Aside from rent or mortgage payments and utility bills, our cars are usually our biggest expenses. So, you’d think we’d do whatever we could to keep our motoring costs as low as possible, wouldn’t you? Despite this, around 17 million people in the UK are overspending on their car insurance.

If you want to know how you can cut your car insurance costs, read on.

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The simple mistake that makes people overpay

We’re all very busy and are often trying to cram far too many tasks into any one day. Therefore, when your car insurance provider gives you the option to auto-renew your policy, it can seem like a great idea.

MoneySuperMarket’s car insurance research estimates that 17 million drivers let their car insurance auto-renew last year, costing a total of over £830 million.

The price comparison site found that 52% of drivers let their insurance renew automatically in 2021. This is a 27% increase from 2020, when 41% auto-renewed their car insurance. The reasons drivers gave for doing this varied.

Of those surveyed, a quarter (25%) did look around but stayed with their existing provider as it was easier. This is a 20% increase from last year.

Meanwhile, 14% didn’t switch because they believed that changing car insurance provider takes too much time or effort, while 19% don’t believe there are significant savings to be made.

It’s true that auto-renewal saves you time and the hassle of shopping around. However, as companies increase their premiums, it can cost you a lot more.

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Why auto-renewing your car insurance is dangerous

Drivers that auto-renewed their car insurance saw their premiums increase by £49 on average. This is a significant amount, particularly when budgets are being squeezed by the cost of living crisis.

This is a 17% increase from 2020 when drivers claimed to see an average increase of £42.

Looking between regions, drivers in London reported the biggest average rises to their premiums at £79, followed by drivers in Northern Ireland (£61) and drivers in the West Midlands (£60). Welsh drivers saw their premiums increase the least (£39).

The research shows that drivers are still opting to auto-renew despite new rules from the UK financial regulator, the FCA. These are designed to ensure providers highlight a customer’s previous year’s premium price against their renewal price. The results showed that 48% of drivers did not recall seeing these notifications.

Of those that did remember seeing the notices, 72% said they did not encourage them to shop around.

How much you could save by shopping around

The exact amount will vary depending on your current car insurance policy and what other providers are offering.

However, it’s likely other providers will at least match your current price. This means you’ll save the auto-renewal premium – so an average of £49 in 2021. With inflation being so high currently, this amount could be even larger for those updating their car insurance policy later this year.

The experts’ view

Sara Newell, car insurance expert at MoneySuperMarket, said: “Last year, more drivers renewed their car insurance with their existing provider than did not.”

These motorists reported average premium increases of £49. This means that collectively, UK drivers overspent on their premiums to the tune of an estimated £830 million.

“While we have seen the introduction of the FCA’s new rules on price walking – which are intended to level the playing field for consumers – it’s important that drivers don’t rely on such measures to reduce their premiums,” Sara warned.

“We’ll monitor the impact of the FCA’s new measures over the coming months, but the fact remains that shopping around is always going to be the most effective way of keeping your costs down.”

The post Avoid the car insurance mistake costing UK drivers £830 million appeared first on The Motley Fool UK.

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The current housing crisis means more people are renting for longer, and often at higher prices. In many cases, this is pushing money away from pensions. Something that is very much on my mind at the moment is whether the housing crisis is jeopardising my retirement prospects. If you’re in the same boat, read on to find out what the current cost of housing could mean for your retirement.

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My story

I’m in my mid-twenties, so it may seem a bit odd that I’m concerned about jeopardising my retirement prospects already. However, when looking at how long it might take me to save for my first home, I can’t help but think about it.

At the moment, the vast majority of my savings and investments are earmarked for a house deposit. The longer it takes me to buy a house – and it could still be three or four years – the longer it will take for me to be able to start putting money aside for retirement.

Moreover, getting a mortgage is not easy. After calculating how much I can borrow, I realised that I may well need more than a 10% deposit to be able to afford to buy a property.

Mortgage terms are usually at least 30 years. It is perfectly possible I will still be making mortgage repayments in retirement, meaning I’ll need a larger sum to be able to live comfortably.

