If you’re looking to get a better understanding of your finances, working out just how much you’re worth is a great place to start. But do you know how to go about doing this?
At a simple level, your financial net worth is the value of your assets, such as pension funds, ISAs (individual savings accounts), cash savings and property, minus any liabilities you have, such as a mortgage or credit card. Tracking your worth can be a helpful indicator of your financial stability, helping you get some clarity on where your hard-earned cash has gone in the past – and where you want it to go in the future. Here we take a closer look at how to get an overview of your current financial position.
Do a bit of detective work
In order to get a steer on your financial worth you’re going to need to gather details on current pensions as well as pots from previous jobs. You’ll also need to track down any share certificates, review your ISAs and take stock of your savings accounts. Don’t forget to factor in the market value of any property you own, as well as valuable possessions, such as artwork or jewellery.
Liabilities, on the other hand, include money owed on a mortgage, credit card debts, personal loans, student loans and so on. While you might be tempted to include your income, be aware that someone can have a low net worth if they spend most of the money they earn each month. By the same token, someone with modest earnings could have a higher net worth if they are diligent about tucking money away – and investing in assets which go up in value.
Jason Witcombe, chartered financial planner at Empower Partners, said: “For most people, taking stock is not something that needs to be obsessed over on a monthly basis. That said, at least once a year, it’s good practice to tot up the numbers and work out where you are.” That way, he adds, you know where you stand and can measure your progress over time.
Keep tabs on your later life savings
While not an asset in the traditional sense, it’s worth keeping an annual update of any defined benefit pensions (such as any final salary pensions) that you have – and how your future income expectation in retirement has increased over the course of the year. You could also note down what level of State pension you are on track to receive.
Witcombe said: “If you are currently in the accumulation stage of life, it can sometimes help to think of your retirement planning as a journey. As with any journey, if you don’t know where you currently are, you are unlikely to arrive at your desired destination in the most efficient way possible.”
Don’t ignore your pension
Recent research by Standard Life revealed that an alarming one in four people aged 55 and over risk losing out in retirement because they have never checked any of their pensions. Mike Ambery, retirement savings director at Standard Life said: “People sometimes think that pension saving is something that happens in the background, with no real need to check up on it until retirement. However, taking a look at your pension is a great first step in planning for your long-term financial future.”
The good news is, it can be easier to do than you think. You should be able to check your balance yourself. If you’re unsure, your pension provider or employer should be able to help you. Aim to review how much is in your pot at least once a year to give you a better idea of how to plan, whether that’s deciding if you should increase your pension contributions or change the type of investments in your plan.
For those who are getting closer to retirement age, staying on top of what’s in your pot may also help you decide how long you’ll need to continue working, whether to consider a phased approach to retirement and the type of retirement you’ll be able to afford.
Top tips to check your pension
Take a good look at your pension statement
You should receive one of these annually from any workplace and personal pensions. Most pension providers give you online access to check values; some will also have an app. Make sure your provider has the right contact details so that you are able to receive relevant information.
How can I see what my pension might be worth in retirement?
Annual statements will provide an estimate of your future pot value and the regular retirement income your pension is on track to generate. Ambery said: “This is based on you using your pension pot to buy a guaranteed income for life, known as an annuity, although there are other ways to access your savings.”
Work out whether you need to make top-up payments
You can check what you contribute to any personal, workplace or self-employed pensions through your statement. Remember, you can also make any additional payments into your pension at any time you like. To top up your private or workplace pension, you can usually make both regular contributions and one-off lump sum payments.
Get an idea of how much your current pension pot might be worth in future
If you save money into a pension plan, it’s important to know if your savings are on track to help you afford your ideal lifestyle after you stop working. Many providers offer pension calculators that can help you work out if you need to start tucking away more. Check out tools from the likes of Standard Life, Legal & General, Fidelity International and Hargreaves Lansdown.
How to track down lost pensions and other assets
One of the big problems for those who have frequently changed jobs during their working lives is trying to stay on top of the various funds they have amassed.
Research conducted by the Centre for Economics and Business Research (CEBR), on behalf of PensionBee, reveals that over £50bn pounds in hard-earned pensions are at risk of being misplaced in abandoned accounts or scattered across multiple lost pots. So, if you’re worried, read more about how to find lost pensions pots.
At the same time, there are also millions of pounds languishing in lost bank accounts, premium bonds, investments and insurance policies. Witcombe said: “This highlights the importance of good record keeping. Be sure to keep all your providers updated with any changes to your postal address.” Find out more about tracking down lost or forgotten money.
So why is it important to know what your financial worth is?
Once you’ve recovered any lost pensions or savings and gathered everything together in one place, you will have a much better overall picture of your current financial position.
Witcombe said: “The clearer you are, the more you should feel on track for the financial future that you deserve. You can then look to project that forward – along with expectations of future income and expenditure – to see where your asset values might end up at an age where you might like to stop work.”
Getting to grips with your financial worth, helps you understand what’s working in your financial life right now – as well as what you need to do differently going forward.
Photo by kayligrace moody on Unsplash
