Workplace Pensions – Is It Worth It?

The Workplace Pension. Sounds quite scary but it is actually quite simple. Your employer will set it up for you and it is, simply, a tax efficient savings account which you can access in your 50’s, under current legislation. 

There are rules about the minimum you pay in, and the minimum your boss must also pay too! You don’t have to choose where your money is invested – as this is done for you by experts – but if you do want to invest somewhere else you will normally be able to. Ask your boss! 

So how does it work? Well quite simply, money is taken from your pay and put into an account in your name. Your employer also puts some money in this account and so does the Government so you end up with more money than you started with! 

You can’t have your money instantly though! You will have to wait until you are at least 55 to get the cash out of your Workplace Pension. In the meantime your money will be invested – in what ever accounts you choose – and could increase in value over time. When you reach 55 you can, currently, take a quarter of your pension savings tax free, with the rest being taxed as per any other income. So there are lots of advantages to using a pension to save. 

But why is having a Workplace Pension even important? Until recently many people retired in their 50’s or 60’s and could be expected to live another 10 or 20 years. Now, with medical advances meaning that we live longer, we could be retired from work for almost as many years as we actually worked. Let’s think of this as having lots of holidays at the end of your life… If you want to enjoy these you are going to need a lot of money saved up. The earlier you save, the more time your money has to earn interest and the larger your pile of cash will be when it’s time to kick back and have fun…

What’s a personal pension?

Personal Pensions are, like the Workplace Pension, quite simple and anyone can set one up.  There are no age limits, even children can pay into a Personal Pension, and they are simply a tax efficient savings account.

Personal Pensions are normally run by insurance companies and you will need to shop around before setting one up. There will be fees to pay, but every time you pay into your Personal Pension, so does the Government via tax relief. A Personal Pension should, therefore, be a better way to save for later in life than putting money in the bank!
You can pay any amount that you choose into a Personal Pension, but over certain amounts the tax relief doesn’t apply.  A Personal Pension is therefore simply your own personal pot of money that you can keep no matter who you work for.

You can’t have your money instantly though! You will have to wait until you are at least 55 to get the cash out of your Personal Pension.  In the meantime though  your money will be invested – in what ever you choose – and could increase in value over time.  When you reach 55 you can, currently, take a quarter of your pension pot tax free, with the rest being taxed as per any other income.  So there are lots of advantages to using a pension to save. 

But why is saving even important? Until recently many people retired in their 50’s or 60’s and could be expected to live another 10 or 20 years. Now, with medical advances meaning that we live long, we could be retired from work for almost as many years as we actually worked. Let’s think of this as having lots of “gap years” at the end of your life. If you want to enjoy these you are going to need a lot of money saved up. The earlier you save, the more time your money has to earn interest and the larger your pile of cash will be when it’s time to kick back and have fun.

If you’re interested in setting up a pension, or finding out more, then check out the link here. 

So what’s the Workplace Pension all about?

Workplace Pensions are actually quite simple and they apply to you if you are employed, are between certain ages (currently 22 and State Pension Age) and earn above a certain amount of money (currently £10,000 for the 17/18 tax year).

Every time you pay into a pension, so does your employer, and so does the Government via tax relief. A Workplace Pension should, therefore, be a better way to save for later in life than putting money in the bank!

If you work and are eligible for a Workplace Pension you will automatically be put into the scheme unless you tell your employer that you want to opt out.  This is called “Auto-Enrolment”. It’s therefore important to read any letters you get from your employer so you don’t miss out on your choices. 

The amount that you need to pay into a Workplace Pension is set out automatically with rates going up over the next few years so more money will be taken from your pay, and more money will be put in by your company unless you tell your employer to stop. 

But less money in your pay packet in return for a pension is not necessarily bad news. Your employer has to choose a reputable pension provider who will invest the money on your behalf, and these investment returns will be tax free! You will have to wait until you are at least 55 to get the cash out but in the mean time your money will be invested and should increase in value over time. 

But why is saving even important? Until recently many people retired in their 50’s or 60’s and could be expected to live another 10 or 20 years. Now, with medical advances meaning that we live long, we could be retired from work for almost as many years as we actually worked. Let’s think of this as having lots of “gap years” at the end of your life. If you want to enjoy these you are going to need a lot of money saved up. The earlier you save, the more time your money has to earn interest and the larger your pile of cash will be when it’s time to kick back and have fun.

