Pensions and tax explained
On 2 November 2022 our pensions expert Clare Moffat joined the Pension Awareness team for a live session all about pensions and tax. Learn about how pension tax relief works, the limits to be aware of and more.
All you need to know about pension transfers
Join Clare Moffat, Head of Intermediary Development and Technical, and Sarah Pennells our Consumer Finance Specialist, as they cover the pros and cons of transferring a pension and what you need to know before you do decide to transfer.
Sarah Pennells: Hi, I'm Sarah Pennells and I'm the consumer finance specialist here at Royal London. Welcome to this webinar. I'm joined today by Clare Moffat and we're going to be spending the next 45 minutes or so talking about pension transfers. Clare, could you explain first of all a bit about what your job involves? I, I was going to say why you're here but that sounds quite rude. And also why we are talking about pension transfers today.
Clare Moffat: Hi everyone and hi Sarah. So, I'm a pension and legal expert at Royal London. I talk and I write about how pensions work. Now, the reason we're talking about pension transfers is because you all asked for it. We did a poll and this was the top result and we're really keen to offer webinars on subjects that you want to hear about.
Sarah Pennells: Well, I've got a few questions for Clare to get the ball rolling but then there will be plenty of time for you to ask your questions and I noticed that we've got some are already coming in. Now, it's important to say at the outset that we can't answer specific questions if you've got a Royal London pension plan but we can take general questions about pension transfers. So, Clare, you use the term, and I just used it as well a moment ago, 'transfer' but I think people may have heard the term 'combining' or 'consolidating', or 'merging' or 'switching' or 'bringing their pensions together', so do all these various terms refer to the same thing or is there a difference between them?
Clare Moffat: So, all of these terms mean the same thing if, and it's quite a big if, we're talking about moving from one pot of money to another pot of money, what's known as 'defined-contribution pensions' when you know what's being put into it. Moving different pots of pension money perhaps you and your employer have been adding to and putting them in, in one pot, but Sarah, why might someone want to transfer their pension?
Sarah Pennells: I think it's kind of helpful to think about our working lives and the fact that, you know, most of us don't have a job for life these days, and in fact we may not want that. We may have a number of jobs through our working live and the more jobs we have the more pensions we're likely to have to go with it and that can be quite hard to keep track of. I was, sort of, thinking back about my own career so far and I've had seven different jobs, people on this webinar may have had more or less but since automatic enrolment came in you're likely to be put into your workplace pension scheme soon after you join, so you've had a lot of jobs, that could be a lot of pensions to keep track of. So, just to get a feel of everyone's experience here I'd like to do the first of our polls, so you'll see the question coming up on the screen. The question is, how many different pensions do you have? So, please vote in our poll. So, just seeing the-, some of the results coming in, I've, I've-, I voted myself so I said I've got seven different jobs but-, or I've had seven different jobs, I actually have four different pensions from them so that seems to be two to four currently is the most popular answer. Some people have more than ten though I've noticed, which is a lot of pensions frankly. Clare, any thoughts on what we're seeing so far?
Clare Moffat: It's really interesting. I'm surprised that there's actually so many between two and four, I thought we might see a bit more of a split. I'm definitely in that category too, between two and four. I've had five jobs since I qualified, so yeah, but interesting.
Sarah Pennells: And one in five people who voted so far have got between five and seven pensions and, again, you know, that's, that's, that's a good handful of pensions, depending on the kind of person you are it may be easy or hard to keep track of and we'll cover that bit later on in the webinar. So, two, two to four definitely seems to be the most popular answer at the moment. I think it is important to emphasise though that whether you are someone who has two to four pensions or you've got ten or more pensions, we're not saying that just because you have lots of pensions you should transfer them into one. So, I think it's worth spending a bit of time talking about who can't transfer. So, if we have an example of somebody who's a, you know, a nurse or a teacher, or a firefighter, Clare, can they transfer their pension?
Clare Moffat: No, they can't. So, if you work in the public sector and you're doing jobs like those you mentioned or other jobs then you normally can't transfer to another pension and that's because those pensions, they-, well, they don't have pots of money. So, the current pensioners who are receiving their pensions from these schemes, well, their pension is paid from money from taxation and contributions from current employees. Now, there is one major exception in the public sector though and that's if you work for local government, it does have a fund of money and you can transfer out of that one.
Sarah Pennells: But just because you can transfer, presumably that doesn't mean that you should transfer, does it?
Clare Moffat: No, if you're in the local government pension or you've got a private-sector defined-benefit pension, so that's when someone knows how much they're going to receive when they do retire, it's generally assumed to be a bad idea. Now, that's because these pensions make this promise to pay you a regular payment for the rest of your life. Now, it's almost like getting your monthly salary except you'll get less, of course, and if you've got a husband or wife and they live longer than you then they will get a regular payment for their lives too, so that's a really valuable benefit to have.
Sarah Pennells: So, in this webinar we're gonna be concentrating on pension transfers if you have a defined-contribution pension, so that's the kind of pension that we and other pension providers offer. It's a pension where you build up a pot of money while you're working that you then can take an income from when you retire but if you have a final salary or another kind of defined-benefit pension and you'd like to find out more about that then the MoneyHelper website does have a guide to what to think about if you want to transfer a defined benefit pension. Now, MoneyHelper is an impartial website that's backed by the government so you can find a guide there. So, there are I think a number of reasons why it can make sense to transfer, now we're not gonna tell you what to do because we're not financial advisors but we will go through some of the most common pros and cons. So, one reason for transferring your pension is for lower charges, namely if the pension provider that you're moving your pensions to charges less than you're currently paying. I think, Clare, the question that, that, sort of, follows from that is how do you find out what you're currently paying in charges if, say, you've got two, three or four different pensions?
Clare Moffat: So, all pension providers apply a yearly charge for managing your pension and this is known as the annual-management charge, or you might see it as AMC. Now, that's taken automatically, so once a year or once a month, from the value of your pension savings. Now, I know that this might seem really complex but comparing the charges on your pension is important. Now, that information can be found in a variety of places, so perhaps online in the key features document, which would be the document you will have been given when you joined the pension, in the annual statement you'll get from the pension provider. It might be on the app if your pension provider has one. Now, if you have a workplace pension then the charges for the default fund, now that's where most people would be, have to be 0.75% or less of the total pot size. Now, the default fund is the fund that you will have been put into when you're automatically enrolled.
Sarah Pennells: But what does that mean? I mean, percentages aren't necessarily the easiest to compare.
Clare Moffat: Yeah, you're right. Actually percentages don't mean much to many of us because we actually like to see a pounds-and-pence amount but we do need to be able to compare the percentage of one scheme to the percentage of another scheme. That upper limit of 0.75% on charges, well it would mean if you had, let's say, £10,000 in your pension fund you would pay no more than £75 as an annual-management charge. Now, many providers with modern schemes will charge a similar percentage but you might have older-style, perhaps, personal pensions and they might be charging a lot more. And in fact one of the great things about workplace pensions is that they're generally quite transparent, so it's quite easy to see what charges apply, and that's that AMC that I just mentioned. Now, this is precisely to help people see what their charge is, even if they're not pensions experts.
Sarah Pennells: Okay, so say you have a workplace pension and you're gonna transfer other pensions, could you end up paying the same on all those pensions you transfer or could you end up paying more or indeed less?
Clare Moffat: Well, it can't be guaranteed but, as I mentioned, the default fund in a workplace scheme has to charge 0.75% or less as that annual-management charge and many are less than that. So, in a workplace pension everyone in the scheme pays the same charge as a percentage of how much money they have in their pot, so that's particularly beneficial to those people who don't have a huge pension pot at the moment. So, maybe they're young, maybe they've had career breaks or perhaps have started saving later, whatever the reason. Now, if you aren't in a workplace pension then one of the benefits of putting all of your pension money together is that often, well, the more you have in your pension pot the lower the charge as a percentage.
Sarah Pennells: So, this is quite a lot of information about charges we're sharing. How would that work in practice?
Clare Moffat: Okay, so let's think of an example. Say you have four pots of pension money from the past, from other schemes you've been in. Two of the pensions have £10,000 in them, one has £40,000, and another has £50,000. Now, you might be paying around 0.70% in charges for each of them so that would add up to £770. So, you might think, 'Well, there's no point in combining them.' But if you put them altogether in one of the pots you might only pay 0.50% in total because you have over £110,000 in one place, so that would be £550, so that's, that's a real saving. A pension provider might charge 0.70% in charges if you've got up to £100,000, but then it would reduce to 0.50% if you've got over £100,000, for example. But these rates and thresholds will vary from one pension company to another, so you would need to investigate and make sure that you aren't moving from a cheaper pension to a move expensive one.
Sarah Pennells: Okay, so let's look at another reason why you might want to transfer and that is the options that you get at retirement, so what might that include?
Clare Moffat: Well, some workplace pensions don't offer as much choice about how you can take money out of your pension at retirement. Now, they might only let you take all of the money out in one go so that could-, that could, could mean that you're actually paying a lot more tax than you should or they might only offer the chance to buy an annuity and that's when you use all of your pot and you convert it into a regular income for your and maybe your husband or wife's life. It might also not offer something that's called 'drawdown'. Now, ignore the terminology. All that drawdown means is that your pension money stays invested in a pot and you can take your tax-free cash and then you can maybe take some money monthly, like an income, perhaps because you've actually stopped working. Or you might just want to take your tax-free cash and leave the rest invested because you're still working and you don't actually need any monthly income. Or you might just want to take larger sums every now and then, so that might be because you or perhaps your spouse has one of those defined-benefit schemes we mentioned, and that could give enough monthly income for you for the everyday bills, but maybe you just want some extra money from time-to-time, so maybe for holidays or a new car, or, or for Christmas presents. Some pensions, well, they also might not offer the same choices to your family if you died and that could be really important to you, but, Sarah, what about the faff factor? This possible hassle of having different pots of money with different providers. Is that a genuine reason to think about transferring your pension or are there ways to streamline your pension admin?
Sarah Pennells: I think the faff factor is a really interesting one and I do-, I do believe it's a personal decision and for some people it can make a big difference having their pensions all in the same place, they can see exactly what they've got and having them dotted around could be a real barrier to thinking about their retirement but for other people it just isn't a problem at all. It is worth saying though if you are somebody who finds the admin a bit of a faff if you have your pensions dotted around, there is something called the Pensions Dashboard which is being rolled out from next year. Now, that's going to be an online dashboard that means you'll be able to see all your pensions in one place, even if they're from different pension providers. So, we've talked about charges, we've talked about the faff factor. What about investment choice, Clare?
Clare Moffat: Well, Sarah, it is important to remember that when you save into a pension your money is invested and different providers offer different investment options and you could benefit from a wider choice on where to invest your pension savings if you transfer.
