Where free money lives
🔸 Plus: Who gets the dog in a divorce? Lawyers are offering “petnups” 🔸 The government owns a wine cellar valued at £3.66 million 🔸 John Lewis job interview questions 🔸
Your 2-minute guide to demystifying money and making you richer
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All the code words that mean ‘free money’
One of the most frustrating aspects of personal finance is the baffling terminology that goes with it. It almost seems designed to deter people from saving and investing by making it complicated.
It is not obvious but the government officially wants you to look after yourself financially. It will give you cash or allow you to make tax-free profits on your savings and investing, especially if you’re trying to take care of your retirement.
Unfortunately, all these free-money schemes are shielded behind a wall of jargon.
So Moneyin2 put together this list of all the personal finance code words that signal when free money is available. If you don’t know your SIPP from your LISA, this is for you:
Pensions
Pensions are an old-fashioned, unsexy word used to describe savings and investment schemes that feature free money in the form of tax breaks or matched money from your employer or the government. You should have one. They often have the most potential for built-in free money.
Pensions come with a ton of jargon …
Match: This word usually means your employer will match any money you put into a workplace pension plan. It’s extra free money on top of your salary and is not taxed. Currently, the minimum employer match required by law is 3%. If you put in 5% of your salary, that would give you untaxed income of 8% of your pay. Always maximise your match.
“Defined benefit” plan or “final salary” plan: This is the gold standard of pension plans. They are increasingly rare but can still be found at large corporations, in academia, or in government jobs. It’s called “defined benefit” because the benefit to you is guaranteed — often in the form of a percentage of the salary you earn in the final year of your employment, in perpetuity. It’s literally free money for life, once you stop working. There are risks. Defined benefit plans sometimes go bust (because the company can’t afford to pay them; management fails to fund the pension plan to the level needed; or management decides to “claw back” part of the benefit). But overall if your employer offers any kind of “defined benefit” plan run to sign up. They are the most financially lucrative retirement plans available.
“Defined contribution” plan: This is the most common form of pension plan offered by employers today. The “contribution” is “defined” usually in the form of your company matching a percentage of the money you save into it from your paycheck. That match is free money. And it goes into your savings before you are taxed on it — so you’re also not paying income tax. Defined contribution plans aren’t as lucrative as defined benefit plans because, usually, the company pays less into them. However, any money you do get is owned by you and can never be taken back. They’re still a very, very good deal.
Private pension: Most companies offer retirement savings plans in the form of a private pension plan. Basically, you put a percentage cut of your pay into the plan, your employer matches a percentage (free money!), and you don’t pay tax on this money (at least until after you retire). Usually, the plan is handled by an investment platform like Halifax or Aviva or Aegon. The “private” aspect is that the money goes into your private account.
Salary sacrifice: This is a confoundingly complex way of saying that any money from your salary that you put into your pension plan isn’t counted for tax purposes. You’re reducing your tax bill, basically.
SIPP: A self-invested personal pension. If you are self-employed, or if you just want to save more, a SIPP works like a private pension plan that is entirely under your control. The major benefit of a SIPP is that any money you put into it is 20% matched by the government. Put in £100, the government will automatically add £20. It’s one of the best free-money deals available but it comes with strings attached.
Pot: This is jargon for a pension plan. The media is always talking about your “pension pot”. It’s your pension account.
ISA
Individual Savings Account: This is the official name the government gives to a set of accounts that come with financial incentives — free money — for those who use them. In general, you can deposit up to £20,000 into an ISA every year. Your money can go into cash savings, stocks, bonds, and mutual funds. Any gains you make — interest, dividends, or profit on your investments — are free of tax. Most banks and online investment platforms offer ISAs.
ISAs come in various flavours:
Cash ISA: Works like a cash savings account. Gains in interest inside an ISA are tax-free. If you keep your cash savings in a regular bank account any interest is subject to tax.
Stocks & Shares ISA: Allows you to put your money into stocks, bonds and mutual funds. All gains are tax-free. Read more here.
Lifetime ISA: Anyone aged between 18 and 39 is eligible for a LISA. They’re intended to encourage young people to save to buy property. The government will match 25% of any money you put into it. So if you save £4,000, the government will add £1,000 — free. There are strings attached. Read more here.
Innovative Finance ISA: Allows anyone to invest in peer-to-peer loans, crowdfunding, and “less liquid” equity. Investors are generally offered higher rates of interest than they’d get from banks but that comes with higher risk — people may default on the loans you’re invested in.
“British ISA”: These don’t exist yet but the government promised to create them after the next election … so they might never happen! If they do, they will allow investors to invest up to £5,000 in the British stock market, with all gains tax-free. That’s £5,000 on top of the £20,000 you could put into any other ISA. There are risks attached — UK shares tend to perform worse than US-based companies.