If you are about to be “Auto-Enrolled” it’s important that you understand what will happen to your take home pay when it happens. Some people might be shocked by the drop in their monthly income and decide to opt out after all, which may not be the best thing to do in the long term.  If you have any questions about the pension you are being auto enrolled into the first port of call is your employer who will be happy to help, although they can not give you advice on whether to join or not.
There is also loads of info here.

What on earth is a pension?

Quite simply, pensions are payments that you might get after a certain age. Claiming a pension used to depend on you giving up work, but with new rules introduced over the past few years you don’t have to finish work to draw a pension and you can even finish work and keep saving! 

But of course the money doesn’t appear from nowhere. You gotta put in to get out! There are four main types of pension in the U.K. Check out the links below to see how they work! 

  1. The State Pension
  2. Gold Plated Pensions (also called Final Salary or Defined Benefit)
  3. Workplace Pensions (these can be Money Purchase or Defined Contribution or, for the lucky few, Gold Plated – see above); and 
  4. Personal Pensions (also called Money Purchase or Defined Contribution)

Ah, the State Pension

Ah, the State Pension. Never has any payment from the Government been shrouded in as much myth and misunderstanding. To be fair, this is due to the complexity of the whole thing and I completely sympathise with everyone who has ever uttered the words “I won’t be getting anything when I retire”, “It’s unfair that my pension has been taken from me” or “I was planning on retiring at 60 and now I can’t”. I mean, who was to know that things would change? And who knew the rules anyway?

Whatever your politics, let’s put this out there and accept that the current and previous Governments have not won any prizes for making the State Pension clear and easy to understand. Let’s face it, they have had wars and the NHS to deal with, as well as divorcing us from Europe, sorting their own complex expenses out and working out whose turn it is next to go on “Strictly”. Your little pension has hardly been the most exciting thing on the agenda – but it should have been, as one of the main results of creating the NHS is that we’re all expected to live longer and so the cost of being retired just keeps going up and up.

Anyhow, let’s leave politics out of it for a moment and focus on the facts which matter to you.  

Here’s a first lesson in what you need to know about the State Pension…

  1. Simply put, the State Pension is a payment made by the Government to people over a certain age, who qualify. I’m not going to go into huge detail here – you can visit https://www.gov.uk/check-state-pension for that, including a personal projection of your own pension which is pretty cool and worth a look – but broadly speaking, you hit a certain age and you get a payment from the state.
  2. There are two types of State Pension in the UK. The Basic State Pension, which applies to men born before 6 April 1951 and women born before 6 April 1953, and the New State Pension, for everyone else. Which will you get?
  3. The current amount of Basic State Pension (i.e. paid to people who have already retired) varies depending on how much National Insurance that person has paid. The maximum amount anyone can get, however, is £122.30 per week.
  4. The New State Pension is a bit higher at £159.55 per week, which works out at £8,296.60. Not enough to live on by most people’s standards.
  5. The State Pension is different to a workplace pension or personal pension. If you have one (or more) of these other pensions then this will be on top of what you get from the government. More about this later.
  6. Now for the controversial one, the age at which your State Pension starts to be paid depends on when you were born. For some people this age has been increased and unfortunately, some people didn’t think that they were told about the change quickly enough. The good news is that these people (including a group called WASPI who are pretty active on the twitter) have been very vocal about how unhappy they are and there is now a tool on the internet which tells you exactly when you will get your State Pension. Try it! It’s here https://www.gov.uk/state-pension-age

Any questions let me know. There is much more to follow….

It’s always nice to attend a client’s governance meeting when markets are up

It’s always nice to attend a client’s governance meeting when markets are up.  Not only is the meeting shorter (less questions about good investment news than bad) but the meeting normally has that lovely up beat feel that rarely happens in financial services – honestly I know – I joined an investment bank as a Client Service Director at the tail end of 2008, so bad news was my bread and butter!

On top of good investment returns we had an update from our very shiny new provider – we are replacing our original workplace pension provider with a new one following a market review last year.  So, all in all, a very nice way to return to consultancy and to chairing my first Independent Governance Committee after having the twins.

Equally lovely was the fact that my client was running member presentations on pensions today – run by the very shiny new provider – and I got to attend!  Hooray, as this is my favourite part of working in pensions…meeting the members.

And there was even more to be cheery about – on top of the good investment returns.

1. We had fab attendance – with some members coming from off site in other parts of Cornwall to hear about the latest developments in workplace pension pensions.

2. Members were taking notes.  This means they were listening.  This means they were engaged with the content and genuinely interested in pensions! Hats off to my client’s super HR team for sorting this out.

