Pensions are unwieldy and complex – and the rules keep changing – but pension tax relief means you get free money when you pay into a pension. What’s not to like? This is the pension episode of Money, She Talked where Taina Moran and Louisa France, two financial planners and huge pension enthusiasts from Tilney, give us the lowdown on pensions and encourage us to get to know ours (remember they depend on individual circumstances). As Taina says, there’s a common misconception that you can’t influence your pension, so why bother? But this isn’t the case. You can – and the choices you make are likely to have a big impact on the way you live your life in future. And it’s not just about money: it’s about freedom and giving yourself options.
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Highlights of this episode
The following is a transcript of the podcast which has been edited for clarity.
It is important to remember that investments fluctuate in value and you may not get back the amount invested. Nothing in this article is intended to constitute advice or a recommendation, and you should not take any investment decision based on its content. The opinions expressed may change without notice. If you are unsure about the suitability of an investment, or if you need advice on your specific requirements, you should seek professional financial advice. Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.
Q1: Taina talks pension tax relief and taking advantage of employer contributions
Women, for many reasons, trail men significantly when it comes to pensions and the amount that they've got saved towards their future retirement. The average pension pot of a woman at the age of 65 in the UK, according to a survey in 2018, is £35,800, which contrasts with the average pension pot of a man of the same age, which is £180,000*. So obviously this is storing up quite a lot of problems for women in the future in retirement and that's something that we would really like to do something about here at Tilney. We spend a lot of time talking to women and men about pensions, but in recent times in particular we're focusing on this area: women saving for their future retirements. Taina, thank you for joining me. Now I know that you particularly enjoy educating your clients on the subject of pensions. Tell us why we should be getting a bit more excited and a bit more involved in our pension planning.
I think everybody wants to retire at some point and do the fun things that you were talking about earlier, but as women we're often really busy. We're juggling children, we're juggling careers and we don't invest enough time in ourselves to sort out our finances, let alone our pensions. And if we actually did take some time to do that, we could make our money work harder for us. We could be more tax efficient, and also it would give us peace of mind to know we're doing something constructive. So, I'm always talking to clients and what I find is that women really, really worry about money and that's not good for their health or their wellbeing. And pensions, as you said, are a prime example of this. People just don't understand them, they think they're complex, they think they're unwieldy. There's been lots of changes in legislation, people think they're really complex, and one of the misconceptions is that people think they can't change them and they can't do anything about them. And that is just not true.
Tax relief, employer contributions… the many benefits of pensions
Let me tell you some of the benefits of pensions. For many of us who are working, maximising our pension contributions is an absolute must if you’re thinking of retirement – getting the benefit of tax relief while it's still there. We all know about the Covid support package that has cost over £280 billion to put this in place for the Chancellor, and he'll be looking to raise funds in the future.
So I would be saying, really take advantage of tax relief while we have it. Take advantage of your employer contributions. A lot of us are working for a company, and our employer will pay pension contributions and we'll pay pension contributions ourselves, but do you know the maximum pension contribution that your employer would pay? For instance, if you're paying 4% into a pension, and your employer matches the 4%, if you actually put it up to 6%, would they match 6% as well?
Tax relief is effectively free money
Also we've seen a reduction in pension tax relief over the years in the lifetime allowance, which is how much you're allowed to put into the pension over your whole lifetime, and also the annual allowance, about how much you can put in each year. Tax relief is effectively free money you get from the Government that goes on top of your pension contributions. And that's all dependent on how much tax you are paying. So it's important to understand how to be more tax efficient. Personally, I'm chucking everything into my pension at the moment. So think about your annual earnings and think how much you can afford to pay into a pension. But remember: you can't access that till the earliest age 55. Just a little flag as well for any of those higher earners: you can potentially lose your personal allowance or your child benefit if you reach a certain income threshold, but you can use pension contributions to bring that down. So that's a really worthwhile point, please do take some advice on that. I hope that's answered your question, Louisa.
Very comprehensively. And just to check: those reliefs and benefits that you talked about, are they available to everybody, even those that don't earn a high salary or perhaps are self-employed or run their own businesses?
Pensions are a great way to offset tax if you’re self-employed
Absolutely. Everyone, even children, can contribute into the pension. And those who are not working and the self-employed can also contribute. So for those who don't have any earnings, there's a gross amount of £3,600 you can contribute, which means that you can put a net payment in, and then the Government tops that up to give you tax relief and at this point of time you'll get £720 of tax relief, so that's fantastic. And if you're self-employed, absolutely, pension contributions are a great way of offsetting against your tax, so reducing the tax. It's a great way of also stripping money out of the business if you're looking to retire. And also, if you've got money in a pension it is protected from bankruptcy – that's really key as well.