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The stats

According to Hargreaves Lansdown’s Savings and Resilience Barometer, renters are far less likely than homeowners to be on track to have a moderate income in retirement.

A moderate retirement income is defined by the Pension and Lifetime Savings Association as £20,800 per year for a single person and £30,600 per year for a couple.

The research found 56.4% of Gen Z homeowners were on track to achieve this, compared with just 15.5% of renters. This pattern is repeated for Gen X, where 52.2% of homeowners are on course, but just 17% of renters are.

For baby boomers – who are approaching retirement themselves – just 13.3% of renters have saved enough for a comfortable retirement.

What the experts think

“Renters have a huge looming pension problem and risk sleepwalking into a retirement crisis,” warns Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

The cost of getting on the housing ladder has increased hugely. This has a significant impact on individuals’ financial planning and risks ruining a lot of peoples’ retirements.

Helen goes on, “Those who don’t manage to get on the housing ladder need to find the money to keep paying their rent throughout their retirement years. This is a significant extra cost to account for in an already stretched budget.” 

It’s not just getting enough money together for a deposit that’s an issue. Mortgages risk derailing peoples’ retirement plans too.

The chances of reaching retirement mortgage free are decreasing rapidly for most. People are buying later in life. It’s not unusual for first-time buyers to be in their mid to late 30s now.

At the same time, mortgage terms are increasing to make them more affordable. This means people are repaying their debts for longer, putting more financial pressure on them later in life.

“Increasingly, we will enter retirement with outstanding mortgage debt that needs to be repaid. This all puts extra pressure on our retirement planning,” Helen adds.

The post Is the housing crisis jeopardising my retirement prospects? appeared first on The Motley Fool UK.

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The ISA allowance currently stands at £20,000 in a single tax year. Will this change in the 2023-24 tax year? Here are some reasons why it just might happen.

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When did the ISA allowance last change?

The annual ISA allowance has not changed for a long time. It has been frozen at £20,000 since the 2017/18 tax year. This means you can save or invest up to £20,000 tax free each year across a range of ISAs, including a stocks and shares ISA.

The government has already announced it will not change the allowance limit for the 2022/23 year, meaning it will have been frozen for six consecutive years.

This, in itself, is enough for many to speculate that an increase may be due in the 2023-24 tax year.

Before the increase to £20,000, the ISA allowance was nearly 25% lower at £15,240. This was itself a small increase from the previous £15,000 limit.

When ISAs were first introduced in 2009, the allowance was just £7,000.

What might lead to an increase in the allowance?

There are a number of factors that could lead to an increase in the ISA allowance. The most prominent of these is inflation. Simply put, saving or investing £20,000 in 2023 will be a lot less in real terms than if you’d saved or invested the same amount in 2017.

Inflation is very high right now – 5.5% according to the latest figures – making the difference even more obvious.

Increasing the allowance could allow savers and investors to reap the equivalent benefits they did previously.

Additionally, the mere fact that the allowance has not changed in six years suggests an increase may be on the cards. The allowance has not remained frozen for this long since ISAs were first introduced.

As increases in National Insurance contributions come into effect and most people will be paying more tax, increasing the ISA allowance could be framed as a tax break to help reduce the current tax burden.

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Why might the ISA allowance not increase?

While there are strong arguments supporting an increase in the allowance, the government may be reluctant to do this.

The vast majority of people do not save or invest the full amount into their ISAs each year.

Just 18% maxed out their ISAs in 2018-19 (according to the latest data available). However, this figure rises to 40% of those with income of £100,000 to £149,999, and to 61% of those with income of £150,000 or more.

The highest proportion of savers, around 44%, saved between £1 and £2,499.

Increasing the ISA allowance could be seen as a way to reward the wealthy rather than support those on lower incomes.

Will the ISA allowance increase for the 2023-24 tax year?

It is impossible to say whether the ISA allowance will increase in the 2023-24 tax year at this stage. However, as the points made above demonstrate, there are a number of factors that suggest an increase is overdue.

The government usually announces the next tax year’s ISA allowance in the Autumn Budget, which will be announced in October.

How much might the allowance increase to?

Again, it is hard to say what any new allowance might be.