Sarah Pennells: That's a good point but it's also worth thinking-, worth thinking about what your workplace pension offers. You mentioned, Clare, earlier on that most people who are in a workplace scheme are in the default fund and that's because that's the fund that you're put into if you don't actively decide to go elsewhere, but your workplace pension provider will offer funds as well, so that could be your starting point to look at what they offer. Having said that, some people do like the idea of actively managing, choosing their investments, and may want to transfer but bear in mind there may be additional investment charges that come with it.
Clare Moffat: That's right, Sarah, and you can think about the type of investment options based on your needs and objectives so, like, thinking about a provider's approach to responsible investment and environmental, social and governance factors. Now, these help investors measure the ethical and sustainability impact of a business or sector but it's important to repeat the point that your pension is invested and its value can go down as well as up, so there's no guarantee that combining your pension will give you a higher income when you retire or a bigger pension pot, because you could get back less than you pay in.
Sarah Pennells: So, we talked about some of the reasons why it might be worth thinking about transferring but let's look at some of the reasons why transferring may not be a good option or some of the things that you need to check before you think about transferring. So, there's a range of valuable benefits that some of the older-style pensions might have had. One that people may have heard of is called a guaranteed annuity rate. What's that?
Clare Moffat: That's right, Sarah. There are valuable benefits sometimes and combining your pensions can seem like a really good idea but you need to check that you aren't losing something that's really valuable. Now, you mentioned guaranteed annuity rates. You wouldn't see these on a modern pension but it was quite common in the past, especially in the 1980s and 1990s, so you might have it. Now, this is a guaranteed minimum level of income that a pension provider will pay when you start taking your pension savings and you convert your pot into a regular income for life. So, it's generally going to be higher with your existing provider than the rates available in the market when you retire.
Sarah Pennells: What are we talking about here? Are we just talking about a few extra pounds a month or could it be an extra chunk of money that's quite sizeable?
Clare Moffat: Well, I mean, it all depends on how much money you've got in your pot. So, common rates offered are around 9 to 11%. I, I have seen higher than that as well. Now, that's about double the best rate that most people can achieve now. So, well, what does that mean? Well, it means that for every £100 in the pension pot that you have, you get £9 or £11 as income a year compared with £5 for every £100 that you would get based on today's rates.
Sarah Pennells: Okay, so when else should people be careful?
Clare Moffat: Well, tax-free cash, that's definitely another one to think about. Now, that's the money you can take as a tax-free lump sum when you begin to take your pension. Now, it's currently set at 25% of the funds and I think it's something that most people are quite familiar with but some older pensions might allow you to take out a higher percentage of tax-free cash. Now, in some circumstances you can transfer this benefit to your new pension.
Sarah Pennells: What about the age that you can take your pension? Does that vary from provider to provider, or is that solely governed by rules and regulations?
Clare Moffat: Well, currently your can't take money out of your pension before you're 55 unless you're seriously or terminally ill, and that will be 57 by 2028, and that is a regulatory-, you know, that comes from legislation. But some people do have the right to take it earlier, now that could be because of the type of job you did and you can keep this, right, if you transfer, but some rules do apply. If you're taking financial advice it is really important here to make sure that you don't lose this right. Now, of course it doesn't mean that you have to take your pension when you're younger, it just means that you can if you want to. Now, you might have also heard of something called a loyalty bonus and normally to get that bonus you have to keep the money in that fund. Another one to watch out for is if you're currently an employee and you don't want to stay in an employer's scheme then you'd need to check that any employee benefits like a contribution from the employer, if you would still get that if you moved to another pension, because you wouldn't want to lose out on that. So, financial advice can be crucial on working out whether you'll lose valuable benefits or perhaps if you can transfer but still keep these benefits.
Sarah Pennells: And there's another idea why keeping your pensions where they are could be a better option, isn't there?
Clare Moffat: Yes. If you've got any pensions below £10,000 and you might want to take money out of them, so you're at the age where you can access your pensions, but you would still want to save into pensions, then transferring into one big pot might not be a good idea for you.
Sarah Pennells: So, what happens if you've been through the pros and cons and you think, 'Right, I want to transfer one or more of my pensions,' can you just go ahead and do it?
Clare Moffat: No. So, there are some situations where you must get financial advice before making a pension transfer.
Sarah Pennells: And what-, why is that? Why do you need to take this financial advice?
Clare Moffat: Well, it's worth remembering that these rules are designed to protect people from being worse off by transferring, so these rules apply if you've got a defined-benefit pension, we spoke about them earlier, that's worth £30,000 or more, and you want to transfer to a defined-contribution pension. So, that's going from where, you know, you're being promised a certain amount on retirement and you want to move it to where you're just going to have a, a pot of money, and it's up to you with what you do at retirement. A defined-contribution pension that's worth more than £30,000 but with a guarantee about what you'll be paid when you retire, so we just discussed that a moment ago, and you would lose this benefit by transferring, so that's the-, kind of the two situations there.
Sarah Pennells: Okay. Clare, I think that's really helpful and I'm aware that we've thrown a lot of information around about charges and pros and cons, and things to think about. So, let's just do another poll before we move onto questions. It's 'who has thought about combining your pensions'? Please vote now in our poll. I'll just leave it a moment while the results come through, so-, okay, well in some ways I guess it may not be surprising bearing in mind this webinar is all about pension transfers, but 95% currently have thought about transferring-, just slipping slightly as I'm talking, so about 5/6% say they haven't but the vast majority have thought about it. As I said, obviously, this is a webinar about pension transfers so it kind of makes sense but we'll just give the results a moment to, to, to settle still. Any thoughts, Clare, on that? On the fact that that percentage is-, well, it's pretty high, isn't it?
Clare Moffat: It is quite high and I'm not surprised because I often get asked questions by my own friends actually when they're talking about they've moved jobs, they don't really understand how things work, and can they move all of their pots together? So, I think it is something that often we want to, you know, think about different admin elements of our lives and how we can make it better but we are a bit worried about, well, you know, might we lose anything? So, it's definitely something that we are asked a lot about.
Sarah Pennells: Yeah, okay. So, it's settled down. 94% said they had thought about it and 6% haven't. So, Clare, you mentioned a moment ago, just before we did the poll, about getting financial advice, why it's a good idea to get financial advice and what you could lose by not having it. So, is it a good idea to get financial advice from an advisor if you are thinking of transferring your pension, no matter what the circumstances are?
Clare Moffat: Well, an advisor will consider your whole life. They'll look at your needs, wants, income, the type of risk you're willing to take and they'll-, they can also look-, if you've got a spouse, they would look at both of your lives. They would then look at potential solutions and we're not just talking about, you know, pensions here, we would be talking about different investments as well. They'd look at pros and cons before drawing up a list of options and providers, and making a recommendation. But if you're younger and you've only got small pots of pension and you're not likely to have some of these, these benefits that I've mentioned earlier, then, you know, it, it might be more difficult to find an advisor and it's more likely, as I'm-, you know, it's more likely you're not going to have some of these guarantees and you're only going to have these defined-contribution pensions. So, in that situation then it's probably easier just to try and look at your pensions yourself, compare them, look at the charges, and work out if transferring is a good idea. But as your pots grow over the years I would always recommend financial advice. Now, I, I mentioned the legal requirements for getting advice when you make a transfer and, and at Royal London we really believe in the value of financial advice. Even if there isn't that legal need, you could benefit from taking advice before making a transfer.
Sarah Pennells: Great stuff. Well, thanks very much Clare. So, we've had loads of questions coming in, which is fantastic. Thank you very much first of all for submitting your questions. So, I'm gonna go down from the most popular ones and work my way down, so the first question I think I'll take actually, that's from Susan and it says-, Susan says, 'I think I had a pension with my old employer but I can't find the paperwork, how do I find out if I have any money in it?' And Susan, it's a really good question and it's one I think, again, that lots of people have. So, there's a couple of thoughts on that. Firstly, if you know who your employer is and that's not meant to be as stupid as it sounds, I mean, your employer may have been taken, taken over. So, if you've got contact details for your employer then contact them, you don't necessarily need to have pension paperwork for them to find out whether you've got a pension with them or not, so that's one option but if you think, 'Well, actually it was so many years ago I don't even know who the employer is or I don't know who the pension provider is,' then there is a, a government website or government service called 'The Pension Tracing Service' which is completely free to use and if you go onto the gov.uk website you'll find that what comes up is basically you can type in the name of your employer or your pension provider, so the last name that you knew for them and it will give you the up-to-date contact details. So, what this service doesn't do is basically scurry around and find out if you've got a pension and tell you how much it is, but it will give you the up-to-date contact details either of the pension company or the employer but you can then contact them.
It is worth saying that if you're looking for the Pension Tracing Service, do make sure you go onto the gov.uk website because there are sometimes other services that may charge you but the government service is free to use. Clare, I don't know whether you've got anything to add to that whilst I just take a quick look at the other questions that are coming in.
Clare Moffat: Yeah, no I think just the same that it's-, I think there's a few questions that are, kind of, covering off this actually that, you know, people lose track of their pensions, you move house, you try to, you know, tidy up, get rid of paperwork and things so this is-, you know, it's, it's not uncommon at all. Now, it will help when we do have the Pensions Dashboard because we will be able to see those pensions that we have in one place but definitely, as you mentioned, you know, if you-, if you can't find or you know you had pensions but you can't find any information, then that's a great step to take.
Sarah Pennells: Good stuff. Well, we had a couple of other questions from people that were along similar lines, I think Robert and Douglas, so hopefully we've answered that for you as well. So, we have another question now which is from Mark and he says, 'Hi, I want to make it easier for my wife if I die first. Is that a good reason to put all my pension pots together?'
Clare Moffat: So, I would think, you know, that's a bit-, thinking about almost, like, making admin a bit easier. Now, I think lots of us-, well, I do all the finances in our household, so that was definitely a reason when I was thinking about this that, you know, I kind of thought, 'I do all the finances, if I died tomorrow my husband would have no idea,' so not only did I want to, kind of, write down everything that we had and make sure that he would know but I wanted to, kind of, streamline it a little bit and make sure that he understood. I, you know, there's also reasons why that sometimes, you know, I, I mentioned that the death benefits might not be as good in, in one pension as in another pension, so that's another reason to have a look at it. So, I, I definitely think it's a reason to look at it. It comes back to that, you know, the, the same story, make sure you're not losing any valuable benefits, you know, just double-check everything that there is but, you know, it's, it's certainly a valid reason, to make sure that when the most awful thing happens then life is made a little bit more easy on the admin side.