It certainly is. Let's talk about workplace pensions, which for many perhaps younger people will have been their first introduction to, or the first experience of, pensions. Are these similar and attracting the same sorts of reliefs?
Absolutely, and nowadays we have a thing called auto-enrolment, and most people who are working are involved in a pension, which is absolutely fantastic. So provided you've got sufficient earnings, you're enrolled into a pension automatically usually after one or three months of employment.It's set up to pay the minimum standard set by the Government, which at the moment is 8% of qualifying earnings with the employer having to contribute 3%, but you can contribute as well to that.
With the majority of employer pension schemes, people make a fund choice at the outset so you go into the pension and you choose what you're going to invest in. It’s absolutely crucial to know what you're investing in. But what most people do is they never review after that, and they just often end up in a default fund which isn't necessarily the best thing to do. So what you need to realise is that a pension is actually just a tax wrapper. It's what's actually inside the tax wrapper that makes the difference on how much return you will get. So I always like to ask my favourite question:do you know what your pension is invested in? And if the answer is ‘yes’, well that's great, but how often do you review it? Do you look at the performance? Do you know what costs you pay? And have you looked at the underlying assets? I guess a lot of people out there just haven't really done that with their pensions. But we also find that a lot of people move jobs,they often end up with a number of different pension pots from other employers and they don't review them. Recently I had a lawyer came to me. She had a group personal pension and four other pensions, but she didn't know anything about them – if they were doing well, if they were in the right fund or what. I would always say, just review. It doesn't take that long.
It’s usually the investments, not the pension, that are disappointing, says Louisa
I think you're right, and particularly the point that you made about the investments within the pensions and reviewing those. Often, when a person thinks their pension is disappointing, it's not the pension itself that is the issue, it’s the choice of investments within that pension that have probably never been reviewed and may not be suitable for them.
Can we just look more specifically about the point I mentioned earlier and the difference between women's pension pots in size and the equivalent male of the same age? Why do we think that's built up to such an extreme?
Q2: Louisa asks why so many women have smaller pensions than men
I think that was a really horrifying stat you mentioned earlier on: the average pension pot for women at 65 is only £35,800. I think there are a number of different reasons why women's pensions are less. One of the things that affects women is often, you know, in their 40s and 50s not only are women looking after young children, they're actually often looking after elderly relatives as well. And that has an impact too.
Another reason is we all know the impact of relationship breakdowns. I personally do a huge amount of divorce and separation work and see the impact this has on family finances with over 100,000 marriages breakdown each year (Ons, 2019, divorces in England and Wales). And what I tend to see when you're looking at splitting up matrimonial assets, what's really, really interesting, is that women often go towards assets that they feel comfortable with. So they might say I want to keep the house, or I want to keep the cash or I kind of understand my ISA so I’ll keep that. But what they don't really understand is pensions. A CII [Chartered Insurance Institute] statistic from two years ago showed that 48% of women – that's almost half of women – have no idea what happens to a pension on divorce. And that's really part of our job as financial planners – you and I, Louisa – to educate people on the real benefits of pensions. And it's really imperative that you make informed decisions about your retirement.
Another reason of course: for women security is an absolute top priority when it comes to finances, as well as providing for their families. And when we look at kind of single parent families, 86% of those are actually headed up by women (Ons, 2019, Families and households). So many people just are frightened of pensions, but they need to understand them.
Q3: How do you pay into a pension with so many demands on your cash? Louisa: “in my early career my spare cash went on my mortgage”
The other consideration I guess for most people – and it certainly was the case for me in the early part of my career – my spare cash was spent on keeping my mortgage under control or making sure I'd got all the extra-curricular activities after school paid for and, you know, holidays for the family. It's often not until later in life, late 40s/early 50s, maybe even mid to late 50s, that we have any money left at the end of the month to put away for our own futures. Is there a point where it's possibly too late to start bothering with a pension?
Absolutely not, says Taina
It's never too late to start, absolutely not. However it's definitely better if you are younger. I noticed in the office these days – when we get back there – that the youngsters are talking more about what they're putting into their pension, their contributions and what their underlying investments are, which is great. But we all appreciate there are huge demands on our income if you're younger; you're moving up the housing ladder and, actually, having children is extremely expensive. You were talking about extracurricular activities for children and all the things as they grow and they change and they need. You know, it has a huge impact not only on our finances, but also on our earning times.
To me it's all about prioritising. So what you really need to start with is understanding what your income and your expenditure is. I always start with a budget plan and I will start with that for all my clients. It's a really useful tool. And what you need to do is break down your expenditure into your non-discretionary expenditure. So your non-discretionary expenditure is all the things, Louisa, you just mentioned, like paying your mortgage or gas or electricity – you know, the things you have to pay for each month like your food. So once you know what those basics are that you have to pay for, look at your non-discretionary expenditure. That's the things that keep us happy, the things we want to get back to doing; going out for pizza, going away for that weekend, going on those holidays. And if you know then what your total expenditure is, you can work out what your income is and if you have any surplus income at the end of the month; then you need to understand where you need to direct that income to.