3. We had some really intelligent, thought out questions.  So I don’t mean “What is a pension” but “What skills should I be looking for in an independent advisor if I was interested in transferring out of my final salary scheme”. This shows that people are engaged with pensions, have thought about them and came to the presentation prepared, looking for some answers.

4. And finally, shiny new provider did a really great, engaging talk about our scheme and their platform and so provided a really interesting and value added hour out of my client’s employees’ day.  Seriously, this should not be underestimated as a few years ago the “pensions talk” really was the graveyard shift.

So, it’s been a great day!

To hear more about pensions please follow me on Instagram at @mdv76 where I will be taking questions for my blog #10steppensions which starts after Easter

What’s a Gold Plated Pension, and how do I know if I’ve got one?

The first thing to say about “Gold Plated Pensions” is that they are not as glamorous as they sound. They are not adorned with Swarovski crystals, or gilded in glitter but are simply one of the oldest ways of a company giving a pension to its workers.

“Gold Plated Pensions” are also called Final Salary, or Defined Benefit schemes and were the main type of pension used by large companies and the public sector until recently.  The name “Gold Plated” comes from the fact that these type of pensions are often more generous than other types and some of them have guarantees attached to them.  However, as the BHS story and others have shown, things can go wrong! 

The chances are, if you are a teacher, NHS worker, member of the fire service, police or other large company and started work a while ago (exactly when will depend) you may have some gold plating in your pension. They are therefore more popular than we realise. 
But what is it? Basically it is a promise from your employer to pay you cash after a certain age. It doesn’t matter how much you save as the cash payments you will get depend on other things (how much you earn and how long you worked for). If there isn’t enough money when you decide to cash in, that’s your employer’s problem not yours -hence the “Gold Plated” label.

Most people DO need to pay into these schemes though and if you’re lucky enough to be in one of these schemes your employer will be taking, or will have taken, money from your salary to cover part of the cost. Don’t worry – they will also have been putting money in as well so these pensions are usually a pretty good deal!

Another part of the “Gold Plating” in that when the payments start from these schemes they normally go up each year to keep pace with the cost of living. Again a pretty valuable thing to have!  

Top tip: If you think you may have one of these types of pension, even if it’s from a job you have left in the past make sure your employer (or ex-employer) knows where you live. That way you will get all the information you need and not miss out on anything. 

Every year thousands of pensions go unclaimed because people haven’t told their old employer that they have moved. 

If you’ve lost details of your old employer then the Pension Advisory Service may be able to help. 

It’s an easy thing to update your contact details and could make all the difference to your finances later in life! 

 

Hooray for a pension free budget, drinks at the Citizen M and a new website!

The 7th floor bar at Citizen M, Tower Hill.  Not a bad spot to do your pensions homework

The 7th floor bar at Citizen M, Tower Hill. Not a bad spot to do your pensions homework

Happy Saturday everyone.  We’re up early in Cornwall. Twin 2 is watching Postman Pat – who seems (literally) to have gone up in the world since I was a kid and now has a suite of vehicles including a helicopter – and twin 1 is asleep.  A good time to get back on line and post my first “post twin” blog.  I was relying on #spreadsheetphil coming up with the goods on Wednesday and giving me something meaty about pensions to blog about – but no such luck.  With the exception of a promise to clamp down on overseas pension arrangements this years’ Budget was pensions free!  Hooray, is my response.  This is a very, very good thing.

My stock answer for years when asked by journalists what I hoped for regarding pensions in previous Budgets was “nothing”.  My view for a long time has been that the Government has tinkered and teased our pensions system to the point of public confusion and what the UK desperately needs now is a period of stability within the pensions industry in order to build public confidence and for us, the pensions professionals, to deliver some badly needed education about pensions – with some hope that what we teach will remaining relevant for longer than 12 months.

So could this be the end of a long era of the Government medling with pensions?  Before my mat’ leave began not a day seemed to go by without pensions being in the press and something either being changed, proposed or reported as miss-sold.  Fast forward and things do seem to have quietened down a little, thank goodness.  This is bad news for consultants but great news for members of pension schemes and companies that need to focus on their core business as opposed to understanding and complying with the latest round of pensions changes.

I’m formally back to work after Easter but am doing a number of “Keeping in Touch Days” at the moment, which are an absolutely brilliant concept and a massive help, particularly in a role which involves knowing what is going on in the world beyond what Postman Pat’s latest mode of transport is.