Sarah Pennells: Yep. So, as you say, there are definitely things to think about that you, you know, to make sure you don't lose valuable benefits, some of the ones that we've outlined but also possibly worth considering, and I think maybe one other thought which is just around death admin, to give it a very, sort of, not very pleasant term. But actually thinking about making life easier for those you leave behind. And I think these days because so many of us live our lives online, certainly our, you know, our financial lives are often online, it's having that record of what you have, so it doesn't obviously mean passwords and things but, you know, accounts that you have and, you know, pensions that you have so that whoever is, is left behind and, and has to sort out the legal and financial affairs at least knows what you had. It's, it's something that I think if you've been through it you realise how useful it is, if you actually know what you're supposed to be dealing with rather than trying to track down things as well. So, that would be maybe just another thing to, to think about. So-,
Clare Moffat: Yeah. Probably just one point just to mention as well, I take this opportunity that remember to keep your expression-of-wish forms up to date, so it can be called different things for different companies but that's the form when you would say what you would like to happen to your pension when, when you die. So, make sure-, I've often seen these forms that are twenty years out of date so, you know, make sure you put down what you would like to happen. Yeah.
Sarah Pennells: That's a really good tip. Now, you've said it can be called different things, are there any other common names that people might?
Clare Moffat: Yeah, so sometimes 'benefit nomination', yeah, so you'll just, kind of, see different things. They would probably be the most common that you would see.
Sarah Pennells: Yep, and I think it's a really good tip because sometimes people think about updating their will if-, if they have them in the first place, they think about updating their will if their personal circumstances change but because their pension doesn't form part of their will they're not necessarily thinking about updating their pension wishes, so good tip. So, we've had an anonymous question in now which is 'I want to take all of my tax-free cash out when I'm 55 but I don't want to pay any tax as I'm still working. Can I keep different pensions and take all of them?'
Clare Moffat: So, the answer to that one is if you-, you know, I mentioned that, kind of, drawdown term that if you moved into drawdown then you could take 25% tax-free cash and then leave the rest invested and not take any of that, so you wouldn't be paying any tax because as soon as you start taking income then it does just sit on top of your taxable income-, taxable earnings. So, you know, a lot of people as soon as they can access their pensions will take only their tax-free cash and move the rest into drawdown. Now, you've mentioned keeping different pensions. You can take that from each of them. So, say you have three different pensions, if they all allow moving into drawdown and keeping some of it invested, or it might be that you are taking the tax-free cash and buying an annuity, it, kind of, you know, it depends, but if you're still working then you could take 25% of each of those different pensions. So, they are just three defined-contribution pensions you can take your tax-free cash and then leave the rest invested in drawdown and that means that you just then start taking the income when you stop working or when you need to take it so you're not going to be taxed because you're only going to take the tax-free cash.
Sarah Pennells: And I think it's just worth maybe, sort of, repeating. So, it might sound obvious but the tax-free cash means what it says on the tin, that is tax-free, and if you just take that it doesn't matter how much you're earning, you're, you're going to not pay tax on it.
Clare Moffat: Yes, that's correct. There, there is another way to take money from pensions when you can take a kind of cash lump sum but the problem with taking that is there's 25% that's taxed at zero but the other 75% has to come with it and so then that is taxable income, so that doesn't work if you don't want to be taking that income and if you don't want to be paying tax.
Sarah Pennells: And one other thing you mentioned, you said that if you go into drawdown-, I'm just aware that we're, sort of, throwing around some, some bit of terminology here. So, you said if you go into drawdown, so that's where you can take bits of money to generate an income, for example, that-, but-, and not the tax-free cash, you said it sits on top of your income, so just explain what you mean by that.
Clare Moffat: Yes, so if-, say I earned £40,000 a year and I wanted to take my 25% tax-free cash from my £100,000 fund. So, I can take £25,000 but if then I decided to take some income then and if I wanted to take, say, £15,000 and that £15,000 is going to sit on top of my £40,000 of earnings, so it's going to be putting me into the higher-rate tax bracket, which probably is not what I want to be doing. Normally you want to be, kind of, making sure you're paying the least tax possible, so that's what happens. As soon as you start taking the, kind of, income amount off that then you're going to be taxed on it. Now, you don't have to take if you've got £100,000 in your pension fund, you don't have to take £25,000 and then leave the rest invested. You can, sort of, take a little bit of tax-free cash at a time, so you could maybe take-, we'll have, sort of, £10,000 of tax-free cash just now and some of that money moves into drawdown. Or you can, you know, just, kind of, work it out like that and it depends if you're working, if you're not working what you want to do.
Sarah Pennells: Yes, so it's important to say just because you can take 25% tax-free, you don't have to take that in one go.
Clare Moffat: Definitely.
Sarah Pennells: Okay. So, we've got another question that's come in from Lisa who says, 'Can I transfer money from pensions to a pension that I'm no longer paying into?'
Clare Moffat: So, yes, it's just about assessing the different pensions and looking what they all offer, so perhaps there is a pension that you think-, so, you know, it's perhaps one you've had in the past and you think, 'Well, actually that offers me something that the pension I'm in currently doesn't offer.' As long as that pension is still open-, so if it's an older pension scheme sometimes they do shut them so you just have to, kind of, check that that's still available. Also if it's a bit older, are the charges higher? So, it's just about looking and trying to compare the different pensions on a, kind of, like-for-like basis. What are the charges? What does that offer that I'm not getting just now? But as long as the pension scheme will accept that money then you can move into it.
Sarah Pennells: And this may sound like a stupid question but you mentioned that some of the older-style pensions, they may have closed, would you have been told about that, is that something you'd know about or would you just find out if you asked if you could transfer?
Clare Moffat: Yes. You normally would have been told because they would really say, 'We're no longer accepting contributions,' and the reason they might have closed is because they actually setup a new, kind of, auto-enrolment, perhaps a new workplace pension scheme that just works a bit differently or perhaps that provider has been taken over by another provider. There's lots of reasons why they might close. Now, I am talking about the defined-contribution world here so that is when we're thinking about those pots of money, and if it's a defined-benefit pension that you're mentioning then defined-benefit schemes will not allow any money to be paid into them, most of these schemes are closed. If it's a public-sector scheme then you can't transfer any money into that. So, you know, when I'm answering that question, I should have made that clear probably earlier, it is thinking about that defined contribution, that pot of money that you grow that I'm talking about there.
Sarah Pennells: So, the earlier example we mentioned, sort of, almost at the start of the webinar of the, kind of, the nurse, the firefighter, the teacher. If you had a pension there you couldn't transfer your, sort of, defined-contribution pots into that kind of pension?
Clare Moffat: No, you can-, you can transfer it. Say, you're a teacher, you can move into another public-sector scheme sometimes if you move to a different part of the public sector but not-, you cannot transfer from one of these kind of pots, like defined-contribution schemes, into a public sector. And also for private sector DB schemes then most of them will not accept any money in. That would just be, kind of, standard practice.
Sarah Pennells: Yeah. Great stuff, thank you. So, we've had an anonymous question which is, 'What would happen to my pension pot when I die as I don't have a partner or children? Does it just die with me or can I allocate beneficiaries?'
Clare Moffat: So, again, if we're thinking about this defined-contribution world where you've got this pot of cash then you would nominate-, in that form I mentioned, you would say who you would want to receive the benefits. So, that could be anyone. You can pick whoever you would like to receive the benefits. It can be an individual, it can be a trust. It has to be a living person or a trust, though I have seen someone's dog be nominated and that is not allowable. So, (talking over each other 35.21).
Sarah Pennells: My dogs would love that if they got their pension.
Clare Moffat: I know. I know. You would have to nominate someone to look after your dogs if, if that was the case but yeah. So, you can choose who would receive them. Now, the only thing I would say is that sometimes when you're in an older workplace pension scheme there are scenarios where it's only a spouse or a partner who'd benefit on your death, and that fund would be used to buy an annuity for them. So, double-check, because death benefits are important to people. If it's a kind of modern scheme you'll have the full choice that the law allows but some older schemes, they had the, the, the capacity to change, the law allowed them to change, but it was kind of easier for them to, to run as they did. So, it might be the case that if you didn't have a partner or children, then it wouldn't go to anyone. So, double-check what type of pension it is, you know, but if it's a modern kind of it's a workplace pension, for example, that your employer pays into, normally they would allow that pension pot to be paid to anyone, so you would just choose. So, it's really important to keep your expression-of-wish form up to date though.
Sarah Pennells: So, thanks Clare. So, we've got a question from Janelle who says, 'Will the Pensions Dashboard help people locate old pensions and when will it go live?'
Clare Moffat: So, it should be able to help, that's the idea is that actually people are going to be able to see what pensions they have and it's, you know, also going to have the state pension as well on it. So, it should be a really useful tool for people to see in, kind of, a snapshot what will happen. When will it go live? Well, that's probably a good question. I think we're looking at it starting to go live from 2023. It depends and not-, you won't see everything on it to begin with, so larger pensions will go on that first, especially if you, you know, are, kind of, have public-sector pensions for example then, you know, they'll be going on but you might find if you're in a, a kind of smaller, perhaps an old private-sector defined-benefit scheme then that might take a couple of years longer to go on, for example.
Sarah Pennells: Yep, so I think it's important to say it's kind of going to be a bit of a phased roll out, isn't it? So, you're not necessarily going to see everything from day one, but we will probably start seeing more publicity about it ahead of the, the beginning of the roll out next year, so I think we'll, we'll definitely be hearing and seeing a bit more about the Pensions Dashboard. So, thanks for your question, Janelle. I've got a question now from Paul who wants to know, 'Can I transfer a pot worth over £30,000 from another pension provider?' So, I think this is going over something that we talked about pretty much at the start of the webinar.
Clare Moffat: Yes. So, that's-, so, yes but if you are transferring it and it had some of these, these benefits, so we mentioned this scenario where it was a, a defined-benefit scheme, if it was over £30,000, or if it had a guaranteed annuity rate, then you would need to take financial advice. If it's not, if it's just another, say, workplace pension scheme that's defined-contribution, so it's that pot of money, then you wouldn't need to take financial advice, so you can just move that quite easily.
Sarah Pennells: Okay and two things to say on that, so you mentioned if it was this, this pot of money, a defined-contribution, an older-style one where it might have valuable benefits. So, is that something that, you know, you would be able to find out by looking at the paperwork or ringing the pension provider, or is that something a financial advisor-, how would you know whether you would need the financial advisor in the first place or could you just not do the transfer?
Clare Moffat: That's a great point. Your paperwork should be able to tell you, if it doesn't tell you then the provider will be able to tell you, so it's worth giving them a phone to find out.
Sarah Pennells: Great stuff. Well, thanks for the question Paul. Michelle has asked a question saying, 'I have two pensions that I no longer contribute to, can I transfer them into an active pension pot?'
