Technology is disrupting everything, it seems, with every day bringing change to something that feels like it’s always been the same way.
A new app, called Wagestream, allows employers to pay their employees at any frequency, as they do their work, strengthening the link between doing the work and getting paid.
For as long as I can remember, employees have carried out the work and then trusted their employer to pay them at the end of the week or the month. This payment frequency has been convenient for everyone, and life has adapted to monthly or weekly pay.
I get paid monthly, so I pay most of my bills monthly. And I pay my tax and National Insurance monthly.
It’s always been this way, but there’s no reason, other than convenience and the need for technology, why I shouldn’t get paid daily, hourly or by the minute, and pay my bills in the same way!
I’m not about to suggest that you start opting to make a daily withdrawal from your pension, or that you pay your electricity bill by the minute, however.
But, in recent retirement, maybe we should adopt a different approach to paying our expenses to that which we used when we were working.
Most people have set their pensions up to mimic their monthly salary. They draw out an amount every month and put it in the bank.
And they withdraw money from their retirement savings in the same way, with a reassuring payment made every month.
Pension providers like this approach, as it’s convenient for them to pay you monthly. HMRC like it as the pension providers pay them your tax every month from your pension pots.
The main exception to the monthly rule is the state pension, which comes in 4 weekly instalments, to keep you on your budgeting toes.
And we frequently meet people who still have the savings habit in retirement.
So, they make a monthly withdrawal from their retirement savings, and part of that withdrawal is then paid into a savings account. It feels comfortable because it’s what they’ve been used to for the previous forty years or so. But it doesn’t make any sense!
Your outgoings in a modern retirement are funded, mostly, by investments (usually held in a pension plan or an ISA).
So, if you withdraw money from these investments, and then put the money in a savings account, at best, you are taking money out of a reasonably tax-efficient account, and putting it somewhere less tax efficient.
At worst, you might find you are paying a whole load of fees unnecessarily. The best thing to do is to leave the money in the pension or ISA until you need it (don’t get me wrong, you still need a fund for emergencies, as it can take a lot of time to withdraw money from a pension or ISA).
Taking that one step further, it doesn’t make much sense either to save up for significant expenses by taking money out of an investment-linked pension or ISA every month.
It is just about logical to do so for annual expenses (like holidays), but it makes no sense at all to be withdrawing funds every month to save up for a replacement car or a new kitchen.
A different approach is needed when you are funding your retirement spending from investments in a pension, ISA etc.
The best approach will be personal to you, but you shouldn’t assume that the system you used when you were working will be the best one when you have stopped.
But, maybe, in a few years, we’ll find that the natural approach will be to withdraw money from our retirement savings by the hour, to pay for things as we use them.
It may sound like science fiction now, but I never imagined that video phone calls would become a reality!
