Paul Lewis has been writing and talking about personal finance for 40 years. The presenter of Money Box on BBC Radio 4 and the son of two teachers, there isn’t much he doesn’t know about money.
As he publishes his new book, Money Box, he explains how to make and save money in a tricky year. This includes ditching your Isa, to think twice before calling your insurer and never entering the office sweepstake.
Here are Lewis’s 10 golden rules for making the most of your pounds and pence.
1. Whatever is automatically saved for your pension won’t be enough
Everybody in work, if they earn more than £10,000, pays into a pension scheme. This is because of auto-enrolment, which automatically puts you into a pension scheme, but not necessarily a very good one. How a pension works is a bit of money comes off your pay every month, which goes into a pension, the Treasury puts in a bit more and your employer puts in a little bit more still.
It’s important to know that what goes in automatically is never, ever, going to be enough. So if you want to protect yourself in retirement, then you should put as much as you can in from as soon as you start working. Because the longer the money’s in, the more time its got to grow when it’s invested.
To get a good pension – by which I mean around half to two thirds of your income when you were working – you have to be saving 25 per cent, ideally from day one.
Now, this isn’t just your money – it comes from the employer as well, as they will contribute a percentage of your salary. If you look at pensions in the public sector – such as teachers and so on – the amount that goes into their pensions is in the 20-25 per cent range.
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2. Don’t call your insurer unless you are definitely making a claim
In the past, insurance companies automatically renewed things like car and home insurance, and they had a habit of renewing at a higher level. They then attracted new customers by charging them less. So we had a situation where someone living in a small terrace house was paying more than £1,000 a year for their house insurance, when their neighbour might have been paying £300. Now this [charging a loyalty penalty] has been banned, although it still happens.
Another thing is when your car gets a dent and you think: should I claim on the insurance? So you ring your insurer and you say: look, I have this tiny little dent in my car. It wasn’t my fault, but it’s there. Will I lose my no claims bonus if I claim?
What happens is, the moment you ask that question, your premium for next year is already going up, because the algorithm will decide you are a higher risk. Never mind that it wasn’t your fault or you may have decided not to make a claim after all. Never call your insurance company, except to make a real claim.
3. Ditch the Isa
With Isas, you put money in and it earns some interest, on which you pay no tax. But since 2016, we have had a personal allowance on savings, which means you can make £1,000 interest in a non-Isa savings account without paying tax.
In the past few years, when interest rates were low, very few people ever got above £1,000 interest on their savings. And guess what? The banks paid you less interest on your Isa than they paid you on a non-Isa.
Interest rates have gone up, but even so, unless you’ve got a large amount of money – tens of thousands of pounds – you will still be better off in the non-Isa. The exceptions are people who pay higher rate tax or those who have a lot of savings and have used up their allowance, which is £500 for a higher-rate tax payer.
Most people’s incomes are too low, so Isas are a waste of time. And the financial industry won’t tell you about this.
4. Don’t forget to negotiate your pension as well as your pay
There are a lot of employers who pay more than the auto enrolment limit, which starts at 3 per cent of an employee’s salary. So go to your employer and say, “well, look, if I put in an extra £50 or £100 a month, will you match it?” Many will say yes.
And if you are saying, “Look, inflation is nearly 11 per cent, I think I need a pay rise”, and your employer says: “Okay, well I’ll give you a bit extra, a few per cent, but I can’t afford more,” you could then ask for them to add a few more per cent into your pension.
5. How to cope with mortgage rates going up
Mortgage rates are much higher than they were a year ago, even though they have come down since that disastrous mini-Budget last year. They are currently at least double compared with this time last year.
So, if you are going to remortgage it will cost you more. The way to get the best possible deal is to go to one of the big, national, independent mortgage brokers – don’t find a mortgage broker over the local cab shop in the high street. Try to find a way to boost the equity in your home or the size of your deposit: anything that means you borrow less. If you borrow less, not only do you pay back less, but also you get better deals.
If you can ever overpay your mortgage, do this, because you’ll end up paying less interest.
6. Don’t expect your kids to move out at 18 like they used to
The average home costs almost 10 times the average salary, when in the 1970s it used to be about three to three-and-a-half times average pay – this is why home ownership is plummeting. Roughly speaking, about a third of us own our homes outright without a mortgage, about a third have a mortgage, and about a third rent.
If you are renting, then you’re working from Monday until possibly Wednesday lunchtime to pay your landlord. This has meant more young adults are living at home. When I was young you would get a job and very soon after, you would move out of home. Now people are waiting to have their first baby – if they’re going to have children – which can cause tensions.
In some ways, you might think it’s a good thing that we’re being families again and looking after one another. It could be positive, but it just depends on how well you all get on and the size of your home.
7. How does this cost of living crisis compares with other economic crises?
I think it’s the worst I’ve ever come across. It’s much worse than the banking crisis in 2008. And it’s worse than the last time inflation hit this sort of level in the 1970s.
Part of the reason is people in the 1970s didn’t have the same level of debt, as it was more difficult to get into then. Now we have middle-income families going to food banks and to do this, you have to be recommended by an agency – you can’t just turn up and get free food.