Clare Moffat: Yeah, so I think that's, you know, what we've just covered. It depends what type of pensions, if they are just defined-contribution pensions with no guarantees then you can easily move them into your other pension pot but, you know, back to what we said at the beginning, make sure you're not losing any valuable benefits, make sure you're comparing the charges. If your active pension pot is likely to be, you know, especially that will be if it's a workplace scheme then, you know, it has to be under that 0.75% for the default fund. It might be the other two pensions you've got are personal pensions, they might be higher charges, so it could save money on charges moving into the new one, but just double-check what those two pensions are. So, again, just look at your paperwork, if it's not clear phone up the provider, they will be more than used to dealing with questions on this.
Sarah Pennells: Great stuff. Okay. Thank you for that, Michelle. And we've got another question which is from Sally saying-, and she asks, 'Do I have to be over the age of 55 to transfer my pensions?'
Clare Moffat: No. So, you can transfer your pension at any point in, in time. You don't have to be over 55, you just have to be over 55 to be able to take money out of your pensions, so your tax-free cash or to start any-, taking any income. So, that's-, that-, what that 55, which will be 57 in 2028. So, again, that's not something that I think is-, you know, we've seen some stuff in the press about it but it's one to be aware of for the younger people who are listening that they might not be able to access until 55 but for transferring, you can transfer at any age. So, if you are 25 and you've, you know, you've moved to your second job then you can move the pot of money you had from your first job, for example.
Sarah Pennells: And it is just probably worth reminding people about one of the benefits that you said it was a good idea to check about which is the age at which you can take your pension, as you mentioned there the age being 55, rising to 57 by 2028, but with some pensions they may have slightly different rules so, again, just a reminder to check not just charges and investment choice but also the age-, the-, and the valuable benefits but also the age at which you can take your pension. So, a really good question. Thanks very much, Sally. So, onto the next question which is from Allison and she'd like to know, 'If my employer changed the workplace-pension provider, can I transfer my pot from the old workplace-pension provider to the new provider?'
Clare Moffat: So, if your employer is changing the pension provider then that's-, they're kind of moving everybody from, from one provider to the other, so it's the employer setup the scheme and it's just the provider that's changing, so you shouldn't actually have to, kind of, physically do anything in, in, in, you know, in that situation but they should be giving you information. So, your employer will be talking about, kind of, what's happening and what this process means for you. So, I'd have a look at anything that's coming out paperwork-wise just so you know, kind of, what's happening.
Sarah Pennells: Okay, thank you. So, we've got an anonymous question, I, I think it's a really good one as well though which is, 'Where can I find a financial advisor?' So, do you want to make a start on that one, Clare?
Clare Moffat: Yes, so, I mean, there is different places you can look, there's different things like, kind of, Unbiased, there's different organisations you can look at to try and find a financial advisor who's use local to you, you know, it's worth doing, you know, kind of, researching this because-, and, and even meeting up with some people. Because if you're going to get financial advice they are going to look at all of your life, you want to build up a relationship, this could be someone that you're going to see for a long time. So, actually spending the time and finding someone that, you know, actually you can kind of like and you trust then that's important. But I do know it feels tricky sometimes, people are like, 'Well, I don't know anyone,' but it's good to sometimes ask friends and family as well but there are different sites that you can use to try and find a, a, a financial advisor as well.
Sarah Pennells: Yep, and you mentioned Unbiased, that's one website and there are-, there are other places that you can find a financial advisor, so I think it depends a bit on what you're looking for and maybe what stage of your life you're at. So, the MoneyHelper has a, a directory of advisors who specialise in retirement, there's another website I think called VouchedFor which is-, has reviews of customers of, of providers and I think the Personal Finance Society has its own directory. Now, we've got an article on RoyalLondon.com which talks about where to find a financial advisor and also there's one that talks about the kind of things to think about before you see an advisor. And you mentioned, Clare, about, you know, meeting or talking to and advisor and why it's important to do that, and I agree, I think it's something that, you know, it's not the kind of thing that most of us do very regularly and it can be a little bit daunting but I think it's a good idea to, sort of, think about the kind of questions you want to ask and, sort of, maybe treat it a bit like a job interview because, as you say, you could be having this professional relationship with somebody for a very long time and you could be telling them quite, you know, quite personal stuff about what you think about money, what your goals are, what your aspirations are, as well as how you spend your money. So, definitely spend a bit of time talking to the advisor and getting a feel for them as well as, sort of, looking at things like, you know, sort of, the areas they specialise in. That would be my, my, my tip. Okay, we've had-,
Clare Moffat: Yeah but-,
Sarah Pennells: Sorry, go on Clare.
Clare Moffat: I, I was just going to say that if you're a couple looking for financial advice, it's important that the two of you actually, kind of, find someone you're both happy with because, you know, if-, when the death of a partner happens your financial advisor can take on loads of the admin involved in dealing with things like death and, and other things that have to be done but you want to make sure it's someone that both of you trust and both of you feel comfortable. So, I think that's really important, kind of, on a family basis to have someone, not just someone who, kind of, you know, one person likes or trusts.
Sarah Pennells: I think that's a really good tip, even if one of you tends to take a bit more of a lead in certain areas of finance because we often find that, you know, maybe couples divide the kind of financial side of things. So, even if you're a bit less involved, for example, it's still important to go along, so a really good tip. So, we've had another question, this one is from Seraphine and-, who wants to know, 'Can you transfer only to your current pension scheme or can you transfer to old schemes if they're more beneficial?' So, I think we've, sort of, covered this in one of the earlier questions but I think it's really worth reiterating as well because this is important stuff to get right. So, what's the situation, Clare?
Clare Moffat: So, if schemes are open then you can normally transfer to them, so that's, you know-, and when I say schemes I just mean pensions. So, it's just about checking that if it is going to be more beneficial, if you think it is more beneficial, then they just have to be able to accept the money, so that's it.
Sarah Pennells: And just, just to recap on some of the things we talked about, so we talked about charges, we talked about options at retirement, tax-free cash, investments, and the age at which you can take your pension, I think.
Clare Moffat: Yep, yep.
Sarah Pennells: And then also you mentioned some of the areas that people need to look at to make sure they're not gonna lose those benefits, you mentioned the guaranteed annuity rate and also the loyalty bonuses were a couple that, that you mentioned. So, definitely worth doing all those checks or talking to a financial advisor even if you can transfer, so-,
Clare Moffat: Yeah and you don't need to move, you know, say you've got six pots you don't have to move them into one pot, that's, you know, it's, it's not about doing that either. Sometimes you can actually-, you know, if you decide, 'Well, actually I quite want, kind of, money in this for this reason or I want it-, and sometimes you have to, in certain scenarios-, to do with those valuable benefits I spoke about, sometimes you have to open a new pension scheme, which is just the way, kind of, the law works. So, there are situations where even if you decide to, you know, to transfer your pensions perhaps because it's going to make the admin better, the charges might be lower, you might still end up with not just one scheme but you might end up just with, you know, a couple of pensions.
Sarah Pennells: Okay, good stuff. So, we had a question from Michelle. Again, I think we may have covered this but it's always worth reiterating, which is, 'What type of pensions can be grouped together? As in-, and, and she says, 'NHS/council pensions.' So, I guess that's, kind of, which kinds of, sort of, the similar, similar kind of pension.
Clare Moffat: Yeah, so when we think about NHS and council pensions, they come under that umbrella of public-sector pension schemes and so I would, kind of, think about them as a group and then we've got private-sector defined-benefit schemes which are similar in that they've got that kind of promise to pay. You won't find many of them open anymore but you might have them from the past. And then we've got defined contribution which is, you know, most modern schemes, most people starting a job now that's what you would have, you pay in, your employer pays in, of course you get the benefits of tax relief as well, and then at the time you start taking pensions it's up to you to manage how you take that money out to last until you-, until you die or until your spouse dies or how-, you know, what you would like to happen. So, that's kind of how I would think of them in, kind of, groupings. When I spoke about the public sector, just as a reminder, most public-sector schemes you cannot transfer money out of them, they are not funded, there's no pot of money that can leave the scheme so that's not how it works. You'd, you'd stay in those, so even if you leave-, say you are a doctor in the NHS and you stop working in the NHS and you go to be a doctor in the private sector then your NHS pension is still there, it doesn't go away and you can access it at retirement, but you can't move it anywhere else because of it being in that. If you've got a council or a local government scheme then theoretically you could move it but that promise to pay is, you know, it's a very valuable benefit so that's, you know, and you have to take financial advice on it, and actually for most people having a guaranteed benefit like that which goes up every year is worth its weight in gold.
Sarah Pennells: Yeah, good point. So, we've had another question which is, 'I got divorced from my husband and I get some money every month from his pension. When I stop work, can I move that money into my other work pension?'
Clare Moffat: So, this is an interesting one and it opens up a huge can of worms about divorce which I could go on about for ages and you really don't want to hear me talking about that at length now. I think from, from this question it looks like that when you got divorced there was an arrangement setup and it would have been called an 'attachment order' or an 'earmarking order' that you would get, say, for example, 50% of your ex-husband's pension when he retired, and so every month money comes into your bank and that's from his pension. Now, legally he still owns that pension, you're just getting some of that money out, so you can have that-, you know, move that into your other pension. But even if it was a different type of way in which pensions are dealt with on divorce, called pensions sharing, that-, what happens then is you, you would own the pension, so you would say get 50% of the fund, so that pot of money, and you can do, you know, what-, you move it to where you want it to be and then when you take it, at age 55 or whenever, it's up to you to, you know, to choose. But there are complications with pensions. So, you can't just maybe move it into the same pot if there's been a divorce, just because the way, kind of, the technicality of how it all works. So, it would normally not be able to move it into the same pension as your other, but you can move it to the same provider but it probably will notionally be held in a- in a separate type account.
Sarah Pennells: Okay, great. Great stuff. And I say, I know that you know a lot about pensions and divorce, and maybe that's a subject for another-, for another, another webinar another day but anyway. Let's go to another question which is from Laura, and she wants to know what year did automatic enrolment into pensions begin. So, I'll kick-off with this one. So, it's coming up to it's tenth anniversary because it actually started being phased in from October 2012, but that was, like, the biggest employers who first started automatically enrolling their employees and then it moved over a period of years through to the smallest employers and, you know, and new employers. So, it's been with us for a while but I guess, Clare, it's really in the last, sort of, six years or so that it's, kind of, got more momentum because we've had, you know, we've, we've-, well, we've had millions of people automatically enrolled.