As already mentioned, there have been both significant increases and much smaller increases to the allowance previously.

In the past, increases have been in line with inflation. Taking this approach, a new ISA allowance could be around £23,500. This is based upon the Bank of England’s inflation calculator for the period from 2017 to 2021 and a 5% inflation rate for 2022. 

The post What might lead to an increase in the 2023-24 ISA allowance? appeared first on The Motley Fool UK.

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Valentine’s Day is fast approaching. Usually, it can be hard to save money if you’re treating a loved one. But Amex has launched a range of offers that could help you get back some of the money you spend on flowers and chocolates.

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How to access the Amex deals

The offers are available exclusively to American Express cardholders. If you have an American Express card, you should be able to access the deals.

However, the offers are not applied automatically to your card. You need to save the offer to your card using the Amex app or online. 

Certain terms and conditions apply to all offers, so do make sure you check the small print and ensure the offer you choose is right for you before you commit to it.

Where you can access Amex offers

The offers are available at a range of stores you may choose to shop at around Valentine’s Day. Let’s break down how each offer works.

Appleyard Flowers

For those looking to treat their loved one to flowers this Valentine’s Day, Appleyard Flowers is offering 15% cashback on every purchase.

This offer runs until 29 April 2022. Amex customers who use this offer will get a 15% statement credit.

Ann Summers

Cardholders can get 20% cashback on any purchases from Ann Summers. This offer is only available online and runs until 21 March 2022. In-store purchases will not be eligible.

You can only take advantage of this offer once on each card. It is also limited to the first 40,000 cardholders to use it.

Annoushka Jewellery

If you’re looking to buy some jewellery this Valentine’s Day, this offer could help you save some cash. When you spend £500 or more at Annouska Jewellery, you’ll receive £200 back.

Be careful though: this offer is only available in certain Annoushka stores and online. You can use the offer once per card, and the offer ends on 31 March 2022.

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Other offers available

If you’re considering a romantic getaway this Valentine’s Day, there are also Amex offers at certain hotels and restaurants.

Sofitel Hotels & Resorts

If you’re planning to book a romantic break, you may be able to get some cashback.

When Amex customers spend £400 or more at a Sofitel hotel or resort, they’ll get £80 back.

There are conditions, however. The offer ends on 31 March 2022 and is only valid at participating hotels when you pay at the hotel checkout.

Hotel Café Royal

American Express cardholders are able to get £100 back when they spend £400 or more at Hotel Café Royal.

You can qualify for this offer either online or at the hotel. The offer runs until 17 April 2022 and is only valid once per card.

The Doyle Collection

If you spend more than £350 at one of The Doyle Collection’s hotels – like The Marylebone or The Bristol – you will receive £75 back. This offer is valid until 30 April 2022.

American Express regularly runs offers for its customers. If you’re interested in finding out whether an Amex card is right for you and which one would best suit your needs, our guide to the top-rated American Express cards can help.

The post Love is in the Amex: catch these new Valentine’s offers appeared first on The Motley Fool UK.

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Buy now pay later (BNPL) firm Klarna has announced it is launching a physical card in the UK. Customers will be able to get their hands on a little pink or black card they can use to purchase items in store or online.

Will this be good news for customers? Or does it risk plunging more people into debt?

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Key details of the Klarna card

• Visa physical card in either black or pink.
• You can pay via Apple Pay or Google Pay.
• Payments must be made in 30 days.
• The payment due date can be extended for 10 days for free.
• In-store contactless payment.
• Instant push notifications for all transactions, even if the payment is declined.          

The benefits

There are some potential benefits to a Klarna card:

• Daily eligibility checks. This could help protect consumers from overspending and taking on debt they cannot afford to pay back.
• No foreign exchange fees or mark-ups.
• Real-time spending updates. These are available on the app and via push notifications.
• 24/7 in-app customer support.

The debt risk of the Klarna card

Despite these positives, there are some serious risks, notably surrounding cardholders taking on large amounts of debt.

The eligibility requirements for the Klarna card are not as stringent as with other traditional credit cards. Klarna says prospective customers will undergo a ‘soft’ credit check and must have used Klarna at least once before and repaid the amount owed in a timely manner.

