Your pensions questions answered

Alice Tapper:                     
And so I think let's start. I mean, I know this is super basic, but I think let's cover everything. So starting with the basics, what is a pension? Is it just a, kind of a glorified savings pot?

Helen Morrissey:             
It's so interesting when you said, "Oh, let's start with the basics," because actually so many people don't really understand what a pension is. So, you know, we did some research quite recently where it showed that 20% of people didn't know what happened to their pension contributions once they left their pay pocket. And quite a few people thought that it was just saved into like a bank account.

Alice Tapper:                     
[Yeah.]

Helen Morrissey:             
Fact is, this isn't what a pension is at all. You know, as you say, a pension is an investment. And we think of pensions as these dusty things that, you know, you think all the time, "It's many years away. Let's think about that tomorrow. And let's just forget about it now." Whereas one of my colleagues described it to me as, "It's your future financial freedom fund."

Alice Tapper:                     
[That’s great. I love that.]

Helen Morrissey:             
And if you think about it now, we get our wages every month, and we use that to do, you know, to live, to see our friends, to go on holiday. There's gonna come a time when you're not working anymore and you're gonna want to do all of those things. And if you engage with your pension properly, it makes such a big impact to your standard of life in retirement. So, you know, people should engage with it as early as possible.

Alice Tapper:                     
Yeah. And it's one of those things, isn't it? It's always, it’s just a bit of a drag and it's a bit painful to kind of think about your future self. And also you don't really want to think about yourself at the age of, you know, 60, 70, or whatever, but yeah, it's super important. And I guess, I think the one thing that I can say and I think a lot of people think, is that doesn't the government kind of take care of this? You know, we’ve got a state pension, if we've been paying my national insurance and so on, why can't we rely on a state pension?

Helen Morrissey:             
Okay. So basically the state pension is a brilliant foundation for your retirement planning. So I think as it currently stands, if you've got full state pension, it would probably be about 9,000 pounds a year. Now, if you think about your lifestyle today, how far would that 9,000 pounds stretch? And the idea is that it will pay some of your bills, or, you know, you wouldn't have anything really left over to live the life that you want to lead. So, you know, while it's an amazing building block on which to build your retirement, you need to be looking to supplement it with workplace pensions, personal pensions, whatever that might be.

Alice Tap:                            
So I think lots of people are probably familiar with the workplace pension that you might’ve been set up with. But can you just give us a quick overview of kind of all the different types of pension beyond just a state pension?

Helen Morrissey:             
Yeah, so basically, the most, you know, well known ones will be, as you say, you've got your workplace pension and you've got your personal pension. So the workplace pension one, as it says on my tin, is the pension that you get through the workplace. Now what happens, is that we have this thing called auto enrollment. So anybody starting a job, as long as you earn over 10,000 a year, you will be auto enrolled into a pension. Now that means that money comes out of your pay packet, towards your pension but the benefit also, is that on top of yours, your employer will also contribute to your pension as well, and you will also get a top up from the government, which is called pension tax relief. Now, when you put all of those things together, you know, it adds up to a much bigger sum than you might think that goes into your pension every month. So when you sit and look at it, it's a very kind of tax efficient way of getting the most out of your money and planning for your future.

Alice Tap:                            
So on workplace pensions, I think let's tackle that one first. And this idea of kind of free money. Well firstly actually, I think, who actually manages it, you know your workplace pension? Because it's not your employer that's managing it, right. You’re saving that money and then where's it actually going and who's taking care of it?

Helen Morrissey:             
If you get auto enrolled into a pension, you will be enrolled into what they call the defined contribution pension. So basically the people that manage that, will be the pension provider. So Royal London for instance, is the pension provider, you know, Aviva, Scottish Widows, people like that, they are all workplace pension providers. And what tends to happen is, your contribution goes to them and they are in charge of investing your contributions and looking after that pension pot for you.

Alice Tap:                            
Yeah, and how does that, with a workplace pension, one of the questions that came up a lot was a lot of confusion around the contributions. And you know, we talk a lot about free money and it's a super tax efficient way to save. But how does that work, kind of, I guess starting off with the government and how they support and then moving on maybe to how your employer might kind of match or also contribute.

Helen Morrissey:             
Okay, so basically, the key thing is the government, it’s pensions tax relief and they top up your contributions. So if you were a basic rate tax payer, for every £80 you put into your pension, the government will top that up to £100. So that's an extra £20 right there, that you wouldn't have had otherwise. So as you can imagine, over time, that builds up to an awful a lot. So you've got that and then you've got the employer who contributes as well. So under auto enrollment, the minimum contribution right now, is 8%. Now of that 8%, you pay 5% of it and the employer pays 3%, so it's still quite a decent amount.

Alice Tap:                            
And that's the minimum that anyone would be on.

Helen Morrissey:             
Absolutely, but what actually happens is that while many employers do just pay that minimum, there's also a lot of employers out there that pay over and above that. So you might actually find that you're with what is called a matching scheme, which is where the employer might say, "Okay, for every contribution that you put in," so you might say, "Okay, I'll contribute 10%," and they will match up to 10% for you. So it's always worth asking your employer about what they're willing to contribute to your pension, because you might find that you could benefit from a lot more than you thought.

Alice Tapper:                     
So onto the next bit, which is my favourite, which is thinking about the fact that you are actually an investor, as you have a pension. Which I think is one of the most commonly misunderstood aspects of having a pension? And that actually that gives you a degree of power by being an investor. Can you talk this through, how that actually works?

Helen Morrissey:             
Okay. So basically your pension contributions, that people think investment is only for wealthy people. It's not, it is for everybody. Basically what happens is, your pension contributions, your provider will invest those contributions in companies. And so that's a real benefit to you, because as these companies will grow, so should your contributions and your pension pot [says part in vid] will grow as a part of that. But also, if you think of all the people that contribute to pensions, that's a lot of money being invested in these companies. Day in, day out over the years, that's a lot of money and that gives you power as an investor. So, for instance, Royal London, our asset managers, we engage with the companies that we invest in, because we have a lot of money invested on our members' behalves. And if companies aren't acting in a way that is right, you have a say in that and people don't realise the power that their pension contribution certainly collectively brings you.

Alice Tapper:                     
And with, kind of slightly different note, but with contributions, I think a big question that we had was around, how do you actually make the most of your pension and specifically, how do you know whether you're contributing enough? Because I think that's kind of a really tricky one. And [whether] as you get older, should you be paying in more? What would you suggest?

Helen Morrissey:             
The key thing is just try to put away as much as you can. Saying to somebody in their early 20s, 14% might not be viable, but get into that savings habit early. And then as time goes on, if you're in a position to put in more, do so. I mean, what I would say is not to really stress and worry about it. Just put away what you can.