One of my KIT days involved a quick catch up with the king of all pension bloggers Henry Tapper who, over a nice cold drink in the fabulous 7th floor bar at the Citizen M hotel, Tower Hill, summarised what I had missed whilst having the twins.  Put briefly, “a pop at independence in the investment world” and “a paper on final salary pensions which claims the problem with DB can’t be cured over night” are the two big headlines.  Neither are ground breaking.

So, on to pastures new.

A huge shout out to the wonderful Ally Toulec for dragging me up to date with modern day blogging practises, teaching me about Instagram, which I have exciting plans for (watch this space) and helping me update my website which I think is all looking a little bit smarter.

 

Tempting? Maybe, but is it better than an income for life?

BoatSo, apparently 1 in 6 people are planning to take their pension as a single cash lump sum. In case you don’t know, if you are over age 55 on 6 April 2015 you could draw out your whole pension pot as cash.

Tempting? Yes.  Especially as the average UK pension pot is worth around £30k which could go a long way towards a nice holiday, new car or paying off that mortgage or credit card.

BUT…before you bite the bullet there are some things that you need to know,  Here’s the lowdown on taking that cash.

  1. MOST IMPORTANTLY: THIS CASH IS YOUR PENSION which has to last you for the rest of your life (unless you have other wealth).  Ask yourself, “do I really need all of it now?”.
  2. You will probably need to pay tax on part of any cash you withdraw.
  3. If you do pay tax, the first 25p in every £1 you withdraw will be tax free.
  4. Any tax you have to pay on the remainder will be at your marginal rate.
  5. If you don’t spend all the cash you will need to think about where to invest it, the return it could earn and tax you will pay.
  6. If you don’t take cash from your pension then it will carry on being invested with interest growing tax free, like an ISA.

So, before you book that world cruise or order the new kitchen, just think about the implications.

Happy saving!

“You can never be too rich or too thin”

Wallis Simpson once said “You can never be too rich or too thin”.

I’m not convinced that Wallis was right; however I do know that money can buy freedom and a little freedom is a good thing, especially after many years of working hard to pay the bills and feed the children.

This freedom used to be called retirement.  I not sure whether retirement in the grand old sense still exists,  and I personally think that “has other private income” is a better, more glamorous label than “pensioner” for those lucky enough to take some time out from work at the end of their lives.  But whatever we choose to call it, the fact remains. This “other private income” has to come from somewhere and there needs to be enough of it to generate a little happiness.

There have been some pretty scary headlines flying around recently regarding all this.  “Today’s children will need a £2.4m pension pot” for an acceptable standard of living, “The average 30 year old needs to save £834 per month to have a comfortable retirement”.  These are some huge numbers by anyone’s standards and they do worry me slightly as I wonder whether the people behind these calculations have really thought properly about what a comfortable retirement really is.

For me, the numbers are confusing and they don’t really tell us anything about our own circumstances, and what matters to us.  Yes, money is one part of planning for later life but there is much more to be considered.

The thing is, only you know what a comfortable retirement means.  And even if you think you have figured out what it means, there is a tiny possibility that, when it comes down to it, what you think you want from retirement, freedom from work, or whatever you want to call it, just doesn’t float your boat when it arrives.

I talk to many pension scheme trustees who, bored with the daily of grind of another round of golf (or beer) at the club, are desperate for some intellectual stimulation and a couple of problems to solve.  There are women being driven to posting the problems of early retirement on the internet – I quote Sasha and the pan incident – “Right – this is going to sound so petty – but I am furious, spitting feathers over what husband has done”  See here for more details if you are that way inclined but, from what I can make out, all this poor man has done is pay dutifully into his pension to ensure a long and happy retirement: http://boards.dailymail.co.uk/trouble-shared/10251927-big-row-husband-still-not-talking-after-2-days.html.

There is lot’s of good evidence, Sasha aside, to show that work is good for us.  It makes us happier, healthier and ironically even makes us live longer.  I don’t plan to retire, although I may use “other private income” (saved through a tax efficient workplace pension with contributions from my employer and probably some capital from my home) to support me doing something that pays less than being an Actuary but gives me just as much enjoyment, or even more.

cooke_2385988b
The great Alistair Cooke, being more succinct about pensions than I will ever be.

And for those of you who think you need the £2.4m, well the great Alistair Cooke commented on this more succinctly than I ever could in his September 1977 Letter from America; “Retiring Kind” which is here and well worth listening to http://www.allmusic.com/song/retiring-kind-september-1977-mt0006752602

So, perhaps there isn’t a pension crisis after all, just a complete misunderstanding of what we need to be happy.