This means a lot of people who would struggle to be approved for a traditional credit card may find themselves with access to significant amounts of credit.

What’s more, outstanding balances have to be paid within 30 days. This makes the debt very urgent. Some customers may struggle to keep pace with the repayments.

While BNPL is often presented as ‘risk free’, the opposite may be true. Missing payments could lead to you being contacted by debt collectors.

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What the experts say

Unsurprisingly, Alex Marsh, head of Klarna UK, is a big fan of the new card.

He said: “Consumers are rejecting credit products which charge double-digit interest rates while allowing repayments to be put off indefinitely.

“For online purchases where credit makes sense, buy now pay later has become the sustainable alternative with no interest and clear payment schedules. The launch of Klarna Card in the UK brings those benefits to the offline world, giving consumers the control and transparency of BNPL for all of their in-store purchases.”

However, not everyone is quite so enthusiastic. Debt expert Sarah Williams, who runs the Debt Camel blog, told the Mirror: “With this new card, some users may accumulate more debt that it is urgent to repay than they can easily manage.

“This is made worse if they have bought several items at different times using different buy now pay later accounts – then it isn’t easy to see how much you owe overall and what needs to be paid by when.”

She went on to warn: “What seemed like a convenience could result in you missing a payment, being contacted by debt collectors.”

If you’re not sure Klarna is the best option for you, why not take a look at our top-rated credit cards for 2022 instead?

The post Will a physical Klarna card plunge more people into debt? appeared first on The Motley Fool UK.

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• How to invest £10,000 to aim for a £6,108 annual passive income

Investing isn’t always plain sailing. For many new investors, a market crash is something they haven’t experienced before, myself included. So when my portfolio dropped last week – by almost 10% – it was a shock.

It can be easy to panic in these situations. Understanding why the stock market falls can help make a portfolio drop less scary.

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Why the financial markets went red

There are a number of reasons the financial markets dropped last week, including concerns about a conflict in Ukraine, worries about inflation and Covid-19 fears still looming over financial markets.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explained: “The threat of conflict breaking out on the doorstep is hanging over European indices, as hopes begin to fade that there will be fresh meaningful moves from diplomats.”

Meanwhile, rising inflation has had a significant impact, particularly on tech stocks. As speculation increases about inflation being here to stay, investors are starting to worry about central banks taking a more aggressive stance. This has led to market falls.

High inflation affects a company’s valuation because it can cause expenses to rise while reducing pricing power.

How individual stocks are performing

While the markets fell overall, individual stocks all performed differently. When trading stocks and shares, it can be useful to keep an eye on how individual companies perform.

Some stocks – like Barratt Developments in the FTSE 100 – have experienced significant falls, as investors fret about the impact of an expected further rise in interest rates on long-term demand.

Streeter explained: “Just like tech exuberance in the era of cheap and easy money, it’s feared the red hot market will cool dramatically when mortgage payments start increasing and the cost of living squeeze intensifies.”

Meanwhile, tech-centric companies continue to suffer. Streeter warns that companies that “launched onto the market with prospectuses full of promise over the last 18 months are now seeing confidence in their business models fading fast, as the era of cheap money hurtles to a close”. 

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There is some good news…

It’s not all bad news for those investing. Some companies are currently performing better than others.

Vodafone is performing well as speculation about its future has increased interest in the company. A potential merger could be on the cards with Three UK, and there are also talks continuing with rival Iliad to merge business in Italy.

“The deals would potentially create a telecoms powerhouse and give Vodafone much more clout across mobile and broadband operations. It would also layer up Vodafone with armour to fend off private equity bidders thought to be circling,” Streeter explains.

Unilever is also performing better than last week. Investors reacted poorly to its proposal to buy GSK’s consumer division. The company’s decision to walk away from the deal and not offer over £50 billion was welcomed by investors.

What’s next for the financial markets?

Sadly, none of the issues have been resolved, and there’s still a lot of uncertainty hanging over the financial markets.

Without a crystal ball, it’s impossible to tell what will happen next. However, it seems unlikely the turbulent times are behind us just yet.