Clare Moffat: Definitely and we can see that auto-enrolment has been a big success. We've got more people paying into pensions than ever and that's really great news because, you know, we all have a retirement income need and when we retire we need to be able to have some money so that we can enjoy our retirement and, you know, in our last session we kind of spoke about that idea of thinking what you would like to have in your retirement and making sure that you're saving enough into pensions, so auto-enrolment has really helped with that. And it will be interesting to see what happens over the next few years. I think there will probably be some changes to auto-enrolment. It might start when people are younger, just now that it, it, kind of, is 22 so perhaps we'll see it at 18. So, I think we will see some changes but I think we can all agree that it has been really great.
Sarah Pennells: Yep. We were talking about the faff factor earlier on in terms of having lots of different pensions around but, you know, there was a bit of a faff factor before, certainly for some people of, of signing up for a pension in the first place and, as you say, automatic enrolment has sort of taken that away. You don't actually have to do anything active, although obviously you can leave if you want to. But you are put into your workplace pension scheme as long as you, kind of, meet the qualifying criteria and, as you say, that sort of changed the saving habits of, of millions of people. So, okay, I think we've got time for just a couple more questions or, or, or one or two. We'll see how we go with the answers, Clare. No pressure. So, again, we've got another one which is about NHS, so we may have covered this but I think it's always good to reiterate. So, there's a question from Wayne saying he has three old pensions, he now works for the NHS and has a current NHS pension, can he transfer it to the NHS pension?
Clare Moffat: So, the answer is probably no because it is a public-sector pension, it's really unlikely, and especially because they're older pensions that I mentioned that sometime you can move other public sector pensions, it's-, there's kind of a light limited time frame. It's something called 'the transfer club', so if it is, kind of, public-sector pensions and you're within a certain time then it's worth asking, phoning up the NHS pension, or if you're in Scotland the SPPA who'd be the people that would send you out the literature. But I think if there are three older pensions and they weren't public-sector pensions, then the answer is probably no for that one.
Sarah Pennells: Okay. We'll sneak in one last question as we're-, as we're coming up to the end of the-, of our time. So, it's from Maria who says, 'I started to work at a company in January, I previously worked for nine years until 2016. How do I check the amount paid in so I know how much I can transfer?'
Clare Moffat: So, you should get an annual statement every year which will say how much money you have in a pension, so even when you're no longer actively a member of that pension scheme every year you'll have to get information out. You might be able to have an app that shows you how much so you can just go in and look at how much you've got in that pension but if it's an older pension that you've, you know, you worked in for a while you might need to get in touch with the pension provider. If you can find any literature that's got the name of the pension provider and you know the name of the employer then you can give them a phone, ask how much you've got and then you can ask about transferring as well.
Sarah Pennells: Great stuff. Well, thank you very much. That is all we have time for in today's webinar. Thanks so much for all your questions and for taking part in the polls. It's really appreciated. Thanks Clare very much for answering all the questions. We have recorded the webinar and that will be available online and we'll be sharing the link with you very soon. Do let us know about other topics that you'd like us, like us to cover in future webinars because we're keen to make sure that the webinars cover topics you're interested in but for now thanks very much for joining us today.
Are you saving enough for the retirement you want?
Hear our consumer finance specialist, Sarah Pennells and Clare Moffat, Head of Intermediary Development and Technical, discuss how much you should be saving now for the lifestyle you might want in retirement.
Clare Moffat: Hi everyone, I’m Clare Moffat, and my job at Royal London is to help explain how pensions work. Welcome to our webinar today.
If I say the word ‘retirement’ to you, what comes to mind? Maybe it’s the luxury of not having to work to pay your bills and being able to spend time doing what you want to do. Or maybe it’s something that feels a long way away, that ‘old’ people do and, frankly, it doesn’t feel very relevant to you.
Well, the good news – I hope – is that because we’re living longer than our parents and grandparents, we could spend 20 years or longer in retirement. But of course, the big question is, how do we pay for it?
You might have the dream or hope of retiring at a certain age, or of spending your retirement years seeing the world. But have you ever taken a step back to look at what you have to do in order to achieve that dream?
Now while the majority of people will have a pension they pay into on a monthly basis, have you ever actually looked into how much you should be saving if you wanted to retire early or to afford a certain lifestyle when you do retire?
Now today I’m delighted to be joined by our consumer finance specialist, Sarah Pennells, to discuss just that. Now I’ve got quite a few questions that I am going to ask Sarah to get the ball rolling, but then we’ve got some time at the end to answer your questions so please type these into the Q and A box at the side. Now we can’t answer any specific Royal London queries in this webinar, but we can deal with general pension questions you have.
But now it’s time to meet Sarah. Hi Sarah!
Sarah Pennells: Hello!
Clare: Welcome – so could you start by telling us a bit about your role at Royal London?
Sarah: Yes, so I’m the consumer finance specialist at Royal London and what that means is that I look at the kind of financial issues that affect people day to day. So at the moment I’m looking a lot at the cost of living rises, so the huge hike in energy bills due to come in April, inflation, interest rates, the rise in National Insurance and so on. But I could also be looking at things like the impact of climate change and how that might affect our lifestyle in retirement if we end up having really hot summers or our homes are at increased risk of flooding and looking at what we could possibly do about that now. So that’s a mixture of talking to customers through webinars like this, through our customer newsletter, through content on our website but also doing media interviews so talking on TV, radio and the press.
Clare: Thanks Sarah. So today we’re talking about retirement. It feels like a bit of a big topic. So where do we start with it?
Sarah: It is one of those things I think can seem quite daunting because as you say, it is a really big topic. And I think that’s one of the reasons why people don’t maybe take that first step. And I think the other issue is that retirement can seem so far away it can seem like something that you don’t need to start thinking about now.
But there are a couple of things – firstly I would really start to think about the lifestyle you want in retirement. So, really start to imagine how you’re going to live your life in retirement. What are you going to be doing and how are you going to pay for it? So that you’re starting to kind of picture that life. Now I’m a real fan of writing things down and thinking, okay, how do I want to spend my time, what will I spend my days and weeks doing? And then starting to work out what you think those things might cost. And I think it makes it a bit easier to - well it makes it easier for me anyway! It makes it easier for some people to start thinking about retirement like that rather than for example starting with the numbers. Which, you know, for some people can be a bit dry, a bit of a turn off.
Clare: Okay but what about those people who do love numbers, should they start somewhere else?
Sarah: That’s a really good point. So there are some people for who numbers really do it for them, and in which case I think it’s a question of starting with what you know you’re going to get for retirement if you don’t have any other kind o pension. So you know for us, the foundation of our retirement income is going to be the state pension. So therefore it’s looking at what you’re going to get from your state pension.
So for somebody who’s retiring today who’s entitled to the maximum amount so they’ve got the full national insurance record, the amount of money that they would get by way of the state pension is £9,339 a year. Now that’s an amount that you’ll get per person. Not that works out at around £778 a month.
Clare: Thanks Sarah. So at this point id like us to do a poll. Now that’s beside the Q and A tab. No one will know how you’ve voted by please do tell us what you think. so the first question is at what age would you like to retire? And there’s some options that you’ll see there. So please think about kind of that age grouping that you would like to have a look at, and we can see some of the numbers starting to come in. that’s moving about a bit Sarah.
Sarah: Yeah it is, it’s really interesting actually seeing how people are voting and the kind of ages that people want to retire at. So I think we’ll just keep it moving for a minute or two because people are still carrying on voting. A minute feels like a long time! Maybe not a minute or two!
Clare: If you vote you’ll see how other people respond as well so that’s interesting.
Sarah: Okay, it seems to have settled down so shall we have a quick, do you want to have a quick run though the numbers?
Clare: Yeah so at the top we’ve got 63-65. Oh no! that’s just changed on my screen, 59 to 63. So we’ve got some people who have just voted who want to retire when they’re younger. Then 63 to 65, followed by 55 to 58, 66 to 68 and there’s not many people, only 5% so far, who would want to retire at 69 plus. So, Sarah, why have we asked this question?
Sarah: Well the reason I was keen to get a poll of what people thought is to link it to the State Pension age. So the last time I looked at this only 12% of people said they wanted to retire between 66 and 68 and the most popular answer was 59 to 62 and I think it was 63 to 65, those were about 29/30% each. But you don’t get your State Pension until you’re 66.
So for people retiring at the moment the earliest they can claim their State Pension is 66. And that State Pension age is due to rise, so it’s going up to 67 by 2028 and it’s due to go up to 68 in a few years after that. So unless you’re happy to wait until you get your State Pension I think that’s also going to skew how you then think about how much money you need in your retirement and therefore what you need to save each month.
Clare: And that’s really important. But Sarah, should people be focussing on the age they want to retire or the type of lifestyle they'd like to live?
Sarah: Well I think both really. I guess lifestyle is possibly more important in a way, in that the kind of lifestyle that you want at retirement is going to probably have a bigger impact on how much you need to save every month. So you know, if you’re the kind of person who’s thinking, you know when you’re picturing your retirement, you’re thinking I want to take up new hobbies. I want to travel abroad. I want to eat out a lot. I want to be able to do those things. I maybe want to have a car or what to do up my home.
Well, your retirement in terms of its cost is going to look very different from somebody else who thinks actually I’m quite happy with a fairly modest income in retirement. I don’t need or want to do those things. I’m not interested in eating out. I don’t want to run a car, that kind of thing. So that’s why I think thinking about your lifestyle is so important.
Now obviously for most people a big cost at the moment is going to be where we live. Whether you’re paying your rent or mortgage. Similarly in retirement it’s really important to think about where you’re going to live. And If you have a mortgage now, are you going to be paying that mortgage when you retire? And obviously if you’re renting are you going to be renting the same, similar kind of property to the one you live in at the moment or maybe somewhere that’s a bit cheaper.
I mentioned the cost of living right at the start and household bills. They’re going to need to be paid as well so you need to factor in things like that. So I do think it is really important.
Now I mentioned about sort of picturing your lifestyle in retirement and why I think that’s a really good starting point. And one of the things I also meant to mention is that instead of thinking about retirement as this concept of something you drift in to when you end your working life, one way to flip it which really worked for me when I started thinking about my retirement quite a few years ago, was thinking about it being the age that you no longer have to work, to pay your bills.
Now I love my job, and I’m not just sating that because some of my colleagues are listening, but I don’t really think I want to retire in a few years’ time. I want to carry on working. But something that does get me quite excited in terms of thinking about my lifestyle at retirement is thinking about the age that I can stop, I can afford to stop work, I can still pay my bills without having to work.
And so that leads me onto the second part and the part we were just talking about as a result of that poll. When do you want to retire? It doesn’t have to be the same as giving up work. But when do you want to have that freedom to stop work, if that’s what you want to do? And does that tie up with when you’re going to get the State Pension? Which is going to be 66 for people retiring now, could be 67, 68, possibly even later for people who are younger. So that’s how I’d think about it. And that’s why I think both lifestyle and when you want to retire are really important.
