The Musician’s DIY Guide to Saving & Investing for Retirement
The following information does not constitute financial advice or serve as a recommendation to buy or sell any financial instrument, and should not be considered as such.
I am not regulated by the FCA, in case you were wondering.
Introduction
I've been speaking with a few mates and colleagues recently about the subject of pensions and saving for the long term. A few years ago, I developed a real interest in investing and I've since spent a lot of time seeking to understand as much as I can about how it all works.
I've put together this guide in an effort to help people who are in a position similar to me, whilst simplifying the process and losing the jargon. Current estimates place my state pension age at somewhere around 70, so I figured that I need to have something else in place.
Collecting a pension used to make me think of shuffling down to the post office to collect a payment when I’m in my eighties. But, pensions can actually be about having the freedom to make choices later in life - it doesn’t even mean that you’d need to stop working; a pension could perhaps act as a second income, provide the opportunity to pay off the mortgage or just make life more comfortable. The point is, they’re not necessarily as boring as they sound.
“Most importantly, anyone who is willing to take the time to do bit of research can learn how to set up and manage their own pension. They can absolutely do so without needing to pay a financial advisor.”
This isn't exclusively for musicians, anyone who works self-employed or as a contractor and are interested in how they might start to build a little for the future, can find value in this post.
Why it's worth doing
To many people, the whole thing is incredibly dull and in some cases, it's hard to imagine how small amounts each month can make a difference. But, even just a little saving now will make a huge difference to the quality and options that you may have in later life and - despite what the financial world would have you believe - being able to benefit from investing, is down to a basic understanding of a few key concepts.
Options (SIPP/LISA/ISA)
Once you're convinced that you'd like to get proactive about a pension, you can of course just stick some extra cash in a bank account every month, but both the SIPP & LISA provide a couple of quite specific incentives for paying into them.
Both a SIPP & LISA can be thought of as normal bank accounts, but they also allow you to hold shares, funds and other assets within them.
SIPP - Self Invested Personal Pension
This is often the first option that most self-employed people would consider in lieu of any company or work pension.
Summary: Especially good for limited company owners. LISA is better for sole traders, in my view.
Boring stuff
Anyone under 75 can open a SIPP in their name and choose how much they would like to pay into each month or, kick it off with a lump sum.
With current rules, you won't be able to access the funds in your SIPP until you turn 55, this rises to age 57 in 2028.
The government will give you 20% in basic-rate relief if you're a basic-rate taxpayer. So, for every £80 you contribute, you'd get a top-up of £20. So effectively, to get £100 into your SIPP, it would cost you just £80.
Higher-rate tax payers would receive 40% relief and additional-rate taxpayers would get 45%, which can be claimed through a tax return.
Withdrawals from your SIPP, when the time comes are liable for tax.
Growth from the investments in your SIPP won't be taxed
LISA - Lifetime ISA
Summary: Perfect for sole traders who aren’t higher rate taxpayers and want to save long term.
Boring Stuff
LISA's are another way to hold investments but they do differ from a SIPP in a number of ways:
You can only open one if you're between the ages of 18-39.
You can only add money to the LISA up until you turn 50.
You can contribute up to £4,000 a year.
You can choose to use the money to buy a home or to fund your retirement.
The government will pay a 25% bonus on any contributions.
For example: If you were to pay in the maximum £4,000 for the year, you would receive a £1,000 bonus.
You can access the funds in your LISA from when you turn 60.
You don't pay any tax on funds which you withdraw from your LISA
“Especially considering that any withdrawals from LISA’s are tax free, they are hard to beat and are an excellent deal for most people.
If you are a basic-rate tax payer who is self-employed and you want to lock away some money for the long-term, take a good look at opening a LISA.”
ISA (Individual Savings Account)
These are just like LISA's but anyone can open them at any time, there is a £20,000 yearly limit on contributions and all withdrawals are absolutely tax-free. Just bear in mind, the government doesn't offer to top up your contributions but they can still be a great option for anyone.
Sole Trader vs Limited Company
If you operate as a limited company, you can make contributions to your SIPP directly from your pre-taxed income. This means that your pension contributions can be treated as a business expense, which could result in some decent tax savings for you overall.
