Ask Jennny Ross: I need to start saving but I don't know where to begin

Question: I am 40 years old with a small income and would like to make better financial decisions, such as starting to save and contributing to a pension, but don't really know where to start. For example, I have a big student loan that continues to grow in interest, but would also like to start savings, but the advice I've previously seen says I should prioritise debts over savings – but paying off my student loan could take years and years. I also have lots of pension pots from various jobs over the years and don't know what to do with them.
The first goal of a saving strategy should be to build up an emergency fund of at least three months’ worth of expensesThe first goal of a saving strategy should be to build up an emergency fund of at least three months’ worth of expenses
The first goal of a saving strategy should be to build up an emergency fund of at least three months’ worth of expenses

Answer: You’re right that it generally makes sense to pay off any debts before starting to save. That’s because you’ll often be paying more to borrow than you can earn by saving: the best rate on a £5,000 personal loan at the moment is around 4 per cent, compared to around 0.7 per cent on an instant-access savings account.

But this isn’t a hard and fast rule as not all debts are the same. Some might have a lower interest rate than your savings – for example, if you’ve got a balance on a 0 per cent credit card.

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You mention that your student loan is holding you back from getting into the savings habit. It shouldn’t. Student loans are a very different beast to personal loans and credit cards. Yes, they’re often big amounts of money and yes, interest starts accruing straight away, but unlike other debts they don’t appear on your credit report and you don’t have to repay them unless you’re earning a certain amount. For Scottish students who started an undergraduate or postgraduate course after 1 September 1998 it’s £25,000.

What’s more, student loans eventually get written off if you haven’t repaid them by a certain point. In your case – assuming you took out your loan in 2005 or before – this would happen once you turn 65.

So what should your savings strategy look like? Your first goal should be to build up an emergency fund of at least three months’ worth of expenses. Because you might need to access this money at short notice, choose an account that gives you this option. These are known as ‘instant-access’ or ‘no-notice’ accounts – though double check the T&Cs to make sure they’re true to their name and don’t apply any limits on withdrawals. Setting up a direct debit for a regular deposit is a good way to establish the habit – you can then top this up whenever you can afford to.

Before 2016, an Isa was the obvious first port of call for savers, because they shelter your money from tax up to an annual allowance – currently £20,000. But now most savers don’t have to pay tax anyway, thanks to the personal savings allowance. This means you can earn interest of up to £1,000 a year tax-free if you’re a basic-rate taxpayer and £500 if you’re a higher-rate taxpayer. So your decision on whether to go for an Isa or ordinary savings account can just be based on whichever pays the best rate. Unfortunately, even the ‘best’ instant-access rates are well below 1 per cent.

Once you’ve built up your emergency fund, consider opening a fixed-term savings account. These generally offer better rates in exchange for you giving up access to your money for a set period – usually between one and five years.

As for your longer-term savings, you’re not alone in struggling to keep tabs on multiple pension pots. On average, we’ll have 11 different jobs over our lifetime, so we’ll build up 11 different workplace pensions in the process.

An obvious solution here is to combine your savings into a single pension (known as ‘consolidation’). This will not only make them easier to manage, but could reduce the charges you’re paying as well. But there are potential drawbacks – some schemes charge exit penalties, for example.

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Before making any decisions, carry out an audit of your existing pensions. Make sure your details are up to date with each one and check you won’t lose any valuable benefits by transferring.

If you do opt to consolidate, you could transfer them to your current employer’s scheme or you could set up a personal pension with a provider of your choice. The scheme you’re moving to will take care of all the admin once you’ve given them details of the pensions you want to transfer.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

Jenny Ross is the editor of Which? Money

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