Chapter 1: What is the main topic discussed in this episode?
Welcome to This Is Money podcast sponsored by Trading 212. Download the Trading 212 app and open a cashizer with promo code TIM to get the 12-month bonus promo rate of 4.62%. Terms apply. I'm Georgie Frost and joining me and Simon Labbert today is Helen Crane. And coming up, the scale of Britain's pension saving shortfall has been laid bare in a major new government report.
Are you saving enough for a comfortable future? Also state why lifestyle pension funds could be leaving millions worse off at retirement. We explore mansion taxes and wealth taxes. Nationwide fair share, a winning formula. And should we cap food prices? Don't forget you can stay up to date with all the latest breaking money news. Just go to thisismoney.co.uk or download the app.
But first, a major new government-backed review into whether the pension system is fit for the future has found millions of people risk financial hardship in retirement. The first half of the report... that's come out this week outlines the scale of the problem, the recommendations will come next year. Now, it found roughly half of working age adults aren't saving into a pension at all.
And among those who are, many are only saving at very low levels. Who is most at risk? Low and mid learners, the self-employed and women. So goodness me, I am totally stuffed.
Chapter 2: What is the scale of Britain's pension saving shortfall?
Simon, tell me about the Pensions Commission.
Well, the entire report wasn't just about Georgie Bingo and the fact that you've managed to hit all of them. But the nub of this is that we've got two things going on with pensions. Well, three things going on with pensions.
Firstly, if you're a public sector worker and you still benefit from a defined benefit pension scheme, which is one that means your employer guarantees to pay you a certain amount in retirement for every year that you've worked there.
And you have signed up to that scheme, which if people are listening to this and they do work in the public sector and their employer offers a pension scheme, I cannot stress how important it is to sign up to that and take the maximum advantage. Pay in whatever you need to pay in in order to get that, because it's a great deal. If you're in that situation, then you're probably going to be OK.
If you work in the private sector, where most pensions are what's known as defined contribution, you pay some money in, your employer pays some money in, the pot's invested to build up a sum for your retirement, and then it's on you to turn that into income in retirement, then you will have benefited, hopefully, from something called auto-enrolment.
which was introduced some time ago now and has dramatically increased the number of people who are saving into their workplace pension. And the idea is it's like the ultimate nudge theory. Instead of having to opt into your pension, you have to opt out of it. And if you don't opt out of it, you're in it. But the problem is the levels are too low.
Even at the highest level that we've now hit of auto enrolment, workers put in 4%, employers put in 3% and the government puts in 1% via tax relief. So you've got 8% going into your pension. Now, most experts say that you need at least 12% going in and probably ideally 15% if you want to have a comfortable retirement.
And what's happened is we've quite rightly patted ourselves on the back for pensions auto enrolment being a success.
workers have not quite so rightly patted themselves on the back for the fact that they're paying into their pension and we've sort of missed the point that we aren't paying enough in for all of these people when they reach retirement to have enough to have the retirements that they probably want and the report that came out this week has said this is a problem we need to do something about it
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Chapter 3: Who is most at risk of not saving enough for retirement?
Obviously, no one knows how long they're going to live. And it's not saying that all these people are spending it on
something silly you know people often take it out to do things like renovate their home to make it more suitable for when they're older or you know buy a new car that they hope will last them into their older age and you know these can be sensible purchases but getting out a bunch of your money when you might have sort of 30 years left to live is another thing that I think people need to think about so loads to think about in this report and I think it's one of those things where there's not one cover-all solution.
Simon, I've just been reading Steve Webb on LinkedIn, his comments about this commission, because, of course, he's been reading it quite thoroughly this week. Pensions Agony Uncle, Steve Webb. And if you cast your mind back to 2014. He talked about the pension freedoms of people basically spanking the money on Lamborghinis. The Pension Commission is not a big fan of pension freedoms.
Was Sir Steve right? Is that how people are spending their money? And if they're not a fan, could that be one of the issues in the recommendations that come out next year? Because actually he says he hopes the commission doesn't crack down so hard on Lamborghinis.
the two most attractive features of saving in a pension, tax-free cash and pension freedoms, that even fewer people think it's worth saving in a pension at all.
I think to go back to the point where Steve famously made his Lamborghini comment, a point that we made back then is that people who have diligently saved for their retirement throughout their working career are highly unlikely to go and spank all the cash immediately, completely recklessly, once they reach retirement. It's not a pattern that you would expect to see.
And actually, the evidence shows, how many years in are we? 10, 11, something like that, that people aren't doing that, that people are actually being relatively cautious. And in fact, Some people are too cautious.
People find it very difficult to go from what's called the accumulation stage to the decumulation stage where they have to start seeing their wealth go down and that, you know, their pension pot start to deplete rather than go up or their savings balance start to deplete rather than go up. It is difficult for them. So actually, you find some people spending less than they should do.