The IMF has warned that tighter monetary policy from the Federal Reserve (the US central bank) might strengthen the dollar and weaken developing nations, who are still recovering from Covid-19. This is raising concerns that the global economic recovery may not be as strong as first thought.

Meanwhile, in China, there are still lockdowns due to the country’s zero-tolerance policy on Covid-19. This could well have an impact on the markets and put further pressure on supply chains.

Finally, geopolitical tensions surrounding Russia and Ukraine are still high and will likely continue to cause uncertainty in the markets until they are resolved.

This doesn’t mean you should be put off investing. If you want to start investing, and potentially take advantage of lower market valuations, setting up a stocks and shares ISA could be a good starting point.

The post Investing panic: why my portfolio dropped 10% last week appeared first on The Motley Fool UK.

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• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income

Recent research has found that retired households are much better off than their working counterparts. And the main differentiator appears to be their pensions. So, could investing in your pension help you join the top 1% of households in terms of wealth? Read on to find out.

The key figures

According to the Office for National Statistics, average household wealth in the UK is currently £302,500. This is a marginal increase year-on-year but is a 20% increase from 2006-8.

The positive is that total wealth is growing. However, the negative is that while total average wealth grows, so does intergenerational wealth inequality.

Retired households have far more wealth than their working-age counterparts, on average. Retirees have an average wealth of £489,300. They also tend to spend less and have a more stable income.

The age group with the most wealth is 55-65 year-olds, with an average of £553,400. This is 25 times the wealth of those aged 16-24.

How your pension can help

The main difference in wealth appears to come in the form of pensions.

According to the ONS data, pensions account for 42% of total wealth. This is more than any other wealth component.

Pensions have risen in their importance over the past 14 years. This is partly due to the way defined benefit pensions are now valued, and partly because auto-enrolment means more young people are now investing in a pension.

For the wealthiest, pensions hold significant value. The top 1% of households have pension assets of around £2 million, on average.

This is 10 times larger than the average pension pot of those aged 55 to 65. The average pension for this age bracket is just over £200,000.

The expert’s view

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, believes this data shows the “power of pensions as a wealth-building strategy,” as private pensions comprise the largest component of total wealth.

Although, the greater level of wealth is at least in part due to retirees being older and therefore having had longer to save.

However, Helen warns that she can see challenges ahead. “Defined benefit schemes are on the decline, and contributions to defined contribution schemes tend to be much lower.”

This means future generations may not benefit from the same level of wealth in later life as current retirees. For young people, investing more into their pension could make a significant difference to their quality of life when they reach retirement age.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, highlights the importance of all investments, not just pensions.

“Financial wealth, including investments and savings, make up 13% of wealth, but the richest households are far more likely to hold this kind of asset,” she explains.

The top 1% of households have more financial wealth than the entire bottom 80% of the population.

Coles argues, “Of course, a huge part of this is the fact they have more to invest to begin with. However, they have also benefitted from growth in their investments over the years. It demonstrates the power of saving and investing over the long term.”

The post Invest in your pension to join the top 1% appeared first on The Motley Fool UK.

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• How to invest £10,000 to aim for a £6,108 annual passive income

American Express has launched a series of limited-time offers that will give some of the most generous welcome bonuses ever on British Airways American Express Cards. Read on to find out more.

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Offer details

New American Express members will receive a welcome bonus of up to double the usual number of Avios points. Existing cardholders will receive up to 12,000 Avios points when they invite a friend.

The offers are available until 28 February 2022.

British Airways American Express Credit Card

People who sign up for the British Airways American Express Credit Card during the period will receive 10,000 Avios, which is double the usual sign-up reward of 5,000 Avios.

If the person signing up is invited by an existing member, the new cardholder will get 12,000 bonus Avios, double the normal 6,000 points.

The existing member who invited the person to sign up will receive 6,000 bonus Avios, up from 4,000.

There is also an exclusive offer available for British Airways Executive Club members. They will receive 20,000 Avios when they sign up for a card, up from the usual 10,000 Avios.

The offer for Executive Club members is available for less time than the other offers mentioned above. It expires on 22 February 2022.