Clare: That’s great Sarah, thank you. Now time for another poll. So if you were to think about your life in retirement, which of these is closest to how you imagine it? Now obviously everyone will have very different ideas about their life in retirement but try and pick and answer that’s closest to what a good retirement looks like for you.
There’s three options there. Again if you put your answer in and we’ll have a look at what most people are saying. It’s moving about a bit.
Sarah: I think these results are really interesting at this early stage it’ll be good to see what they settle down to., but yeah it’s quite good to see what people are going for as their top answer.
Clare: Yeah I think the top answer is my top answer as well!
Sarah: Okay what do you reckon it’s settling down, should we share the top answer?
Clare: I think that’s settled down now. So, top answer is ‘holiday abroad three times a year, eating out once a week’ followed by ‘one holiday abroad a year and eating out once a month’ and third, ‘holiday in the UK eat out once in a while’.
So I think possibly we could have predicted that result Sarah?
Sarah: Yeah and I can see why people have voted for that and I voted for the top one as well! Once of my reasons why I wanted to ask this poll was not to be nosy about the kind of lifestyle people want in retirement, but to really try and link it back again to how much that might cost you.
So there’s a really useful website which is called RetirementLivingStandards.org.uk and we’ve put the details in the link below. And that website has information about sort of the kind of retirement you might want, and it puts a figure on it. And the research has been done by independent researchers from Loughborough University and they’ve come up with three different categories of how much people might need or want to live on in retirement depending on the kind of lifestyle they’d like.
So the least popular option form our poll was one where it’s minimum standards of living in retirement. And for that the researchers reckon that you’ll need £10,900 a year. And for that you’ll be able to do things like eat out once in a while. You’ll be able to have a holiday in the UK, spend about £40 a week on food shopping, about £40 a month on clothes and shoes. But you wouldn’t, for example, be able to afford to run a car.
Now at the other end of the spectrum, at the other extreme, the researchers have looked at what they call a comfortable lifestyle. And in that case you would have to have about £33,600 if you wanted to have a comfortable lifestyle in retirement. And these figures are both for somebody who, a single person, someone living on their own.
Now for this lifestyle as with the poll, was sort of first option that was not surprisingly very popular, you would be able to eat out in a decent restaurant one a week, have takeaways, go on these holidays abroad. You’d also be able to do up your home. Have a new kitchen of bathroom every 10 or 15 years or so. And you’d be able to have a car as well.
So I would really sort of recommend spending a bit of time on this Retirement Living Standards website. Play around, have a look at the different costs and see what appeals to you. It’s really helpful because it does break it down in some detail as to how much you might need to live on.
And it’s worth saying as well that there is the in-between version which is people who want to have what the researchers have called a moderate standard of living in retirement. And that means that you can go out a little bit at restaurants, have the odd takeaway here and there, you can spend a bit more on things like food and clothes and things like that. And you can run a car, but you wouldn’t be able to replace it as often as if you had this comfortable lifestyle. And in that case the figure that you need is £20,800 a year for a single person.
Now I’ve talked about how much you’ll need as a single person, as someone who lives on their own. If you do live with your partner, your husband or wife then obviously your costs will increase. But you wont need double the amount because generally it’s much cheaper for two people to live together than it is for two people to live in separate households. So in that example where I’ve said for a moderate income you’d need £20,800 a year if you’re someone living on your own, you’d need 30,600 a year if you were a couple.
Now I know I’ve thrown lots of figures around, but I think one thing I would just like to mention as well is that you don’t have to generate that entire income on your own. We talked earlier on about the State Pension and how much you’ll get from that. So depending on when you want to retire you may be able to have the State Pension kicking in from day one when you want to retire, or maybe a few years down the line if you want to retire below State Pension age.
Clare: That’s great Sarah. So this might be a bit of an obvious question, but when should people start saving into their pension?
Sarah: Ah! It’s a really good question. And you know I work for a pension company so you might expect me to say, ‘pile this money into your pension’. But really what I would say is do think about your pension and your retirement income when you can. The reason is that your pension money is invested. It’s not just sitting in a bank account. And it’s the money that you pay into your pension in the early years that kind of does most of the hard work the really heavy lifting. And the reason is that the money you invest in the early years when it starts getting a return in later years when you’re still making your contributions, the early contributions have generated their own return and then you start to get growth on those returns as well. It’s called compounding and it can be quite powerful.
And I think it’s just one of those things that it can feel if you’re young, in your 20s and so on, you can just think oh retirement is so far away. And especially I’ve just talked about when people are going to get to State Pension age. But the reason it is really important to try and think about starting your pension earlier rather than later if you can, is because of this heavy lifting that the early contributions do.
So I’ll just illustrate this with an example. I was talking earlier on about this sort of moderate standard of living, and comfortable standard of living from the Retirement Living Standards website.
So if you were happy to live on the minimum income which is £10,900 a year and you were to start saving into your pension from the age of 22 then you’d need to contribution £45 a month. Now if you left it until you were 40 that figure would rise to £90 a month.
Now if you prefer to live on that sort of moderate standard of living in retirement that middle one, so in which case you’d need to generate the income of £20,800 a year. Well in that case if you started saving when you were 22, the figure you would have to save would be £340 a month. But again it would almost double, it would be about £660 if you waited until you were 40.
Now again it is worth saying around those figures that I’ve quoted if you’re in a workplace pension whether it’s £45 a month you pay or whatever it is, £340, that’s not just down to your own contributions. That figure includes any money that you’re getting from your employer by way of contributions and the government top up that you’ll get through tax relief.
We have made some assumptions around these figures. So we’ve made some assumptions about inflation, we have assumed that you’re entitled to the full state pension at age 66. We’ve made some assumptions about the returns and about charges. So these figures aren’t set in stone, but they are just to give you a guide of the difference between starting to save for your retirement at age 22 and then not being able to or leaving it until you’re age 40.
Again it is worth saying again anyone who’s employed, or a worker, as opposed to being self-employed, as long as they’re aged 22 or over and earning more that £10,000 a year they will be automatically put into their employer’s workplace pension scheme. Now you can leave it if you want to, but in order to join it you don’t have to fill in reams of paperwork that work is already done for you.
Clare: Okay so, you’ve made the decision to start saving into a pension or not to leave the scheme if you have been put into your workplace pension. But how much should you be paying in?
Sarah: Yeah now that’s a really good question. It’s one of those questions that we get asked a lot. So again it’s really important to think about how much you want to retire on and that’s why thinking about the retirement lifestyle you want is so incredibly important. So the answer really will sort of depend, different people have different answers. But for example at the moment if you are enrolled into your employers workplace pension scheme, you will be saving 8% - that’s the kind of minimum amount that will go into a workplace pension. And that’s roughly 8% of your salary and that will be made up of your own contributions, and your employers contributions and this government tax top up. So the employer will pay in 3%, you will pay in 4% and then you’ll get an extra 1% which is this tax top up from the government.
And so you think ‘great well that’s money in going in, and I’m in my pension scheme, happy days’. But I think it is really important to think about whether that’s going to be enough for the retirement that you’d like. And especially as we’ve heard from people who have been voting that lots of us want to have a nice lifestyle in retirement and you completely understand why. So I think it’s really important to think about there may be a gap between what you’re paying and what you want, what you actually need, in terms of generating that income at retirement.
So there are some useful websites that can help you work this out, there are some pension calculators. We’ve got one on our on website. There’s one also on a website called MoneyHelper which is an impartial government-backed website. And what you can do with these pension calculators is you can put in information about how much you’re paying into your pension at the moment, how much your employer is paying in, and tax relief, and then any other pensions that you may have built up over the years you can put in those details. And then it’ll start to tell you what kind of income you might generate in retirement. Once you see that figure I think you can really start to work out is there a gap between what I want and what I’ve got?
I think as well, it’s really important to say that you know, I’m talking about lots of figures and picturing your retirement and working out how much is going into your pension, and how much you might get. And people might be thinking, I need to wrap a cold towel around my head and have a lie down! And that’s where I think, why a financial adviser can be so helpful.
At Royal London, we’re champions of financial advice. We think it’s really important for people to get financial advice. And one of the reasons is that we’ve done some research over the years that shows that financial advice doesn’t just make people better off financially it also helps them emotionally. So people who take regular financial advice are less likely to be anxious about their finances. They’re more likely to feel comfortable about their own financial future.
And what a financial adviser can do in this situation is they can really look at, help you to unpick that retirement lifestyle that you’d like and start to put some figures against it and then work backwards and say; okay you want this lifestyle in retirement, this is the kind of income you’d need to have including any State Pension for example, this is the income you’d need to have when you retire, let’s work backwards - this is the age you are now and therefore this is the amount that you should be setting aside every month.
So as I said I think having financial advice around something like this is really, really useful. But we know not everybody has a financial adviser, many people don’t so those calculators, and the MoneyHelper website that I mentioned, they can be a really useful as a really good starting point for you to do your own research. And even if you do have a financial adviser, I know lots of people like to do their own research before they talk to their adviser, so they feel they’ve got their head in the right space. So that’s why those websites can be a really good starting point. So the address of the MoneyHelper website, as I said it’s impartial and government-backed, is moneyhelper.org.uk.
Clare: That’s great Sarah, and I know that we’ve spoken in the past and said that actually we speak to a lot of people about their finances and pension and retirement, and people who’ve retired, and actually we very rarely we meet people who say ‘I’ve got so much money, I’m retired now, I don’t know what to do with it’ so these are top tips. Thanks Sarah.
Are there any rules of thumb that people can use to work out how much they should save?
Sarah: Yeah that’s another really good question. I mean there are a few rules of thumb that I’ve seen over the years that are flying around but one that I think can be quite useful - take the age that you start saving into your pension and then that’s the basis of how much you should be putting into your pension every month as a percentage of your salary. So if we take somebody who can be automatically enrolled into their workplace pension, they’ll be 22 when that happens, so if you start saving into your pension when you’re 22, if you halve that age you get 11 then 11% is the amount of your salary or income that should be going into your pension every month. If you wait until you’re 30, if you can’t or you don’t think about saving into your pension til you’re 30, halve that that’s then 15%. If it’s 40 before you think about or are able to save for your pension I think that’s when it starts getting a bit ‘eek!’. It’s actually 20% of your salary then that needs to go into your pension.
But again while I’m talking about these figures as you know 11%, 15% or 20% that’s the total amount. So again if you’re employed or you’re a worker, you’ll be in your employer’s workplace pension scheme. So that includes not only your pension contributions but your employer’s and that top up from the government by way of tax relief.
Clare: So that’s definitely a great starting point to think about. Now, Sarah what would you say to people who didn't start saving in their early twenties though, especially if they can't afford to be saving more because of the current climate? I mean, is there anything else they could be doing to reach their goals?
