Finance Questions Explained Simply

Simple explanations with no jargon

What is a Pension?

What is a Pension?

A pension is a regular income paid after we retire and leave the world of work behind.  It’s usually paid weekly or monthly and, if we have planned properly during our working years, should be enough to allow us to live comfortably in the fashion to which we have become accustomed.

It may all seem a long way off, coming to the end of your working life, when you are probably just setting out on it but unfortunately a pension is something you should consider as early in your working life as possible.

Plan your pension early

OK, maybe that is a little early for you to be thinking about it personally but many new parents will set up trust funds or savings accounts for their children as soon as they are a twinkle in dad’s eye.

For most of us however, retirement seems a very long way off, but if you sit down with a pension’s expert you will soon realise that if you are going to put money aside for your retirement you need to get started soon – and the more you can put into a pension plan early in life the harder it will work for you over the years.

If you live it the UK you will no doubt have heard of the ‘state pension’.  Put very simply, provided you work during your lifetime and pay Tax and National Insurance contributions, you should be entitled to receive a pension from the government when you retire – if it still exists by the time you retire!

The ‘pensions gap’ that they keep going on about on news programmes is all about the population living longer because of advances in medical care and better health education.   As a consequence, the government won’t have enough money when the next generation of workers retires to be able to pay them a state pension big enough to provide a decent standard of living and the experts are all considering what we are going to have to do to prevent ourselves from living in abject poverty in the future.

Pensions are really quite complicated so what you need to do is find an expert – an independent financial adviser or a company which specialises in providing pensions advice is the best place to start to get the advice you need.

So don’t put it off.  If you don’t have a private pension already (ie not a state pension), go and find out about it.  We’re all going to need a way to fund our old age.

Retirement Pension

Leave a comment »

Direct Debits and Standing Orders

Direct Debits and Standing Orders

So what’s the difference?  In fact, what are they at all?

When you leave home and get your first place there comes with it a raft of responsibility and … BILLS.  Not much fun.  You are likely to have utility bills, such as gas, electricity or maybe oil;  a telephone bill – either landline, mobile or both;  and you will probably have other bills which are for large-ish amounts.  You will probably want to spread the payments over time so it’s not such a big ‘ouch’.  Car insurance, TV license and satellite TV are all good examples.

 

Let’s say you are earning £1200 a month after tax etc (your ‘take home’ pay).   You buy a car with your savings but you don’t have enough for your insurance which is going to cost £1000 for the year.  Obviously you can’t afford to pay it all in one go because then you won’t have enough money to pay your rent, the phone bill, any heating costs and nor will you have enough money to last you the month for food (or, more importantly, beer!).

 

 

You can spread the cost of the £1000 insurance bill by agreeing with the insurance company to pay by direct debit.  All you have to do is complete the form which gets sent to your bank and this authorises them to collect the money from your account in equal amounts on a certain day each month.  By setting up a direct debit it allows the company to collect differing amounts of money from your account, so it might collect 11 payments of £85 each month and one final payment of £65.

 

 

The same goes for your phone bill – the amount you use each month might vary considerably.  One month the cost might be just £20 and the next it might be £35 for example, depending on how much you use it.  By setting up a direct debit, the phone company can collect the money you owe them without having to send you a bill which you stuff in a drawer and forget about.

 

 

So what is a standing order?

A standing order is a method of payment that you are more in control of.  Not all companies will allow you to set up a standing order but it is a method of ensuring that payments you owe are paid on time.  When you set up a standing order you have to instruct your bank to pay a certain company or person a set amount at set regular intervals, such as weekly or monthly, or maybe even annually.  You are totally in control of this payment and it can only be altered by you and not by the person or company you are paying.  Unless you instruct the bank to make only a certain number of payments, they will carry on until you tell them to stop, so it’s a good idea to work out how many payments you need to make if you can and set it up at the time.  It’s very hard to get money back once you have paid it away!

Leave a comment »

Debit Cards and Credit Cards

In this post I’m going to explain the difference between a debit card and a credit card.

Debit Cards

If you have a bank account already you will probably have a debit card.  Most high street banks such as Natwest, Barclays, Royal Bank of Scotland etc. issue debit cards.  A debit card is simply easy access to money you already have, so if you have a job and your wages are paid into your bank, you can use your debit card to draw your money out either at the counter in the bank or at a cash machine.

There is usually a limit on how much you can draw out.  This helps to prevent anyone from stealing all  your hard earned cash if your card and pin number should fall into the wrong hands.  The PIN number (Personal Identification Number) is 4 digits long and banks recommend that you don’t use famous historical dates such as 1066, which if you are unsure, was the year the Battle of Hastings was fought.  Anyway, I’m getting away from the subject.

When you put your debit card into a cash machine you will be able to see how much money you have available to draw out.  If you have an overdraft facility with your bank, you will be able to draw out more than you actually have as an overdraft is basically the bank letting you borrow money you don’t have from them.

It’s a good idea not to go overdrawn if you can help it as many banks will charge you a fee for using your overdraft facility.  I’ll talk about how to manage your money in another post soon.

Credit Cards

This is where it can get tricky for a lot of people.

Many people find that they can’t afford everything they want, so they get a credit card.  Unless you can afford to pay off your credit card in just a month or two, this is the best thing you can do with it:-

That’s because the credit card companies charge high rates of interest for letting you borrow money from them.  ‘So what’s interest rates’ I hear you say?  Well it’s a fee which is worked out as a percentage of the amount you have borrowed.  They call it the ‘APR’ or ‘Annual Percentage Rate‘ which is the interest rate for a whole year (annualised), rather than just a monthly rate.  You will often hear of people looking for the best deal – and that means a card with a low interest rate.  They work out the interest on the amount you owe and add it on – that’s how the credit card companies make their money and why people find it hard to pay off their debts – especially if they are paying a very high rate of interest.

Credit card companies such as Barclaycard, American Express, Virgin and the like may offer deals such a ‘Zero per cent on balance transfers’.  What they are trying to do here is get you to switch from a credit card company where you might already owe, say £1,000 or more, to their credit card by not charging a fee for say the first 12 months.  If you can be confident that you can pay it off in a year then it might be worth going for but beware – there is often an up-front fee for making the switch.

If at all possible, the best thing to do is not get a credit card and save up for what you want, otherwise you might find yourself owing more and more money – this is what’s known as ‘getting into debt’.

Well, that’s all for tonight.  Please do let me know if you have any questions.

Leave a comment »

finance explained simply

Mention anything to do with managing finances in my house and everyone scatters in different directions.  It’s like trying to herd cats.

In this economic climate (words we have heard so often since 2008) it’s hard to be enthusiastic about anything to do with money, let alone trying explain it to your kids.  With doom and gloom about the economy in the news on a daily basis it’s easy to switch off.  The constant reports of profit warnings, the Eurozone crisis and the like leave many people cold and my partner now often changes channel to avoid the depressing news reports.

With this blog I want to simplify topics such as insurance, pensions, mortgages, and taxes so that you get a general understanding of the subject which, if you need to, you can then explore further.  I want your children to be able to read this and for the lightbulb to go on for them without boring the pants off them.

I hope to impart some useful advice along the way and I expect I will probably learn a great deal myself in the process.  Your feedback and comments will be really important too, so please don’t be shy to let me know your views, or indeed if you think I have mis-represented anything.

Leave a comment »

Follow

Get every new post delivered to your Inbox.