Long-term saving is the big thirty-something challenge

Two-fifths of those in their thirties and forties who have tax-free Isas plan to use them as their retirement accounts, according to new research by Fidelity.

Two-thirds of those say the Isa will sit alongside a workplace or personal pension.

But the ‘advice gap’ means that independent financial advice is now harder to access for anyone of moderate means or modest savings, because IFAs are now supposed to charge upfront fees rather than earning commissions which might bias their advice..

One young professional facing this conundrum is Herald journalist Helen McArdle, 32, who says: “Getting really good investment advice seems a lot tougher because the best financial advisors aren’t interested in someone like me starting off with £1000.

“I think a lot more should be done to encourage young people to start saving for retirement and make quality advice available to them. Where you have to opt into a company pension scheme, it’s very easy -and tempting- not to bother. In the past it would have been automatic.”

But where employees join new auto-enrolment schemes,company contributions are limited to 1per cent, way below their levels in pre-existing schemes.

The Office of National Statistics reported last week that the average contribution into a pension has almost halved in two years, from 9.1 to 4.7 per cent. That level of savings would create a pension of only £56,000 – or £3,252 a year, the ONS said.

McArdle says: “I would say at least half my friends are not saving for retirement, except maybe in the auto-enrol scheme, and they would have no idea where to start if they wanted to set up something on their own. It’s fairly bewildering without the help of a good financial adviser.”

The Sunday Herald consulted two IFAs on the issues.

David Thomson, at advisers VWM in Glasgow, said anyone starting to save should set aside an emergency fund of three to six months salary. After that they should “put a little protection in place to ensure that their income is protected in case they have a long term illness”. He advises PHI (permanent health insurance) cover, which will pay out about two thirds of income until retirement, or a cheaper critical illness policy. “Life insurance is unnecessary assuming they have no dependents.”

Thomson commented: “While there are good income tax breaks for contributions to pensions I think it advisable to build up a pot of assets which can be accessed – say to fund house purchase deposit or any other large expenditure. So I would recommend at least half to an Isa, probably more or even all if someone has an existing company pension scheme.”

He recommended using a 'fund supermarket', allowing a change of investments when necessary, and to look at the new generation of platforms now offering a ‘guided’ service. They include the likes of Nutmeg, Hargreaves Lansdown and Tilney Bestinvest.

New services using so-called 'robo-advice', not tailored to an individual and not covered by full regulation, are spreading.

Thomson said a pension should still be started early. “Even if contributions are stopped or reduced when houses and/or children first come along, growth on early investments compounds and compares very favourably with investments made later in life.” He likes Standard Life’s Stockmarket fund investing in global equities with a long-term time horizon.

Patrick Connolly, certified financial planner at 'whole of market' IFAs Chase de Vere said: "Pensions provide initial tax relief but aren’t particularly flexible for younger investors, whereas Isas can also be tax-efficient and provide far greater flexibility .

“An investor with a time horizon of more than 10 years should look at stocks and shares rather than cash. These people can afford to take risks, especially if investing on a monthly basis, but still shouldn’t take unnecessary or excessive risks. A good approach is to select a global equity investment trust or open- ended fund. These can effectively be a whole portfolio in one fund.

“Scottish Mortgage investment trust, managed by Baillie Gifford, is a good choice. I also like the Witan investment trust and personally use that for my son’s Junior Isa.”

McArdle pondered, eventually deciding to look at the two investment trust options, and made her decision last month. “I chose to take out a Share Plan with Baillie Gifford in the end. I might transfer into an Isa in future though, to avoid tax, but at the moment I have a separate Isa with Bank of Scotland which I’ll use for general savings.

“I chose to go with Baillie Gifford because there was no initial or annual plan fee, I can stop and start investment at any time, and because it allows you to top up your investment with additional lump sums from a minimum of £250 per trust , compared to a minimum of £500 with Witan. The only drawback for me was that Baillie Gifford had more trusts to choose from - I guess this is where an advisor would come in useful.”

She opted to divide her monthly direct debits between Scottish Mortgage, investing globally, and Baillie Gifford Japan. “Both of these trusts are rated five-star ‘gold’ by Morningstar, which is why I picked them – although obviously I realise this is based on past performance.”

Connolly commented that Japan was a higher-risk option and success would depend on the performance of one region.

McArdle concluded: “I wish it was more like shopping for a mortgage. When I was buying my flat, I asked around for a good mortgage broker who was “whole of market”, and I didn’t have to pay a fee because he’s paid by the mortgage companies. So I felt like I got great advice, for free, and everything was more or less done for me.”

But thanks to reforms intended to clean up the industry, that is no longer so easy.