Sarah: Yeah again I think it’s a really good question and for a lot of people there are always other priorities, there are always things that you think, oh actually I could be spending my money on this, or sometimes, I should be spending my money on this.
And you know, we have got a cost-of-living crisis. And I’m aware from talking to people of some of the really tough choices that people are having to make. So the first thing I’d say is that if you get to the stage in your life when suddenly retirement is feeling rather more real and you realise that you don’t have the kind of pension pot saved up that’s going to give you the kind of retirement you would really like, don’t panic because all is not lost.
There’s a couple of things that you may be able to do. Now some people may be able to do more of them than others, but I’ll just run through them anyway.
First of all, think about whether you’re in a position to put more money into your pension, that’s obvious in a way. But you may be able to put a lump sum in or maybe even just to edge up your monthly contributions. Even paying in an extra 1% of your salary every year could make a difference to the amount that you have at retirement. And if it’s not something you can do at the moment, maybe you are worrying about the cost of living, is it something you can do in 6 months? Is it something you can set a reminder to do in a year or at some point in the future? Even if it’s something you can’t do now, don’t just kind of ignore it, do try and come back to it if you can.
The other thing to look at is you may have other savings or investments. So I think we often talk about retirement and pensions interchangeably and although pensions are a really tax-efficient way to save for your retirement and if you’re in a workplace pension you have that advantage of getting the contributions from your employer as well. But people may have savings or ISAs or other things and it doesn’t have to be that your retirement income is only generated by your pension.
The other thing is can you retire later than you’d planned? Again we heard from the poll, we saw in the poll, the ages at which people wanted to retire but can you revisit that and either carry on working full time or maybe even part time? Now in days gone by you had to retire at the age of 65, but the default retirement age was abolished over a decade ago so now you do have much more choice about when you retire so that’s another thing to look at.
And I think lastly just think about where you’re going to live. So if you own your home, do you want to live in the same kind of property? Could you maybe free up some cash by selling and downsizing, buying something that’s a bit cheaper and having a lump sum of money? Maybe you think well actually I don’t want to move, I love where I live, I’m really happy here. Well in which case perhaps you could consider releasing some equity through equity release which is where you basically you take out a mortgage that you don’t pay back until you either die or move into long term care.
Now some of these decisions are going to be really big decisions, so if you’re thinking about selling up a property, talk about it with your family. If you’re thinking about equity release talk about it with your family, but it’s also really important to take legal and financial advice. I think the point is that even if you think actually, this is not where I wanted to be, I’m at whatever age I am and retirement suddenly feels quite real, there may be steps that you can take.
Clare: Okay, thanks Sarah. And how much should people be relying on their State Pension?
Sarah: Yeah I think this is such a good question and we talked earlier on about how much the State Pension was, is. So for somebody retiring at the moment it’s this figure of £9,339 a year. Now that’s assuming that you’re entitled to the full State Pension. So in that case you’ve either paid National Insurance for 35 years or you’ve been credited with National Insurance for part of that time, perhaps because you were out of work, claiming benefits, you were ill or you were not working, you were looking after your children and claiming child benefit.
Now that figure works out at around £179 a week. And again, if you want to break it down into a daily figure that comes in at just under £26 a day. And again if you think about that, and I’ve talked about this before, about this and State Pension figures to other people, that sort of £26 a day, and I think there’s the assumption that’s your spending money. That’s your money for your coffee and your treats. But it’s not. That £179 a week, £26 a day, that’s the money that you have to live on. That’s what you have to pay your bills, your food. If you want to go out it’s got to pay for everything.
And again some people might think, well actually I am quite happy with a fairly modest standard of living in retirement. But if that’s not you, if you don’t want to just retire on the State Pension then you really do have to think about paying into a pension, how else are you going to fund your retirement? And as I said much earlier on it’s not just about how much you get it’s also about when you get it. Are you happy to wait until you’re 66 or possibly even later to get that income in retirement?
Clare: Okay so let’s just do one last poll to have a think about that and to ask, would you be happy living on the State Pension alone, just State Pension, when you retire? So if you fill in the poll question and we’ll see what most people think.
I think the responses from earlier showed that people wanted to retire before State Pension age so there’s a bit of a gap there, but would most people think that that amount of money is going to be enough in retirement? I think it’s fairly conclusive Sarah so far. The numbers are still going up, but the percentage isn’t really changing. So it looks like 98% of people are saying actually they would need more money than State Pension in their retirement.
So Sarah what would you suggest to people that, what can they do to make sure they’ve got those pension savings, so they have that choice of when to retire and how to enjoy their retirement and that lifestyle that they want in retirement?
Sarah: Yeah so first of all I mentioned earlier on about workplace pensions, and you know these days most people will be in a workplace pension, so as I mentioned if you’re age 22 or over and if you earn at least £10,000 a year. Now it is important to say that if you have more that one job then that £10,000 threshold applies to each of your jobs.
So if you are in a workplace pension then you know it’s really important to stay in that because it’s a really good foundation for your retirement. And as I mentioned the benefit of a workplace pension is not only is your money going in, but you get that money from your work, from your employer, as well. I do understand, I’ve been talking about pension and savings, save for your retirement, prioritise your pensions, prioritise your retirement and I really understand that for a lot of people, especially for younger people you might be thinking – I’ve got other things to pay, I really have, I can’t prioritise my pension, and I do get that. I think we all get that, especially at the moment.
But I think it really comes back to this, well two fundamental points. One of them is if you don’t save for your retirement what will you live on? And we just saw from that poll 98% of people said they didn’t think the State Pension was enough for them. So if you don’t have any other pension then you will be living on just the State Pension.
And I think as well, it’s thinking about okay well if I don’t, if I’m not happy just to live on the State Pension and I really need to think about having a pension. I also mentioned earlier on that it’s those earlier contributions that will do the real heavy lifting. Of course people have to make their own decision about what their priorities are but the earlier you start the easier it is in terms of the monthly amount that you need to pay in because of this compounding effect, because of the heavy work that those early contributions will do for you.
Clare: So Sarah, let’s think about someone who has a set amount going into their workplace pension, now can they pay more into their pension if they wanted to?
Sarah: Yeah absolutely. So again I was talking earlier on about this minimum amount of approximately 8% of your salary that will be going into your workplace pension. But you can pay more in, and even a relatively small amount, you know an extra percent or 2%, can make a difference potentially to the mount of money that you’re going to get when you retire.
But you may also get some help from your employer if you do that. Quite a few employers will do what’s called marching contributions. So in that case if you want to pay in some extra, so say at the moment you’re paying in 4% of your salary plus 1% of government top up of tax relief that’s going in. Well if you could afford to pay 5, 6, 7% your employer will match that pound for pound. Now different employers have a different approach. Some of them may match up to a limit of 7% some 8, 9, 10. A few of them even higher. So it is really worth asking your employer – do you do employer matching? If so, what’s the limit? What’s the maximum I can put in with you matching that pound for pound? Now again as I said not all employers will do this but there are a couple of other options to think about.
So if you’re in the kind of job where you get a bonus then you can do something called a bonus sacrifice or a bonus exchange. And the way that works is that instead of getting your bonus paid into your bank account you give up some or all of it. Now that could be a percentage or you could decide to give up a certain amount, up to a certain limit. And in that case the bit that you exchange doesn’t end up in your bank account, instead it is paid directly into your pension by your employer. Now the advantage of that, apart from having more money going into your pension, is that you save tax and National Insurance on the bit that you give up and your employer saves National Insurance as well.
Now if you don’t get a bonus, there’s something called salary sacrifice, or salary exchange, that you can also do in a similar way. So here, you and your employer agree that you will exchange a percentage of your salary and again that money will go directly into your pension. So again it’ll save you some tax and National Insurance and save your employer some National Insurance as well.
Now these are just suggestions, I’m not giving advice, these are just things to think about. So salary exchange in particular it may not be right for everybody. So for example it will affect any salary related benefits that you might get. So we obviously hope that people don’t have to be furloughed in the future, but your furlough pay is based on your salary so if you’ve exchanged some of it, it will affect that. And again there are certain benefits that are maybe related to the amount of salary you get. So it’s just something to think about, it’s not necessarily right for everybody. But I would just say one thing which is, years and years ago I used to work for the BBC, a very very long time ago. Before you were automatically put into your workplace pension. The days when you had to sign up and go through the paperwork and join. And I did join the pension scheme quite early on. And I was paying, you know whatever it was, into my pension. And to be honest I didn’t really give it any thought as to whether it was enough or not. I was just kind of, I’m in the pension – job done. And then I started working on a personal finance programme on radio after I’d been at the BBC for a few months. And I guess if you can imagine, pensions were a hot topic. Previously I hadn’t really been somebody who found finance, pensions, that fascinating, it wasn’t something I spent my childhood and teenage years talking about. But I did find it interesting when I started working on this programme. And a couple of people were talking about their pensions and how much they were paying in. And they mentioned that they were paying in more than the standard amount, and to be honest it wasn’t really something I was aware you could do, and it certainly hadn’t really crossed my mind for me. But it was something I thought, I really ought to get my act together, because the way they were talking about it, it seemed to make a lot of sense. And it was something I did. And in some ways you can say, it is something I’m very glad I did. But it wasn’t almost like it was a conscious decision where I got out my spreadsheet and started to look at how much I’d need. It was really based on this conversation I had with a couple of my colleagues when they were like, well actually this is why it could be a good thing to do. So I think sometimes it’s thinking about your pension, there are unusual things that can trigger that thought process and conversation. But it’s definitely worth exploring employer matching, if you get a bonus whether bonus exchange is right for you, and as I mentioned salary exchange or sacrifice as well.
Clare: That’s great Sarah. Now just to finish off, what are the three key things that everyone should think about and take away from today?
Sarah: I think the first thing is this mindset shift, and I mentioned this idea of being or having your own financial independence day, and it’s something that really made a difference to me as to how I thought about my own retirement. So don’t think about retirement as being something that – in inverted commas – old people do, and you sort of shuffle off to the end of your working life. Start to think about, when do I want to not have to work to pay my bills? I can work if I want to, but when do I want to have my own financial independence day?
And again if you’re looking at money that’s coming into your salary and money that’s going out to your pension it can feel like you’re depriving yourself. You’re thinking, that’s money I could spend today. But again this is something that I’ve found really helpful when I’m thinking about either saving in cash savings account or my pension is instead of thinking about the money that I therefore wouldn’t have to spend today as being given up, it’s about buying myself options and choice further down the road. So whether that’s about having the ability to go on holiday without putting it on a credit card. Or being able to retire without having to live on the State Pension which our poll told us that 98% of people don’t want to do.