Everybody needs to have a cash fund – that emergency fund for when the boiler blows up, the car breaks down and those things you need to fix. But if you've got more than that – once you've got an emergency fund – you should think about having medium-term savings, for example your ISAs. But if you've got cash in an ISA, it might not be giving you a very good return at all because bank rates are so low, so you might look at a stocks and shares ISA. And then if you've got more money and it's longer-term, absolutely consider putting it into a pension, because of the tax relief on it, it's absolutely brilliant. But it's imperative to know what you're investing in, as you just mentioned. We need to make our money work hard for us, because we work really hard for our money. So I would say, start planning now, don't leave it too late, don't just leave it to chance.
Q4: Why is it important to know what your pension is invested in?
You mentioned this just a minute ago, in fact we've mentioned it a couple of times now, but I do think one of the things that puts people off is the huge array of different types of pensions, particularly if you work for a number of employers or different businesses and you've built up lots and lots of different pots. Within those pensions there's then a huge choice of funds. And you know, many people don't have the time, the knowledge or the interest to want to really research all of that, choose investments and monitor them. And is there an opportunity to have a successful pension without having to spend a lot of time researching, monitoring, picking and choosing and learning about investments?
We need to take responsibility for our future
I know, being busy is a fact of life but we do have to take responsibility for our future. And I really understand that pensions are confusing for people. Actually that's what stops them doing anything: because they're overwhelmed by it. Some people are lucky enough to have what we call a defined benefit pension, which they don't have to do much about, or a final salary pension, as we used to call it. But the majority of us either have a group personal pension that comes with our company and we pay into that or a personal pension that we might have taken out ourselves. We have the responsibility to grow that over time because that is just a pot of money that you have to grow in a tax wrapper. You need to pay attention to it. So, you need to understand what your investment options are; I started my life as a dual-qualified stockbroker and a financial planner.
Get help – who has time to research investments?
I have a good understanding of markets and investments, but I don't make my own choices at all. I take advice from an investment manager because, as you said, there's such an array of investments out there, and who has the time to research all of that? Certainly not me and not busy people when we're working. So what you need to build is a diversified pot, different asset classes. So you might have some equities in there - that's like a company share. You might have some bonds in there, they might be government bonds or commercial bonds, and some property, commodities and alternatives. And then you’ve also got to have a geographical spread. You might have to have some stuff in the US, some stuff invested in the UK or emerging markets. So, trying to make those decisions is completely overwhelming. I don't know why people would, so I would just say go and take advice because you're going to have this pension invested for a number of years. If you're 40 and you're not going to retire until 60, that's 20 years. If you're younger, it's longer. So it's really important to have the right investment over the longer term to grow your money. And, last, it is a lot about confidence. I often find that women really put themselves down about it. They feel they're a lot less knowledgeable than other people so they just don't do anything about it. And I think that really hampers the growth of women's pensions, so do something about it. Go and take advice.
Q5: What about using property to fund retirement?
I agree with what you said, that a lot of the time women will say “oh you know, this isn't my thing. It's not what I do” but actually, when you ask them questions, they usually know a bit more than they think. It’s a shame because the message is that you don't have to do it all yourself, do you? There's people out there who can help you with all of this. It’s just taking those first steps but it's really important. I just wanted to mention one thing on the investment side, Taina: you often hear people saying “oh I don't need a pension, I'm going to downsize my house and take out some of the equity. Once the children are gone I won't need a big house. I'll live off that”, or they might say, “oh well, I'm going to get some properties and rent them out and that will be my pension.” Now, we know there's a number of different ways of saving for retirement and none to be disregarded, but what would be your response to somebody who sees property as their pension?
Yes, you know, I understand why people invest in properties. They feel bricks and mortar is safe – it's tangible. And they feel they understand it because most of us have a house, we have a mortgage or a flat or something. But what I find with clients actually, the ones who say, ‘oh, we’ll downsize for retirement” is that it actually doesn't make sense for them in their mid-60s or 70s, because they have families who come and stay, they have grandchildren coming. And actually, if you have a nice house, why would you want to move out of that and use that as your pension pot?
Buying and maintaining a rental property makes pensions look simple, says Taina!
