Episode 333 - On this week's podcast I discuss the money mistakes to avoid in your 40s and 50s. Andy provides tips for buying a used car. Finally, we discuss the best strategy to ensure your online passwords are secure.
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Abridged transcript - Episode 333
Money mistakes to avoid in your 40s and 50s
Damien Fahy 03:03
One of the biggest mistakes that people make in their 40s and 50s is ignoring their pension. You've got to the point in life when you're in your 40s, where retirement might feel a long way away, but isn't as far as you think. So it's something you can't just keep putting off tackling.
So that means you need to make a plan. If you haven't made a plan already, you need to start to think about what your retirement might look like and how you might fund it, because you won't be able to work for the rest of your life.
Pensions
So the first thing I want people to do is go out there and find all their pension statements. Don't ignore your pension. That's a big mistake. Go and find out the information about all of the pensions you've got and pull it all together and start to look at it and analyze it. One of the times when it pays to go and get advice if you are really stuck is with pensions. Most people will have defined contribution pension and they're just pension pots you pay money into and then that money is invested, which then grows and you use that pot of money to provide an income in retirement.
Take a look at our Money to the Masses pension calculator https://calculators.moneytothemasses.com/pension. You can play about with the figures without having to put your full details in. Just put in your age, when you want to retire, how much money you've got in your pension, how much you might want to contribute each month and how much your employer might want to contribute. It will then provide an estimate (based on certain assumptions about investment growth) how much your pension pot might be worth in the future. You can also make changes to see how it impacts the figures, so you can change your retirement date or you might want to increase your contributions to see what the future might hold. Stop burying your head in the sand, because every day that goes by where you don't do something about your pension planning is another day that you lose in time and compounding. One of the things that everybody wishes they could do is turn back the clock.
Following on from that, though, I want people to look into their state pension. When you get to state pension retirement age, you will get a pension based upon your national insurance contribution history. You need to have 35 years worth of contributions to get the full state pension. Now a lot of people think they will automatically get the full state pension and that everyone gets the same but you don't.
What I want people to do if they’re in their 40s, but particularly if they’re in their 50s and getting towards the latter stages of their 50s, is make sure they get a state pension forecast. Click on https://www.gov.uk/check-state-pension to find out what sort of state pension you are likely to get. It is not just finding out what you might receive, it is important to know whether there is a gap because you've not paid enough National Insurance contributions, for instance, if you've taken a career break.
So if you're in your 40s, for example, you may have taken a career break at some point in the recent history in the last six years. That's the key part where you may not have been paying National Insurance Contributions. So if you can check your national insurance contribution record by, for example, getting a state pension forecast, then you can see if there's any gaps on your national insurance contribution record. If those gaps are in the last six years then you can pay to have those gaps filled and it normally works out very cost-effective to do so. Don't just think when you go back to work, there's nothing for you to do.
Equally, for females who may have taken a career break, they've got to think about their pension at work as well as their own private pensions, because they may have stopped contributing to those or they may not have increased their contributions over time. So there's likely there's going to be a period of time where they weren't contributing to a pension, or they weren't contributing as much as say a male counterpart would have done because their wage would have been increasing over time. So they need to be mindful of that when they do their planning and they might have to increase their contributions to their pensions to make up that shortfall. Don't bury your head in the sand this make a plan and seek advice from an independent financial advisor.
Opting out of auto-enrollment is another mistake I think people make when they start focusing on other areas of their finances in their 20s and 30s. Make sure you are part of your auto-enrolment at work. That way you’ll be getting those contributions from your employer on top of your own, helping to build your pension pot over time.
Next, particularly around the age of 55, you need to think carefully about how you start accessing your private pension. I think it's probably the best time in life to get financial advice, because of the rules that happen and the options you've got around that time. Making a mistake here can cost you in the future and it can have knock-on effects. So for example, if you want to go into drawdown and use your pot of money to provide an income, I would suggest you go seek advice. If you go back to podcast 271, I did a whole piece about drawdown and how that works when you're taking money out of a defined contribution pension. So go back and listen to that podcast.
One of the biggest mistakes around pensions, especially when people are in their mid to late 50s, is people taking money from their pension just because they can. It doesn’t make sense to needlessly draw money from your pension pot. The issue is that you're going to be taking money out of a tax-free environment into a potentially taxable environment and it's also going to be part of your estate, meaning it could be potentially liable to inheritance tax as well.