Open An Account
Once you've decided which sort of account you'd like to open, you need to pick a platform or broker and and open an account with them. There are loads to choose from so its best to do your own research to decide what best fits your needs. I would say that the main thing to watch is the platform fee - what they charge you to hold funds will ultimately influence your returns over the long term.
Three of the key players in this field are HL, Interactive Investor & AJ Bell.
This is a decent guide, comparing a number of the platforms which offer various savings & investment accounts for the retail investor:
https://moneytothemasses.com/saving-for-your-future/pensions/the-best-cheapest-sipps-low-cost-diy-pensions
Why Invest?
Why bother investing? To make lots of cash obviously, but assuming you're sticking your money away for a long time - you have to consider the impact that inflation will have on the spending power of your money.
Although inflation has been at higher than average levels over the last few years, the Bank of England's aim is to keep inflation at 2% per year. According to website Pension Bee - the assumed level of inflation, used by the FCA (FInancial Conduct Authority) is 2.5%
So, you can assume that, on average, your money is losing around 2.5% in spending power, every year. This compounds of course so - if you had £100 saved - this would theoretically be worth £97.50 after the first year, £95.06 after the second year and so on.
What do I invest in?
Given the effect that inflation will likely have on your money, it is sensible to look at holding assets which will likely give you a return greater than the rate of inflation over the long-term. There are a huge number of assets in which you could invest your cash: gold, wine, classic cars or guitars but, one of the easiest and more accessible assets to invest your money in is company shares - or stocks as they are referred to in the US. I can’t emphasise how absolutely essential it is to be thinking long-term here - if you are thinking about buying shares, even if they are heavily diversified, you should be planning to invest for at least ten years, twenty years would be even better, thirty years would be better still.
This doesn’t mean that you need to buy a pinstripe suit and a subscription to the FT but instead, consider buying a basket of many different shares which will allow you to diversify your risk and spread your eggs across many baskets.
Instead of buying shares in a single company, look to purchase units in funds which hold shares of many different companies. This diversifies your investments and allows you to track the broader performance of the market. That market can be an ‘index’ and this is where index investing comes in.
Index Investing
An index - in financial terms - represents a basket of shares in a particular area of the stock market. The FTSE 100 and FTSE 250 represent segments of the UK market for example. Whilst the S&P 500 and Nasdaq indices represent segments of the US market.
There is countless research presented in numerous articles, by people who have experience and qualifications way beyond my own which explains why, passively investing in indices will yield superior results, when compared to choosing the shares yourself or paying someone else to do it.
Doing so will also likely reduce volatility, diversify your investments and allow you to take an almost entirely passive approach.
Here are a few experts to back me up:
How Do I Invest?
So if you like the idea of passively buying an index, you need a way of doing this. Buying units in a fund which tracks the performance of the index is the easiest way, often called a 'index tracker fund'.
Here are some examples of funds which target specific markets or countries:
Global Stockmarket Index (excl. UK)
FTSE All Share - Aggregate of FTSE 100 & FTSE 250
S&P 500 - 500 of the largest companies listed on stock exchanges in the United States
FTSE Japan Index
The first fund that I’ve listed above is, in my view, one of the best ways to invest in a broad range of companies from around the world. It's a simple low-cost fund which aims to mirror the performance of the global stock market.
Compounding
Apparently referred to by Albert Einstein as the 'eighth wonder of the world,' Compounding, is essentially, earning interest on your interest and it can work in your favour, if you're very patient.
Here's a great bit of writing on how it can work in your favour but, in summary - it’s brilliant and it will make a huge difference to your end goal.
Pound Cost Averaging
This is basically finance talk for 'drip feeding' your money into a fund or investment.
The idea is that if you set up an automated direct debit from your account, you will buy varying numbers of units in the fund every month. In doing this, You 'average out' the price amount you pay for a unit - buying more when the market is down and less when the market is high.
This approach means that you can worry less about what the market is doing and whether you're timing it right.
Wrapping it Up
Using cheap index funds which track the market is a great place to start. The key takeaway if you're looking to grow money over a very long period of time is to be very, very patient. It will take years, possibly decades to see results so you have to play the long game.
It’s important that you feel comfortable with whichever approach you choose to take so you need to understand what you’re doing. You don’t need to be a financial expert but having some broad understanding of where you’re investing your money and why you’re doing so is essential.
