS if this occurs. However, peer-to- peer platforms do counter this with safety measures of their own such as a reserve funds to cover any losses, and even an insurance in some cases.

Diversification and self-discipline

There are many ways to look after your family nest egg, and what works for one person may not be suitable for the next. One common rule that generally makes sense though is to spread risk by diversifying your money as much as possible. After all, you want to maximise returns, but you don’t want to lose any of your hard-earned pennies.

All in all, saving money and then finding a suitable home for it need not be a complicated exercise. All it needs is a bit of self-discipline and common sense, and then you’ll no doubt keep moving in the right direction. And looking back, you’ll be glad that you did, because while we are less and less able to rely on those we elect in Government to make things easier, taking matters into your own hands can go a long way to ensuring your family’s long-term financial security.