Despite many households being hit hard by Covid-19, for some the pandemic has offered the opportunity to accumulate wealth and save significant amounts. Huw Wedlock, Director of our Singapore office, takes a look at the options if you’ve been fortunate enough to boost your savings during lockdown.
A recent report from the ONS showed that the household savings rate rose to a record of 16% in 2020, with a peak between April and June of 26%. Before the pandemic the rate stood at just under 8%. Unsurprisingly those most able to save came from high and middle income households. But if you’re lucky enough to find yourself with extra savings, how can you use them to best effect?
The first consideration is how old you are. Depending on your stage of life, it’s likely that you’ll have different priorities.
The middle ages and beyond
If you’re older, perhaps hitting middle age or above, it’s best to focus on repaying debt if you have any. If not, you can opt to add to your retirement savings, perhaps making lump sum payments into your pension or other investments. For some the additional capital might give the opportunity to explore new investment strategies, considering new approaches such as ESG investing. Of course extra funds also mean you can enjoy some spending, safe in the knowledge that you’ll be helping support the much needed economic recovery.
One clear benefit of the last 18 months is that many have seen their property wealth grow substantially. This creates flexibility; you could downsize if you are keen to realise some of that increase or need some capital, or upsize if you want more room, perhaps if you’re facing the prospect of a more permanent period of working from home. Don’t forget that if you’ve seen an increase in your home’s value, and therefore the overall value of your estate, you might need to consider an update to your estate plans, or at least a review of the impact of Inheritance Tax.
You might also be able to use your financial cushion to make a career move – perhaps to re-train, re-locate or scale back to a part-time role ahead of retirement. And for those keen to think about long-term aspects, there’s also the opportunity to make a gift to younger generations, perhaps in the form of a lump sum payment to help children or grandchildren take their first steps on the property ladder, or to establish their own nest eggs.
A younger perspective
If you’re below the age of 40, and have managed create some savings – perhaps whilst your social activities have been curtailed – you now have a good opportunity to create a solid financial plan for the future.
The first step is to ensure you have an emergency fund – a good rule of thumb is easy access to the equivalent of six months usual income which you can draw on if needed. The issue with the current situation is that you might only have the option of a low interest account, which can be frustrating. Alternatively you can consider buying property, although again saving for a deposit might mean you only have low interest cash account options. If you do already own a home it might be worth considering an offset mortgage. This enables you to overpay on your monthly mortgage payments, creating a financial cushion for future years, perhaps if you or your partner take a career break for family reasons. This approach can help you pay off your mortgage early, whilst ensuring that the capital stays available if needed in an emergency (either to cover your mortgage or for other life events).
It’s prudent, however early on you are in your career, to consider retirement plans and get a pension or investment option set up which you can contribute to over the years. It does mean that your money is locked up for many years, but time and discipline will put you in a better position in later life.
Another option if you’re aged 18-39 is a LISA – a Lifetime Individual Savings Account. This offers the same Income and Capital Gains Tax advantages of a regular ISA, but with an added benefit; a 25% bonus if your savings are used to purchase your first home or to contribute to your retirement. LISAs can be left as deposits in a savings account, or invested long-term using stocks and funds. They are flexible, enabling you to access funds in emergency, and can be used until you reach the age of 50, although you might face penalties if you draw down funds for ‘trivial’ reasons. Given their age requirements LISAs can also be useful vehicles for parents or grandparents to use to gift away additional funds.
If you have been fortunate enough to save during the last 18 months, you have a good opportunity to put your money to good work towards future financial freedom. There are lots of options dependent on your circumstances, and working with an experienced financial adviser can help you make the most of your situation. We are here to help so get in touch with your nearest office to discuss your plans.