The second thing is to really think about the retirement lifestyle you’d like. So not thinking about it in vague terms, just really start to put some numbers against it. So I mentioned that Retirement Living Standards website. I talked about how financial advisers can help. And there’s calculators that we’ve got, and also there’s one on the MoneyHelper website.
And then lastly, if you’re in a workplace pension, don’t opt out of it if you can afford not to. Think about how much is going in and maybe look at ways that you could increase the amount that you’re saving, if it’s something that you can afford to do.
Clare: Okay, brilliant, so thanks for those three top tips and I totally agree that mindset shift is absolutely crucial. Now we’ve had questions coming in while we’ve been talking so let’s move on to them and see the type of things that we have been getting.
So, there are quite a few questions. Ah now! This is one that often I’ve come across and I know you’ve come across. So Amy says - I don’t really understand how tax relief works, can you explain it some more please?
Sarah: Yeah, Amy it’s a really good question, I’ll give it my best shot! I think one of the problems with tax relief is I don’t think the name really explains what it does. But the way to think about it is as a government top up in terms of the money that’s going into your pension.
So I think the easiest way to explain it is with an example. So assuming that you want to say pay £100 a month into your pension. If you’re a basic rate taxpayer you will have already been paying tax on income that you receive. But when you put that money into your pension the government effectively kind of gives you some tax back as a top up. So back to the £100 a month example, if you’re a basic rate taxpayer, and you want to pay in £100 a month, it will actually only cost you £80 a month because the government will pay in the other £20 in tax relief. Now if you’re a higher or an additional rate taxpayer then you can reclaim higher rates of tax, you can normally do that through your self-assessment form if you fill it in. It’s one of those things that you know, pensions does sometimes have some not very user-friendly jargon and I think tax relief is one of those things that doesn’t really explain what it does. But once you understand it, I think it’s really useful to think, every time I’m paying into my pension the government is paying as well. And it’s not every day that you get money from the government, so I think it’s definitely a good one to understand and think about!
Clare: Definitely and to just add to that as well that depending on the type of scheme you’re in you might have to, if you’re a higher rate or additional rate taxpayer, you might have to claim it back. But if you’re in a salary exchange scheme then that will automatically happen so it’s worth checking that if you are a higher rate or additional rate taxpayer.
Now the top question just now is – I have a number of pensions from different previous employers, should I combine them? And again this is a question we get asked quite a lot isn’t it Sarah?
Sarah: Yeah and I mean it’s one of those questions, it’s a really really good question and you’re going to hate me for saying this but there isn’t really a straightforward answer!
There are pros and cons and it’s the kind of thing that it’s a really good idea to get financial advice on, but ill just give you a couple of things to think about.
So reasons why it might be a good idea to combine your pensions. If you’re somebody who finds it hard to keep track of lots of different pots then it can be easier to see them all in one go. Having said that there is something coming down the track called the Pensions Dashboard which means that you’ll be able to see on one sort of, as it sounds, dashboard, all your pensions at the same time. So that’s maybe just worth being aware of.
Reasons why it might not be a good idea. In terms of where you’re moving your money to it’s always worth just looking at what the charges are, whether you’re giving up any existing benefits from your pensions. So some very old-style pensions have some specific benefits which can be quite valuable and if you were to give those up by transferring elsewhere then you could be worse off.
And it is worth saying, we’re talking about combining pension posts like pensions are all the same but there are two main categories of pension. One is what’s called a defined contribution pension which is what most people will be saving into these days and it’s where you pay in money, your employer does, you get this government tax top up and then you get a pot of money at the end that you can take money our of or convert into a guaranteed income. But a while ago a lot of people were in what was called a defined benefit or final salary scheme and there the amount the you get at retirement is linked directly to your salary rather than the pot that you have that you’ve been growing over the years.
So in this case, generally, thinking of combining a final salary pension with another one it’s generally a bad idea. Again, there can be some exceptions, but the starting point is often this is not a good idea and if it’s something you’re thinking about, unless you’ve got a very small pensions, you’ll normally have to take financial advice as well.
Again there is information about this on our website, there’s also information about it on the MoneyHelper website. But if you are thinking of doing it it’s a really good idea to take some financial advice first.
Clare: Okay so, next question is should I pay off my mortgage before increasing pension contributions? Now that’s another interesting one isn’t and it’s probably another one that there’s not quite a right or wrong answer, but Sarah what would you recommend – well we can’t really recommend – what would you say to that question?
Sarah: It’s a really good question again and I don’t want to frustrate people by saying there’s no easy answer, but first of all I’m not a financial adviser so I can’t give you advice, I can just give you some suggestions and things to think about.
So first of all I think it depends on how much your mortgage might be and whether it’s the kind of thing that might stress you at the moment. So we don’t know what’s going to happen to interest rates. Some people are on a variable rate, so for example if you’re on a variable interest rate and you’re worried about interest rates rising, you might think actually I’d rather get my mortgage down a bit if I possibly can.
Sometimes because of the way fixed rates are priced, you can get a much better fixed rate if you have a little bit more equity so you might think I’ll pay it down a little bit and I can qualify for a better fixed rate. Again that might be something to think about. On the other hand, I was talking about why how a bit extra into your pension potentially could make a big difference especially in the early years. So my thoughts would be it doesn’t necessarily have to be either/or. I think it depends on the size of your mortgage, what your plans might be, how much the mortgage is compared to the value of your property, whether you’re on a variable rate deal, how much headroom you’ve got in your budget if you are on a variable rate deal. Would you not be able to sleep at night if mortgage rates go up? But also think about the tax efficiency of pensions and the fact that if you are paying extra into your pension and you’re working, you’re employed, you could potentially get some more money from your employer if they do this matching.
The last thing I’ll just say and again this is not advice, this is just what I did. I did a bit of both, I did pay a bit extra off on my mortgage when I could, but I also like I mentioned earlier on, increased my pension contribution. Because although it was important to think about my mortgage it’s actually my pension I’m going to be living on when I retire, not my house.
Clare: Yeah, okay then, there’s a couple of questions that are sort of dealing with death. So what happens to my pension when I die? And there’s also another question about passing on pensions to children. Sarah, shall I pick up this question because this is certainly a topic which comes up quite a lot?
Now again Sarah mentioned this issue of the difference between the two types of pensions, so the pension when you save up and you have a fund on retirement that your employer’s contributed to, or final salary or defined benefit type pensions. Now the death benefits are quite different.
So what I would say is if you’re thinking, if you have a personal pension or a workplace scheme where you are contributing and you’re expecting this fund on retirement and you kind of choose what to do, then normally what happens is the death benefits if you died would go to the people that you would want them to go to.
Now what’s really important, and often people forget about this, is that there are forms to be filled in, and on that form you put down who you would like to receive the death benefits. Now obviously the older you are, the bigger the fund can be, and actually if you die when you’re under 75, your beneficiaries will get that money without paying any income tax. So it’s really important to fill in that form, to say who you would like to receive the benefits.
Now again it’s a bit of a tricky question because different schemes operate in different ways and you can ask exactly how it works, but that fund of money isn’t going to disappear when it’s sitting in your pension. In most scenarios it is going to end up with the people that you would want to receive it. But make sure you fill in these forms. So if you haven’t filled one in and you’re in a workplace scheme then ask your employer for one because it’s really important.
I know that certainly I would want to know that my family were going to receive the benefits so I’ve asked that my husband and my three children would receive the death benefits when I die because it’s important to me that they would all have a share.
I don’t know if there’s anything else that you’d like to add about death benefits, Sarah?
Sarah: No I think you answered that very well and because I’ve got a bit of a sore throat I was using the opportunity to have a glass of water so thank you for picking up that question!
Clare: So another question, should I be paying more into my work pension or running my own?
Sarah: Again, we’re getting some great questions so thanks so much to people who are submitting questions, and also who are voting the questions up, so I’ve seen some that we’re getting in, the popular questions. It’s really appreciated.
As I said really good question. So I think in terms of whether to pay more into your workplace pension or to have your own, I mentioned the extra benefits that you may get from your employer. So if they do this matching of contributions. So again this is not advice, but my starting point would be to start with my employer, find out whether they will match contributions up to a certain limit if I pay extra. So every pound you pay you’ll get a pound from your employer.
Also think about whether you can use this bonus exchange or salary exchange because that’s quite a tax efficient way of paying extra money into your pension. There may be reasons why you might want to run your own pension. It’s normally to do with if your workplace, if you want to invest in a certain kind of fund that your workplace pension doesn’t offer. But I would just say one word of, well not quite caution, which is maybe one thing to explore before that. The vast majority of people who are in a workplace pension are in what’s called a default fund. So basically that’s the fund that you’ll be put in to if you don’t actively decide to put your money into a different fund.
Default funds can vary from one workplace pension provider to another, but I think the bigger point is that if you are in that default fund, or even if you’re not, your workplace pension may offer funds that you weren’t aware of or that you haven’t though about switching your money to. So if it’s about thinking, actually I want to handle my own pension because I want to invest my money in a certain way, then maybe look at your workplace pension first just to be sure that they don’t offer that option. Because what you may be able to do is split your money and have some of it going into one fund and some going elsewhere, so that’s definitely something I would think about
Clare: Okay now I’m just flicking through the questions, we’ve only really got a minute left. There’s an interesting one that’s come up with someone who’s a stay-at-home mum, Sarah. And I think it’s important to think about this as well because there are quite a lot of people who don’t. So they’re asking - should they set up a private pension while they’re not working? Sarah, did you want to just pick that one up as the last question?
Sarah: Yeah, again really good question. There’s a couple of things to think about. Firstly, under the rules you’re allowed to pay in up to 100% of your salary or £3,600 a year into a pension, whichever is the largest. Now if you’re not earning at all that means you’re allowed to pay in up to £3,600 a year. Now that figure includes tax relief, so just because you’re not earning doesn’t mean you can’t benefit from this tax relief, this government top up that I mentioned earlier on. So again I just think it is worth thinking about that even if you’re not working and you don’t have earnings, there may be ways that you can save that mean you benefit from that tax relief.
The other thing is it is possible for one person to set up a pension for another. So it’s possible for example for grandparents to take out a pension for a child, or for a husband to take out a pension for a wife or partner or vice versa. So there are ways that it’s possible for you to benefit from having money going into a pension and getting that tax efficiency. You don’t necessarily need a salary or income to do so.
Clare: That’s great Sarah. Well, I think we’re almost at the end of our time today. So thank you so much to Sarah for answering all those questions today. And thank you for watching and submitting such great questions. Now, sorry we didn’t get to all of the questions but hopefully this session has helped you in planning and saving for retirement. We will read all of the questions though and look at the ones we didn’t answer, and we might use them to help shape future webinars.
So thank you again and have a good day!
Sarah: Thank you.