Cash savings
Interest: Banks will pay you to keep your cash in their bank. Usually, you have to move your cash into a savings account to get it. Currently, banks are paying something like 4-5% at the high end — meaning if you put £100 into a savings account now you’ll have £105 by the end of the year. It doesn’t seem like much but it’s risk-free and guaranteed.
Compounding: Put simply, compounding describes how the interest you earn on your savings earns more interest on top of itself, and that interest then earns more in turn, and this can go on forever and ever. It’s one of the most important free-money concepts in finance. And you need to know how it works.
Cash-back: Banks sometimes offer credit cards that give you “free” cash rewards if you use them. But be warned: they come with strings attached. They are generally not a good way to save money unless you are already rich enough to pay them off in full every month.
Roundup: Roundup accounts help you save by rounding up anything you spend and sending the loose change to a savings account. So if you spend £4.50, the account will round it up to £5 and send the extra 50p to your savings. As usual: strings attached.
Help to Save: If you’re on benefits (i.e. receiving Working Tax Credit or Universal Credit) the government offers a special savings account called Help to Save which comes with a government match of 50%. Deposit £1 and the government will add 50p. It’s limited to £50 per month (which would net you £75) and has a four-year time limit. Read more here.
Taxes
Allowance: This is an amount of money that you are allowed to have or earn that is not taxed.
Tax-free: Pretty much what you think it means.
Tax relief: Usually refers to ways to reduce your tax bill by deducting work-related expenses from your income, and then paying tax only on the remaining sum. Some tax relief is automatic and some you have to apply for — especially if you are self-employed. It’s free money because you’re not paying tax when you do not have to.
“Before tax”: This term usually crops up to describe stuff you can do with your money before HMRC starts to tax it. Pension contributions are generally “before tax” and thus are not counted as income that is taxed. It’s free money by not paying tax, basically.
Tax wrapper: Any kind of account or plan (most commonly a pension, ISA, or SIPP) that shields your money from tax.
Investing
Dividends: Some companies reward people who buy their stocks and shares by paying them a small amount of money per share. It’s free money just for investing. There are risks attached — companies that pay dividends tend to do so because there might be limited growth in the value of their stocks.
Staking: This is a new concept from the world of crypto, and therefore comes with considerable risk. If you’re willing to buy Ether you can allow it to be used by the Ethereum blockchain to validate transactions. You are rewarded for doing so with a small cut of the transaction fees. Rewards are usually calculated as interest. Ethereum currency pays just under 3%. It’s risky because crypto is volatile — it can easily lose more in value than you gain in staking rewards — and because there are time constraints if you want to retrieve your stake.
Now you’ve deciphered personal finance learn the basics …
Use these posts from Moneyin2 as a guide to securing your financial future
And for dessert …
Who gets the dog in a divorce? Some lawyers are offering “petnups” for marrying couples to advise divorce courts on who gets the dog in the event of a split. They are not legally binding. Whoever bought the dog, or received the dog as a gift, is usually the legal owner. That can be a big deal — a Crufts champion could be worth £250,000.
Goldman Sachs has banned its staff from booking meetings in Paris that take place — purely by coincidence, no doubt! — at the same time as the Olympics. The bank doesn’t want a bunch of expensive tickets to the games showing up in its expenses claims.
The UK government has its own wine cellar, valued at £3.66 million. The wine — which is predominantly French, bien sûr, is used by the Foreign office to impress visiting politicians.
The London Stock Exchange is in a bit of a “crisis” because US companies keep acquiring its best firms and taking them private. Darktrace, the cybersecurity firm, was just acquired by an American private equity company for £4.3 billion. It’s the 20th takeover of a London-listed company this year, taking £26 billion in equity off the exchange. Why is this happening? Because the UK market is smaller and has access to a smaller pool of capital than the US markets. So UK companies end up being underpriced. American companies see them as bargains.
John Lewis has put all its most common job interview questions online so candidates can prepare answers before interviews. You can read them all here, from entry-level shop assistants to management level. Sample question: “When have you stepped in to restore harmony and cohesion across teams that weren't working well together?”
A really cool inflation vs interest rate tracker. If to want to see how the UK compares to other countries in terms of inflation and interest rates, the FT has a great interactive chart here. Use the drop down menu to change the country. Rule of thumb: central banks raise interest rates to force inflation down. Be glad you don’t live in Turkey.
More from Moneyin2:
The Woodford zombie: why ‘star money managers’ are dangerous
Ignore financial influencers - the stats say they’re usually wrong
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Photos: freemoneyday via Flickr; Jim Edwards.