Some people like buy-to-let properties and I've got a lot of clients who do have them; there's been a lot of changes in tax rules around buy-to-let properties. I understand people like them and the reason they often do is because they think, “I'll get a rental income and then I'll get some capital growth” but you’ve got to be conscious that on that rental income, you're going to be paying Income Tax. So if you've got a basic State pension or some other pension income, the rental income is going to be put on top of that and taxed. You need to also make sure that, financially, if you've got periods when you've got no tenants, you can cover the cost if you've got a mortgage. And also, if you're going to do it through a letting agent, you've got management charges, and properties, as we know, need work. I mean, I'm a DIY fan. I'm constantly doing it but would I really want to be doing that on a rental property? You know, you've got maintenance things you have to do. We also used to have tax relief offset against having a mortgage – Section 24 – but that's gone too. One of the things people often don’t take into account is the cost of purchasing property: your legal costs; if it's not your only property, you're going to have additional dwelling supplement; you're going to have land and buildings transaction tax as well; and then you're going to have to put in things like furniture. And don't forget Capital Gains Tax when you sell it if it's not your only property. So there's a lot of things to consider in buying a rental property – it makes pensions look really, really simple!
You don't get tax relief on money you put into a house and, you know, tax relief on pensions is a huge benefit, especially if you're a higher-rate taxpayer or additional rate, or even a basic-rate taxpayer over a long time. It's very significant. With pensions, you can draw 25% down tax free – everyone knows that one. Pensions are outside your estate for Inheritance Tax purposes, whereas a property would be taxed at 40% on death if you're over the nil rate band. Pensions also have flexibilities. You can draw down a regular income, take tax-free cash from your pension every year. You don't have to sell part of the house to take income out of it. And one of the great things about pensions, like ISAs, is that they grow free of Income Tax and Capital Gains Tax within the wrapper. And also, it's actually dead easy to start a pension and pay into it. It’s a lot easier than buying a house and doing that. And then you could just contribute directly, monthly or annually. So, I would always say to people: think about making a pension contribution, get tax relief on top of that, and then have a robust investment strategy for growth and the combination of those three steps can really grow your pension for your future retirement years.
Okay Taina, so for those who have been listening to this and have taken the decision that they'd like to now have a retirement plan and take more care over their pensions, what do you suggest that they do first of all to make a start?
Q6: Dig out those old pension policies and get going
Start thinking about when you want to retire. And then, what do you need to retire on? What level of income in retirement are you going to need? I would go back to look at that budget planner that you will have of course completed, and then look at your non-discretionary expenditure, and then think about the kinds of things you want to do in retirement. You might want to travel more, you might want to buy a second home, you might want to learn new hobbies. So work out what you need in retirement and then put a plan in place. I mean, it's nonsensical to leave your retirement to chance! Take some advice.
The next step is also then to look at what you've already got. As you mentioned, Louisa, people often have different pension pots that they've gathered from other employers so actually dig them out. Have a look. What are they invested in? Go and take some advice. Is it that a consolidation exercise needs to be done? Are they in the right investments? Could you be putting more into them while you're still earning money? Have a pension contribution strategy. What can you put in? Look to be as tax-efficient as possible so if you have spare income or capital, could you be putting money in each year? And look at your carry forward allowances so have you used all your allowances from your previous years, or can you use them? Also another thing to flag up and this often affects women, look at your State pension forecast – that's really easy to do. You can google ‘BR 19’ and look to see if you've got any missing years that you could contribute to. So, really, I would urge everyone to invest some time in themselves, make that time, get your finances in order and get your pensions in order.
Thank you, Taina for those excellent pointers. Now I hope this has inspired you to get out those old statements and policy documents and old certificates that might be lying around in a drawer or gathering dust or, in my case, in a box in the attic, and have a look at them and make a plan for the future. Now, it's really important to say at this point, we did have some important messages at the beginning but I think it's particularly important with pensions to bear in mind that some of the older pensions which Taina touched on earlier have some really important guarantees and features that may be lost if you move them around.
Also, some people, particularly those with large pensions, have some forms of protection from the lifetime allowance in place which can be lost if you do the wrong thing and pay into a new plan, so it's really important that whilst we want you to take action and take ownership, understand what you've got with your pensions, do some research on your own personal position, and take advice if you're at all unsure before diving down in there and making any drastic changes. I think you'd agree with that Taina.
If there are pitfalls, that's not a reason not to do anything, but please take care and take advice. On that subject, if you're interested in learning more, please do visit our website where you'll find a range of guides and articles that you can read yourself. You'll also find on there a place to put your contact details in if you would like to have a consultation with a financial planner. We do initial consultations without any charge or commitment to take things any further.
What we do in those meetings is give you some facts and set you off on the path of the next steps. What we don't do is give specific individual advice - obviously until we've investigated your own position.
*CII, Insuring Women’s Futures, Solving Women’s pension deficit to improve retirement outcomes for all, 2018
Issued by Tilney Financial Planning Limited.
The pension section of our website has more information on pensions and the latest allowances. And if you’re ready to conquer yours, remember we offer free initial consultations to help you get started.
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This article was previously published on Tilney prior to the launch of Evelyn Partners.