Personal Finance Q&A: Wealth-building
Here are answers to some of your top saving, investing, and retirement questions to help you start 2025 on the best footing.
Saving
What’s going to happen to interest rates in 2025?
Giving a prediction on something like this is best done cautiously. That’s because any number of things could happen between now and next January that affect the interest rate landscape in the UK – and no one has a crystal ball.
If we take things as they are in January 2025, we’re in a strong position. Inflation is under 3% and employment numbers are stable. The Bank of England’s Monetary Policy Committee could therefore keep things relatively flat – with no big hikes or declines certainly for the first half of the year.*
One thing we’d be relatively comfortable predicting – and never say never – is that there’s probably not going to be a return anytime soon to interest rates being sub 2% or sub 1% as they were for a decade pre-2020. It’s more likely that we’ll be in this 3%, 4%, 5% range for the time being. From a purely saving perspective – this is a good thing.
How should I balance saving vs paying off debt?
The first step in personal finance best practice is to prioritise paying off debt – especially high-interest debt. That’s because the interest on this debt will eat into your disposable income – which is income you could otherwise be saving. Using this money to pay interest on a debt won’t help you in the long run. Plus, the interest rate on credit card interest will likely be much higher than the interest you can earn with a savings account, or on your investment gains.
Instead, focus on paying off the debt – like with the avalanche or snowball methods. The avalanche method means you’ll look at the biggest debt you have first and focus on paying that off as a priority. The snowball method is the opposite – you’ll look at tackling the smallest debt first and work up from there. Either method works, it’s about choosing the one that’s best for you.
Once your debt is cleared, it becomes slightly easier to build your emergency fund or other savings. That said, there’s no reason you can’t attempt to do both at the same time – and having an emergency fund in place while you’re trying to pay off debt means that if an emergency does happen, you can use your emergency fund to pay for it rather than using a credit card or overdraft – which will only add to your debt.
You can set up a savings goal with our Goals feature. Check it out today and track your progress towards your target – we’ll even suggest the accounts to achieve them.
Do you get taxed on your interest when saving?
If you’re using an account that’s not a ‘tax wrapper’, the simple answer is you might. That’s because everyone gets a tax-free savings allowance each year (known as your personal savings allowance), which allows you to earn a certain amount of interest without paying tax on it. This amount is determined by your individual tax bracket.
Basic rate tax payers can earn £1,000 in interest tax free each year and higher rate tax payers can earn £500. Additional rate tax payers don’t get a personal saving allowance – so if that’s you, a tax-wrapper like a Cash ISA can really help protect your savings interest from tax you’d otherwise have to pay.
But, if you’re using a tax wrapper – like a Cash ISA for example – you won’t need to worry about ever paying tax on the interest you earn. With the Moneybox Cash ISA, you’ll earn 5% AER (variable) on your savings, tax-free. Rate subject to conditions. ISA and tax rules apply. Other accounts available.
Can I have a Cash ISA as well as a Stocks & Shares ISA?
Yes! You can have both of these accounts open at the same time and they share the same £20,000 allowance. Plus, if you’ve already maxed out a Cash ISA this tax year but you want to invest tax-free, you can move some of that money into a newly opened Stocks & Shares ISA to start investing without going over your £20,000 annual ISA allowance.
Moneybox is currently running an incentive to get more people investing. Just open a qualifying account and deposit, transfer, or move in (from a Cash ISA for example) at least £500 and you’ll earn cashback. The amount of cashback you’ll earn increases with the amount of money you deposit.
Capital at risk. All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest. ISA and tax rules apply. For Stocks & Shares Lifetime ISA: govt. withdrawal charge may apply.
Investing
What are some top investments for 2025?
The top investment is a diversified portfolio, invested for the long term. And the easy way to invest over time is with tracker funds, which have historically risen in value over time.
You can explore the things you can invest in with Moneybox without having to open an account. This will give you an idea of what you can invest in and allows you to read more about our different funds and US stocks, before you commit any money to them, and without the risk.
What are the most common investing mistakes?
In a similar tone to the above question, the most common investing mistake is trying to time the market. It’s just not something we as investors should be looking to do. It’s a long-term game with investing and building wealth doesn’t happen overnight.
Avoid this mistake by setting up an investment account and committing a regular deposit that you’re comfortable with. Over time, this will add up to a decent investment pot and if you factor in compound returns, you’ll find your returns tend to outstrip that of saving over the long term.
You can see how investments could grow over time with our Time Machine feature – available to Stocks & Shares ISA and General Investment Account customers. Projections are not a guarantee of future performance. You may get back less than you invest.
Retirement
How would you explain pension tax relief to a friend at the pub?
Well, when you receive your payslip – your monthly salary – that amount of money has already been taxed. And if you earn £50,270 or less you’re a basic rate tax payer, paying 20% tax. So if you earn £8 in take-home pay, you’ve actually earned £10 but it’s been taxed at 20% – that’s where the £2 goes. If you put that £8 into a pension, the government will add that £2 back in – that’s what we call pension tax relief and it happens automatically.
With all of this tax relief going into your pension month after month, it’ll help you get to your target pension amount quicker. Plus, things like bonuses are often taxed – but you can keep more of the bonus if you put it into your pension.
How should people who are self-employed think about their pension?
When we look at workplace pension participation rates, it’s about 88%.* That’s due in large part to autoenrolment. But when we look at self-employed people who participate in a pension, that figure drops to about a third (depending on who you ask).
So if you’re self-employed, you should consider investing some of the wealth you’re making into a pension. And if you’re making money with your business, you might want to consider paying into a pension, saving some of that money, or investing.
We get it – in the early days of running a business you might not know when the next paycheque is coming in, so putting some of it aside into a pension for the future might be difficult. But if you do, you know that you’ve got that wealth set aside. Plus there are tax advantages to doing this.
When investing, your capital is at risk. Pension and tax rules apply. For more guidance, we recommend you speak with an independent financial advisor.
*Moneybox Personal Finance Q&A, January 2025
When investing, your capital is at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.
A 25% government penalty applies if you withdraw money from a Lifetime ISA for any reason other than buying your first home (up to £450,000) or for retirement, and you may get back less than you paid into your Lifetime ISA.
Tax treatment depends on individual circumstances and may be subject to change in the future.