So there's a lot of planning that needs to be taken into account when you're taking money out of a pension. There are people who take income, for example, out of their pension, and they might decide to take more than the 25% tax-free lump sum. The issue is that you are therefore going to be liable to taxation on that excess. Again, if you go back to podcast episode 271, I explain how it all works. If you take money from your pension pot in excess of your tax-free lump sum allowance, then your pension income is liable to tax and you could even trigger the money purchase annual allowance. What that does is it reduces the amount you can pay into a pension in future down to £4,000 pounds a year. So there may be people, for example, who want to continue working all through their 50s into their 60s, and keep putting money into their pension, but think that they can take some money out. Doing that could end up limiting what they can put into a pension over the next decade. So you want to make sure you don't trigger that unnecessarily and it is something to bear in mind. Always take advice if you are unsure.
There are times when you're thinking about taking money from a pension, where it can be better to take it from a different source, maybe savings or a Stocks and Shares ISA. If markets were crashing and your pension had plummeted in value, withdrawing lump sums out of that will start to hamper its ability to rebound or its ability to provide you with a sustainable income over the long term, because you're obviously taking a bigger chunk of it out. Something to bear that in mind.
One really interesting thing that people might not realise is that there is a government initiative where you can get free guidance meetings if you are over 50 via the Money Helper website. You can get a free 45 to 60-minute consultation in which you'll be explained your options for your defined contribution pensions, paying particular attention to the taxation and your options when it comes to taking money out of pension. Click on the link to find out more https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise/book-a-free-pension-wise-appointment
Another thing is to ensure you do not exceed the annual allowance that they are allowed to put into a pension each year, because it does taper if you earn lots of money. Additionally, don't exceed the lifetime allowance which is the amount that you've got in your pensions and that lifetime allowance is £1,073,100. Obviously, that's not going to impact a lot of people, but as people become more affluent, these are things they need to be mindful of.
Wills and lasting power of attorney
Now if you go back to podcast 179, I did a whole piece on lasting powers of attorney which is where you're able to give somebody the power to control your finances, or make decisions on your finances or your health if you are mentally not capable of doing so in the future. It's very cheap to do. It costs £82 to do it online via the Gov.uk website. Making a will is another incredibly important thing you should do if you are in your 40s and 50s, especially if you have children and have assets you want to pass on. Having a will and lasting power of attorney in place are important things that you need to be thinking about, but also for your parents. It may be a slightly uncomfortable conversation to have around death, but it's something that we all should be talking about. There could be inheritance tax to pay, if somebody were to die, let's say your parents, you need to have these conversations about this stuff before it occurs. How big is their estate? Have they got wills in place? How would they fund long term care if it was needed? Go back to podcast epsiode 330 where we did a whole piece about care and funding care and future.
Mortgages and debt
Now let’s talk about mortgages. Not having a plan to pay off your mortgage is not a good place to be. Most people these days will have repayment mortgages, but there are going to be quite a few people in their 40s and 50s who have an interest-only mortgage. You're going to have to have a plan of how you're going to repay that. That may mean that you end up downsizing or investing money to be able to pay that mortgage in the future, but you need to think about that and put a plan in place. You don't want to get to the point where you’re suddenly facing a huge debt that you haven't made contingency plans to actually pay.
One issue as you move into your 60s is that your options when it comes to mortgaging or re mortgaging start to reduce. You can still get mortgages way into your 60s, so there's not a problem, but the length of the mortgage will eventually start to become an issue. So you might want to think about that if you're going to need to move and you're going to have to fund that with a mortgage.
In terms of investing, staying in cash or leaving money in a low-risk fund for a long period of time is a mistake that people make. People do that in drawdown a lot. That's one of the things that the FCA is worried about. Money is effectively losing its buying power because of inflation. So don't be one of those people and seek advice. Most pension providers now have pension pathways where they will show you the sorts of portfolios that you can invest in to try and generate an income.
Insurance
The next thing to cover, especially if you're in your 40s and 50s is a lack of insurance. I'm talking about life insurance, critical illness insurance, income protection insurance and health insurance. They're all different types of insurances that if you listen to the interview I did with Emma Thomson, you’ll see the power of having those insurances.
Emergency fund and savings
Make sure your emergency fund isn't too small. As you earn more money, your bills get bigger and so don't just sit there and think you've got a certain amount of money and that will do. You need to increase it to be in line with your living expenses.
Don't be complacent about debts. I'm thinking about credit cards. Sometimes people live with them for so long that they just become complacent about the idea that they will ever be able to repay the debt. You don't want to get into that scenario because your time is running out.