To qualify for these bonuses, the new cardholder must spend £1,000 on the card in their first three months.

New cardholders will also receive 1 Avios point for every £1 spent on top of the welcome bonuses. This means new members will get an extra 1,000 points through spending the £1,000 required to qualify for the bonus.

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British Airways American Express Premium Plus Card

New and existing British Airways American Express Premium Plus cardholders will also see big rewards during this offer period.

New customers that sign up in time will receive 40,000 bonus Avios. This is a 60% increase on the usual 25,000 Avios given as a welcome bonus.

Meanwhile, if a new customer is invited by an existing cardholder, the new customer will get 42,000 bonus Avios, up from the usual 26,000 Avios.

The existing member will receive 12,000 bonus Avios, up from 9,000.

There is also an exclusive offer for British Airways Executive Club members when they sign up for the card. They will earn 45,000 bonus Avios – an extra 15,000 bonus Avios than they would normally receive.

This offer is only available until 22 February 2022.

All bonuses on the British Airways American Express Premium Plus Card depend on the new cardholder spending £3,000 in their first three months.

New cardholders will also receive 1.5 Avios for every £1 spent on top of the welcome bonuses, further increasing the number of points new cardholders will receive.

Other details to consider

These offers follow the launch of the new British Airways American Express cards in September 2021. The launch was designed to make it quicker to earn Companion Vouchers and easier to redeem them. The cards were also given a new look as part of the re-launch.

The British Airways American Express Credit Card representative APR is 24.5% variable, and for existing British Airways American Express Premium Plus cardmembers it is 101.1% variable. 

The British Airways American Express Premium Plus card has an annual fee of £250.

The post Get up to 12,000 Avios points with your American Express card! appeared first on The Motley Fool UK.

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• How to invest £10,000 to aim for a £6,108 annual passive income

At The Motley Fool, we always love to hear from our readers. One reader got in touch last week to ask why the London Stock Exchange still quotes UK stock prices in hundreds or thousands of pence and not pounds.

I found this question very interesting, so I decided to look into why UK stock prices are quoted in this way. Read on to find out what I discovered.

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How are UK stock prices quoted?

On the London Stock Exchange, UK stock prices are quoted in pence. You’ll see this price when you’re trading shares.

So, the price of a stock could be quoted as ‘GBX 520’. This means the stock costs £5.20. Similarly, if a stock is quoted as costing ‘GBX 1,190’, it will cost you £11.90 to buy one share.

The sums can split into smaller values than pence too. For example, it’s possible for the price of a stock to be ‘GBX 400.5’. This would cost you £4 and half a penny to buy one share.

What is GBX?

GBX represents a form of currency. While GBP refers to Great British pounds, GBX refers to 1/100th of a pound or one penny.

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Why are UK stock prices quoted like this?

There is no official explanation from the London Stock Exchange on its reasoning behind quoting UK stock prices in this way. However, there are a number of plausible explanations.

The UK is one of the only major economies that quotes its share prices in this way. Other countries, like the US, use dollars and cents for quoting their stock prices.

It is thought that the LSE’s system has roots in the old days of the pound – pre-1971. This was before the GBP was decimalised and one pound was worth 20 shillings. Each shilling was worth 12 (old) pence. This meant one pound was worth 240 pence.

Stock exchange quotations need to be reduced to the lowest sub-unit of currency – in this case, pence. It was much clearer to say ‘470 pence’ than ‘one pound, 19 shillings and two pence’.

It could also be expressed as 1.958 pounds, but this would be even more confusing as it doesn’t really have any relation to the actual currency.

Given it’s been over 50 years since decimalisation, it would make sense to change the process now. However, no system is simple to change. It seems to have worked for the past 50 years, so there is little desire to change it to reflect the decimalised currency we have at the moment. 

Are there any other theories?

One theory is that most stocks are only worth a few pounds, so it makes sense to use a smaller currency unit. Some think it is easier to read a stock price as ‘102’, for example, rather than ‘£1.02’.