We’re setting up warm banks – churches and libraries and so on are opening up so that people can go in and keep warm. All the people I know who’ve been around as long as I have say exactly the same thing.
8. Tax needs to be reformed so it’s fair
If I were chancellor for the day I would reform tax. This year and next we’ll all be paying more of it because the amount of tax-free income you can have has been frozen, as well as the thresholds for the different tax rates, and this will continue until 2028.
As our salaries are going up, and the minimum wage is increasing, more people end up paying more tax because of the freeze.
We’ll see an increase in people paying the 40 per cent higher rate. This doesn’t start until you earn £50,270, but in some cities, that is not an exceptional amount of money to be paid. And, in Scotland, you pay higher-rate tax from £43,000.
Personally, I would allow the thresholds to go up with inflation, but it would be very expensive. And in order to find the money I would then up the taxes for unearned income.
People who receive money from dividends – regular payments made from shares they have invested – or capital gains from selling things rather than working, they currently pay less tax on that money than working people do. Plus, they don’t pay national insurance. I think the rate of tax should be equal. The growing divide between people who are doing very well and people who were doing middling and low is causing great unhappiness.
So I would work towards a more equal society where there wasn’t great wealth and great tax advantages alongside a lot of people unable to manage. And while I’m at it, I would reform pensions. Pensions are great for people on high incomes, because they get huge tax relief of whatever rate they pay. I would introduce a flat rate – say 25 or 30 per cent of tax relief. You want to incentivise those people who don’t earn very much to save, not people who will be fine in retirement anyway.
9. Don’t always pay for the drinks
The financial industry isn’t your friend. It’s a kind of vague acquaintance you have to see from time to time that always makes you pay for the drinks. These companies are there to make a profit.
10. Avoid making the mistakes I have (except, possibly, the cash one)
I don’t invest. This has probably cost me a lot of money over the past 10-12 years when I could have invested my pension. My problem is that the fear of losing money is so much greater to me than the pleasure of making it, that I’m much happier when my money is just sitting there getting a little bit bigger every year.
And of course, cash seems a pretty sensible option today, when you can earn 4.5 per cent over five years with no risk – there really isn’t an investment that will ever guarantee you that much. Of course, very financial adviser I talk to has told me that putting the last 10 years of pension money in cash has been a huge mistake, but I sleep at night.
One of my other mistakes happened when I was 15. I came to London by myself and I only had £5 which, back then, was a great deal of money. I was in Oxford Street and there were the people doing card games. They hide the cards and you have to say which pile the queen is in. And it looked really easy. Of course, as soon as you put your fiver down, it’s gone. That was a really important lesson to me, because it was precious money and I lost it in a matter of foolishness.
I’ve never gambled since. Ever. I’ve never bought a lottery ticket, never entered the office sweepstake on the Grand National. It gave me my aversion to risking my money.
My inbox contains messages from people who have taken the risk or fallen foul of other much more sophisticated thieves, and they’ve lost their life savings or their pension fund because they thought, “I’m fed up with earning 1 per cent in cash” – which of course you did until recently – so when they were offered 8 per cent guaranteed, they handed over the money. And it went. Greed is what really damages people.
Paul Lewis’s book, Money Box, is out now. £16.99; published by BBC Books
‘Never, ever, ever, ever take investment or financial advice from anyone on social media’
Sorry, I don’t want to sound like an OK Boomer, but social media is a dangerous place. I know it’s fun – I spend hours on it myself – but there are some things I never do on it. Here’s why.
I once wrote a book that had a lot of golden rules. Some of them were golden and sparkly rules. And the most important had jewels on as well. If I could do that here, this would be the diamond encrusted platinum rule: Never, ever, ever, ever take investment or financial advice from anyone on social media.
OK, that’s it. Follow that rule and you will not lose money in a get-rich-quick scheme, not be seduced by the compound interest tricks of teenagers, and never be fooled by the thieves that pretend their idea is supported by a celeb.
No real-world celeb would ever endorse anything on such platforms. By which I mean, they would only endorse things if they knew nothing about money and were paid to promote it. That’s how influencers work. But no journalist or financial expert who knew anything about investment would do it. If you see one, it is a fraud.
YouTube, TikTok, Instagram, Snapchat, Twitter and – for you older readers – WhatsApp, Facebook, Telegram and LinkedIn, to name but nine, are all haunted by denizens of the underworld. There are influencers – many of whom have far fewer followers than I do – who say they can give you advice about investments, schemes to make money easily and quickly, pay off debt, repair your credit score and so on. But I refer you to the rule above. Social media might be a fun place, but it is also lawless.
Despite attempts by the Government – still wending their glacial way through Parliament after four years of discussion – it is almost impossible to regulate publishers who have no real physical place on Earth. They are everywhere and nowhere. And there is no silver lining. So you often cannot find out who is behind the advice or ideas you see.
If anyone promises you quick instant money, often called a “moneyflip”, it’s a fraud. The story is that you send them money, it’s invested on the foreign exchange or crypto markets, and when they rise you get your money back with a bit added. These are all frauds. All of them.
Extracted from Money Box