Don’t make the mistake and assume that your best earnings are yet to come. People always assume they're going to have more money year on year or going forward but you just don't know how your career will go or what will happen. You may not earn a lot more money in the future and so you may hit your peak earnings way before you retire. It happens at different stages for different people and so your peak earnings won't necessarily happen the day before you retire. So, if you're making a plan based upon the fact you're going to earn lots of money in the future, just be mindful that it might not happen. Don’t fall into that trap of thinking that the version of you tomorrow is going to be richer, more successful and will solve all the problems of today, because that might not happen.
Andy Leeks 20:57
Tips on buying a used car
Since the pandemic, people are starting to look at their finances in a slightly different way. I also know anecdotally of a few people who've reduced the number of hours that they are going into the office and so their annual season ticket isn't as good value as it used to be. People are looking at other ways that they can commute to the office and have been looking at buying a used car.
So the idea of this piece is to provide a few tips on buying a used car. There are effectively four main places you can buy used car from; I'm ignoring the fact that you can buy a car from auction because that's more specialist and not something we're going to cover in the podcast.
Buying a car from a main dealer
You'll receive a better level of vehicle preparation by buying a used car from a main dealer. They will likely do a vigorous inspection, provide you with a 12 month MOT and it is likely to come with a relatively good warranty, maybe six or 12 months. Additionally, you'll get some after-sales support as well.
The flip side to that is it's going to come at an extra cost. The dealer is likely to have higher overheads and so you will be paying more and so you need to work out whether you're prepared to pay more for that peace of mind.
Buying a car from an independent garage
Again, you should expect a good level of vehicle preparation. In most cases, the cars will come with a new MOT and some level of warranty. A point to consider it that independent garages will be keen to protect their reputation. They're independent and so they survive on reputation and so that can be an advantage to you as the buyer. Again, you're likely to pay slightly more if you go through an independent garage but you do get those extra assurances with the MOT and warranty.
Buying a car from a driveway trader
A driveway trader is essentially someone who trades vehicles for profit, often picked up at auction. Cars are often sold as seen and there's usually a minimum amount of vehicle preparation carried out and very little after-sale service. There are some good deals to be had, but it does come with an added risk.
Buying a car from a private seller
A private seller is essentially someone looking to sell their own private car. Cars can be cheaper by buying from a private seller and you have the added bonus where you can talk to them about why they're selling the vehicle as well as asking about the history of the car.
If you are buying from a private seller it might be advisable to take someone who knows something about cars so they can carry out a basic vehicle inspection. Additionally, the AA can do a vehicle inspection on your behalf if the seller agrees. It costs either £142 or £192 depending on the type of inspection you require, but it may be worth the money in the long run.
You do have slightly fewer rights in terms of your consumer protection when you're buying privately, but one tip is to ensure you meet at an address rather than a public place. This way you can make sure that the vehicle is registered to the address that you're going to.
Documents and consumer rights
The most important document you need to check when buying a car whether it's from a dealership or a private seller is the V5C, also known as the registration document or the logbook. Make sure that the make and model of the car you're buying matches what is on the V5, and make sure that the number plate matches too. You should also check that the Vehicle Identification Number (VIN) matches the VIN on the vehicle and that can normally be read from outside the vehicle under the lower part of the windscreen.
A good thing to remember about the V5C document is that it proves the registered keeper and is not proof of ownership. You might therefore want to ask for proof of ownership from the seller, for example, a receipt of purchase or an invoice just to tie the things together.
Another thing you should do is check the vehicle history as it can reveal if there are any hidden discrepancies in the car's history. You can get one online from the RAC for between £10 and £30.
When transferring funds, make sure that you use some sort of trackable, traceable method, such as a credit or debit card and always ask for a receipt. Under the Consumer Rights Act, all cars bought from dealers must be of satisfactory quality fit for purpose and as described. Whether you've bought through a dealer or privately, the vehicle must be roadworthy, which means it must be fit and safe to drive. So even if you buy a car from a private seller, the vehicle must be fit and safe to drive under Section 75 of the Road Traffic Act 1988. It is illegal for anyone to sell a vehicle that is not roadworthy.
Remember that an MOT is not proof of road worthiness. A lot of people will look at an MOT and assume that the vehicle is safe to drive on the road. An MOT only proves that it was roadworthy at the time that the certificate was issued. So if that was say 10 months ago, it is possible that the car isn’t roadworthy. If you think you've been sold an unroadworthy vehicle, then you can report it to the local Trading Standards as well as the Driver and Vehicle Standards Agency, the DVSA. Depending on the issue that you report, you're actually entitled to a number of remedies up to six years after taking delivery of the vehicle.
Finally, always consider buying a used car, either in part or in full, using a credit card. So long as you pay over £100 pounds and not more than £30,000 pounds, you get full protection from Section 75 of the consumer credit act, meaning you get assurances from the card issuer itself entitling you to your money back if things go wrong.