Many also believe that quoting UK stock prices in pence improves accuracy and reduces errors. Decimal points are easily missed out and people could find themselves buying £102 worth of shares rather than £1.02. This could clearly be an unfortunate – and costly – error!

Will the way stock prices are quoted ever change?

While some find this way of quoting UK stock prices frustrating, there doesn’t appear to be any clear movement to change it. However, it’s impossible to say that the practice will never change. It is more than possible we will see a change in the future, but it is not imminent.

For now, love it or loathe it, you will have to put up with UK stock prices being listed in pence rather than pounds.

The post ‘Why are UK stock prices quoted in pence not pounds?’ appeared first on The Motley Fool UK.

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Twenty-six-year-olds don’t tend to worry about their pensions – at least my friends don’t! With so many financial pressures on young people, this is hardly surprising. However, recently, I’ve become increasingly concerned about my pension. I’m concerned that Covid-19 has ruined my chances of a comfortable retirement. Read on to find out why.

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How Covid-19 has affected my retirement prospects

I’ll admit it sounds crazy to be worried about my retirement prospects at 26. But compound interest works wonders and it’s so easy to fall behind with pensions.

I was put on furlough for around five months in April 2020. Then I was on flexi-furlough for another four months, meaning I was still earning less than my pre-Covid-19 salary.

Throughout this time, due to my paycheck being lower, my pension contributions – and therefore my employer contributions and my government tax relief – lowered too.

Over nine months this can make a significant difference. In total, I missed out on investing over £800 in my pension pot. This might not seem like a lot, but with compound interest (assuming 7.5% growth annually), it could have grown to £14,772 by the time I reached 65. 

That’s a significant sum of money that would make a difference to my retirement. 

Aside from these lost contributions, when I came back to work, I was nearly a year behind. All the work I would have done and the progress I would have made didn’t happen. Therefore, it took longer to be ready for a pay rise or another role.

This, in turn, means I haven’t been able to increase my pension contributions above their February 2020 level.

It’s harder to put a figure on this, especially as the full effect is not yet realised. If I’m a year behind now, it’s possible I could stay a year behind for the rest of my career. The effect on my pension and subsequent retirement could be long-running.

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What the figures say

According to the OECD’s Pensions at a Glance, someone currently on the average wage in the UK can expect the average income from their State Pension and auto-enrolled pension to cover around 58% of their working wage when they come to retire.

As a result, at the moment, just under 24% of people aged between 65-69 continue to work in the UK.

This is a significant number. It’s a figure that will probably only keep rising as the financial impacts of Covid-19 are felt by younger generations.

Meanwhile, the ratio of working age people to non-working age people continues to accelerate, and this will place further pressure on the State Pension.

The OECD predicts that a 22-year-old entering the UK labour market now will be able to retire at 67. This is dependent on them working continually until they reach retirement age. Therefore, women may struggle to retire at this age if they have career breaks or extended maternity leave.

The expert’s view

The financial impact of Covid-19 on young people has been well reported. More young people were put on furlough or made redundant during the height of the pandemic.

Such events clearly have an immediate financial effect. They also have longer-term implications.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, explains, “Late career starts, lower wages and redundancy means they risk missing out on vital pension contributions. For a generation who has already suffered so much financially at the hands of the pandemic, this is another blow.”

Young people face working far longer than traditional views on retirement would indicate.

Morrissey warns, “While many people are happy to do so, there will be others who are unable to – Public Health England data shows healthy life expectancy is much lower than life expectancy and so the reality for many people is they will be unable to keep working for as long as they need.

“The role of the workplace pension has never been so important in plugging these gaps. Auto-enrolment will make a big difference to people’s retirement prospects in years to come, but it’s important to engage and not just set and forget your contributions.”

Morrissey also urges people to top up their contributions whenever they get a pay rise. This can make a huge difference to your pension when it comes to taking it.

She explains, “If you are increasing your contribution, it’s also worth checking with your employer if they will increase their own contribution – over time this can really add up.”

The post I’m 26 and I’m worried Covid-19 has ruined my retirement prospects appeared first on The Motley Fool UK.

More reading

• Suddenly investors can’t get enough of GSK shares! What’s going on?
• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income