A financial advisor has given people one tip if they get a pay rise. Many people will have just got their annual pay rise in April with the coming of the new financial year, and chartered financial adviser Martin Rayner from Compton Financial told Sky News they need to take action now to make sure it doesn’t disappear.
He explained that people should follow a ‘rule’ when it comes to getting a bit of a bump – and it’s the wisest course. He said: “My best piece of practical advice is… follow the “never saw it” rule. Start contributing to a pension the moment you start working. Every time you get a pay rise, immediately divert 10% of that increase into your pension. If you never see the money in your bank account, you won’t miss it – but your 60-year-old self will treat you like a hero.“
On the issue of pensions too he added: “The smallest habit that can have the most explosive impact is… starting a pension when you get your first payslip. Some people wait until their 30s or 40s, but by then, they’ve already missed the most powerful growth years. Assume a 7% growth rate, and your money doubles every 10 years. If a 27-year-old starts now, their money has 40 years to grow before they hit state pension age. That means every £100 they tuck away today has the potential to become £1,600 by the time they retire.”
Martin Lewis has previously explained why paying into pensions is a great way of making your wages go further. In a podcast last year Mr Lewis highlighted two key features of pensions that make them ‘unbeatable’. These are the fact that contributions are deducted before income tax is applied and that employers are legally required to contribute.
He explained: “The two pensions superpowers which mean you can double your investment instantly. The most important thing I’m going to tell you about pensions today. This is crucially important – pensions have two superpowers in my view and I want to explain them. The first pensions superpower is this: You contribute to your pension through your pre-tax income. and that means you get more savings than it costs you. So imagine you’re putting £100 into your pension from your salary which is how many do it.
“Normally for someone who pays tax at the basic 20 per cent rate for every £100 you get in your salary you only take home £80 of it. Yet pension contributions are made before the tax is taken out. That means you get to invest the £100, because the £100 comes off your salary but you only lose £80 in your pay packet. So effectively the tax relief is the difference – you get a £100 investment and it only costs you £80.”
“If you are a higher 40 per cent rate tax payer you get £100 investment and only lose £60 from your pay packet. If you’re a top 45 per cent taxpayer you get £100 investment and only lose £55 from your pay packet.”
Mr Rayner added another top tip related to your house. He said: “Some common advice that might not suit everyone is… pay down your mortgage if you have spare money. While this is definitely suitable in some situations, paying into a pension can give you much better returns. For example, paying down a 4% mortgage saves you 4% on that money. A high-rate taxpayer paying £60 into a pension from their own money will get effectively £100 of benefit. A 66% return on the money. So a much better return on their money.”
