Why coffee is bad for your pension!

Did you know that drinking coffee is bad for your pension?

Experts believe that if we were to pass up our daily latte, and instead put that £3, or £21 a week, aside to go into our pension savings, we would not only be less jittery, but our money would be working much more efficiently for us.

The topic came up lately when we had a discussion here in the office (over coffee, naturally – we’re doomed) about the received wisdom on how much a person around age 30 should be putting aside for their financial security, both in the short-term and long-term.

The first point we agreed on is that everyone’s situation is different

For instance, saving can be a lot easier for someone still living in the family home. They may find it relatively easy to save; others may find it considerably harder. The rules of thumb are simply anchors for us to hold on to as guides, and our message is: no matter how much or little you can save, it’s better to be doing something than nothing.

Some believe that by 30, you should have built a pension pot equal to twice your annual salary. Your 20s and 30s are the golden years for pension saving. It’s the first pound you save into your pension that works hardest for you, given that it will have 30 years to grow before you retire. So the motto is: save early and often.

The next point was: how much should you be contributing to your pension? 

Again, as much as you can afford, and everyone is different. Scottish Widows regularly say we should save 12% of our annual salary as a minimum, but they always stress that’s the minimum. A general rule of thumb on this is to divide your age in half, and treat that as the percentage of your salary you should be saving. No point in missing out on all that ‘free’ money in tax relief and employer contributions!

Then there’s the question: how much should we have in our emergency fund?

With the financial fortunes of the past year, many who had saved for a rainy day then felt they’d been hit by a monsoon, but the general wisdom is to build up 3-6 months of your household outgoings – housing costs, groceries and bills – in your emergency fund. Not many people realise that this can also be a cracking little nest egg if, for instance, you wanted to quit your job and have time to find another.

In terms of saving, we are in a time of historically low interest rates – the Bank of England base rate is on its belly at the moment at 0.1%. Unfortunately the base rate dictates savings interest rates, which are also a low: the top easy access Isa at the moment from Cynergy Bank offers an underwhelming 0.46%.

Worries about inflation

Which, in our office discussion, brought us to talk about trying to save against that mysterious force that many never think of, the ‘silent bank robber’ – inflation. That’s currently running at 1.46%, which savers should note because, if inflation is higher than your interest rate, then your money is being eroded, and you are losing rather than gaining.

Inflation affects the price of everything we buy, from a car, to white goods, to a packet of chocolate digestives, to the most important item of all, my glass of wine.

On a recent holiday in the Cotswolds, I paid £9 for a glass of wine with my pub lunch, which seemed a bit steep but not excessive. Then it occurred to me that put the price of a bottle at £27, and I had to have another glass to calm my nerves.

Businesses recovering from the last year are trying to get some money into the bank, so even if it’s not easy on us as customers, perhaps it’s understandable.

Even worse, inflation is expected to top the upper limit target of 2% in coming months, at which point the dear old Governor of the Bank of England has to write to the Queen and explain why.

One senior official has already predicted a spiral harking back to the 1970s, when a hurricane of inflation reached down into our wallets and ripped up our wages in front of our eyes. It won’t be anything like the 70s, when inflation hit 25% at one point, and the rate is expected to rise only for a short time, then rapidly come back down once it peaks.

It’s just worth bearing in mind that your savings are only growing, if they stay ahead of the storm.

And now it’s time for another cup of coffee.