Damien Fahy 33:07
Creating passwords and keeping them secure
Ok, so the last piece we're going to go on to now Andy is to do with passwords. We all have passwords that we use online and there was an interesting post by the National Cybersecurity Center talking about passwords. We're normally told to create these extremely complicated, hard to remember passwords, however, they’ve said that they're still promoting the idea of using three random words as a password. That might seem strange, because you think they'd be quite happy with people creating the crazy random letter and number combinations, but when they've looked at it, they said that actually three random words does work well, because it creates an unusual combination of letters, which still makes it a strong password.
Ironically, some of the techniques that some of these systems use to create passwords and particularly people when they try to create hard to guess passwords is replacing an O with a zero for example. Sometimes people will replace a number 1 with an exclamation mark thinking that they’re making their password more difficult to crack. It has been proven that this in fact weakens the password that you're creating, because the hackers that use algorithms that try to crack these passwords are programmed to try those sorts of combinations as well.
So, using three random words is still a good way to create a password mainly because it creates a strong password with some odd combinations of letters. More importantly, it is also usable and relatively easy to remember, meaning people aren't having to write them down.
I’m now going to bring Justin onto the podcast as he does a lot of our tech stuff and he is going to talk about something called a ‘password manager’. He’ll explain what they are and why you might want to use them.
Andy Leeks 36:29
Okay, Justin, welcome to the show. So password managers, What on earth are they How do they work
Justin Fahy 36:34
Password managers are quite simple, really. They are either browser extensions or pieces of software that you store all your passwords in and you have one master password that grants access to those passwords, enabling you to easily autofill any sites and forms that require password access. I would split them into two types; there are free and paid versions of them.
Free password managers
Free versions are usually available through your browser extension. Many of us will be aware of things like Chrome's password manager that pops up from time to time as well as the one provided by Safari. These are browser-based and they tend to suggest storing your passwords when you enter them into a site. They get securely stored into the cloud servers of those services and when you go to those sites in the future, you can put them in
Third-party password managers
The second type is what I call third-party password managers. A couple of examples are ‘One Password’ and ‘Last Pass’. They are third party services that securely store your passwords and usernames, using encryption, in their services on your devices, that's the biggest difference. The key concept of all of these services is that you have one very strong password that you access the services. All of your passwords are remembered and are unique. Ultimately, you should always have a unique, strong password and it should always be different in every location. That's why you use a password manager.
Andy Leeks 38:12
One of my biggest issues and probably where I come unstuck is trying to come up with passwords. Do password managers offer any sort of help with regards to coming up with passwords?
Justin Fahy 38:37
Yes, they all do. If you sign up to a new service, they also suggest a password. You simply click to accept that and then it will store it. You don't even have to remember it. That is one of the key benefits of it because you don't have to come up with them and you don't have to remember them. The passwords can only be accessed by entering the one strong, unique password that looks after that service. Crucially, all of the passwords are encrypted and can't be accessed by anyone.
Another benefit of a password manager is that they scan the internet as well as the dark web for password exposure. Safari and Chrome both do this. They willl alert you when they find evidence of a security breach and recommend that you change your password, which can be done in a couple of clicks.
Andy Leeks 40:27
Do you have any personal preference of whether to use the free browser options, or a third party options? Do you get anything extra by paying for third-party software?
Justin Fahy 40:40
Ultimately, it comes down to personal choice. The difference between the paid services and the free services comes down usability functions and some additional features here and there. The free services are often the browser-based services and you can only use them in your browsers whereas a lot of the paid for ones will work across a number of browsers and devices.
The other thing that premium services have is a designated emergency contact.. So if I use, let's say, for example, Last Pass, I could designate you as an emergency contact if I've lost access to everything. Then, as a Last Pass user, you can give me access back to my account. Also, you can share these passwords across your family, so your partner can access all the sites that you have the passwords for or you can limit it to certain services. Netflix is a good example where you can share password access to family members, meaning you don’t actually have a password written down anywhere.
Finally, there's one last thing I would love everybody to do. Your email is one of the most important things you access because all roads lead back to your email address. If you reset passwords, they go back to your email, in order to prove who you are, people will send you an activation code to your email address. If your email password is used somewhere else, it is not unique and so go and change your email password now. I can guarantee if someone gets into your email, they can pretty much access everything. So go and change your password and put two factor authentication. It is the one thing that is easy to do and will have the biggest impact in making sure you don't fall foul of a security breach.
Resources:
- Money mistakes in your 20s/30s
- State pension forecast
- Check a used vehicle's condition with AA
- Used car vehicle history check
- RAC used car guide