Now, on the flip side of that, you've got people who don't have a big enough pot to last them. And so obviously, it's easier to crack through that quicker. But we're not seeing evidence of people, you know, splurging the cash. I think the issue is, however, most people are not really equipped to be turning a lump sum of money into an income that lasts them for the
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Chapter 4: How does auto-enrollment impact pension savings?
doing this myself and it can be a bit of a nightmare you might have to get in touch find out your sort of login details and things like that get in touch with an old sort of HR person but it is really worth doing because it gives you a really sort of full picture of where you're at and you might be surprised you know if it was a job from several years ago even if you weren't there very long they're sort of compounding you know it might be a worthwhile sort of amount in that pot so it is one of those annoying kind of admin tasks but
Really worth setting aside a sort of rainy afternoon to think about doing something like that. You've also got the option once you've done that to consolidate your pension pots from different jobs. Some people advise against that because you can lose out on some benefits sometimes and there's fees associated with doing that as well.
But it can be beneficial if you're the kind of person who just wants everything all in one place and be able to easily see it. So it's worth considering. And also just worth talking to, if you are a salaried employee, just worth talking to other people at your work about, you know, are you in the pension scheme? Is it decent?
Some companies will have sort of different options that you can opt into. And it's worth just knowing what's out there, whether you're in the sort of best scheme that's on offer to you. Like Simon said, especially if you work for the public sector, definitely make sure you're paying in whatever you need to be paying in to get that deal because it's incredible.
If you are able to up your contributions, say, for example, if you get a pay rise or some other windfall, think about putting some of that money into a pension. It's an incredibly good deal. You know, obviously, for a lot of people, there'll be times in their life where they can't think about putting more money away for retirement.
But I think it's about sort of keeping on top of it and as and when you can, putting in a bit more. Some good tips there, Simon.
There's a couple of things I'd add to that. In terms of the finding out where you're at, Look at your letter from your pension provider when they send it to you, but also look at the date on it. The date that they've sent it to you might be quite recent, but the date of what that projection is might be a fair distance in the past.
I've seen this before where you get your annual pension statement and you're like, oh God, I thought it'd be better than that. And then you realise that actually it's based on a value from six months ago or something like that. Whereas if you log in to your workplace pension scheme... And everybody should find out how they can do that.
If you don't know how to log into your workplace pension scheme, find that out. First step, log in, see where you're at. You can then go use a pension calculator to try to look at the numbers. And there's a number of them out there. We've got one on This Is Money. Go to thisismoney.co.uk forward slash pension calculator.
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Chapter 5: What percentage should you ideally save for a comfortable retirement?
That'll get you to 13%. And that will cost you, if you're on 50 grand a year, it will cost you Ā£2,000 a year, which is Ā£167 a month. And you might think, I don't have Ā£167 a month, but this might need to be Ā£167 that you need to find. You know, it's just over 40 quid a week, or you might need to just find as much of that as possible.
Even if you can't find the full amount, find as much of that as possible. But also watch out for something that Helen mentioned. Are you in the best pension that your employer offers? If you're auto-enrolled, you get auto-enrolled into the auto-enrollment one, but they might offer a better option. You could be leaving money on the table.
And also watch out for this thing in auto-enrollment where the money that goes in is on your earnings between Ā£6,240 and Ā£50,270 a year before tax. So if you earn more than that, check are you paying as much into your pension as you think or are you only paying in a percentage of your salary up to Ā£50,000 and above that you're not paying in that percentage at all.
One thing, though, Simon, on your website, could your workplace pension be scuppering your retirement plans? This is where you want to take a look under the bonnet. This is all about so-called safe lifestyle strategies. So basically, as you get older, you get closer to retirement, closer to potentially taking that money out.
The last thing you want to do is it being really, really risky assets that could drop as soon as you need the money. So These lifestyle strategies move you into less risky funds as you get closer to the inevitable date. But could they be leaving savers with less than they expect when they stop work? There's a load of research on this and it is not pretty, Simon. No, it's not.
And actually, this is a very, very difficult topic because arguably, probably these lifestyle funds shouldn't exist anymore and you shouldn't be lifestyling people anymore because this is a system that was built on the back of working your way up to a certain point when you retired and then you probably bought an annuity with that pot and turned it into retirement income.
So as you said, what you didn't want was for your pot to suddenly fall in value due to market problems, you know, stock market suddenly tumbling just before you retired. So it de-risked you into safer assets. Except cash and bonds are also controversially not necessarily that safe. Cash regularly doesn't beat inflation, so you've got an inflation risk there.
Bonds, theoretically a safe investment because the return from them is more certain. But the bond market has been extremely volatile since the financial crisis. We've seen bond yields on the floor when interest rates were cut. We've then seen bond yields soar when interest rates rose. And the corresponding element of that is that prices have gone up and down quite substantially.
So at any given time, you could actually find that it's the safe part of your portfolio, the bonds, that have actually suddenly caused it to drop in value. And as most people with defined contribution pensions are now keeping them invested, arguably they shouldn't be lifestyling at all.
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