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Four pension pitfalls and how to tackle them · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to On the Money, a weekly show that aims to help you make the most out of your savings and investments. So in this episode, we're gonna focus on Interactive Investors market leading Great British Retirement Survey, which is based on answers over 9,000 people across The UK. It's been going a number of years now. It was first launched in 2019, and we published a very comprehensive report, which I'll include a link to within the podcast description. Joining me to discuss some of the key findings and what could be done to improve the culture and education around pensions is Craig Rickman, personal finance editor at Interactive Investor.
• 0:46
  Craig, great to have you back on the podcast for the second successive week.
• 0:50
  Craig Rickman: Yeah. Thank you. Thank you. Great to be back on.
• 0:52
  Kyle Caldwell: So, Craig, you've been part of the team that have put a lot of time and dedication into compiling the report this year. Given that we try and keep this podcast to around twenty to thirty minutes, I think it's best that we summarize four of the main findings and then talk through how each of these issues could be addressed in order to improve people's financial position and also improve financial resilience. So, Craig, let's kick off with the finds and that there's a a lack of confidence in the pension system. So the survey found that frequent changes to pension rules and taxes are undermining trust in the pension system. Just to give some examples of that, one in four respondents said that they feel empowered to save more into the pension if the rules stop changing, and one in three millennials said that this was also a key concern of theirs.
• 1:48
  So, Craig, how how can the situation improve? What needs to happen for people to have more confidence in the pension system?
• 1:56
  Craig Rickman: Well, I think that this sort of lands, the feet of the government, really. As you said, there've been lots and lots of changes to particularly to pension tax in recent years. I mean, last year is a really, really good example. So, in 2024, in April, the lifetime allowance, which was a a sort of a ceiling on how much your pension could be worth before you were hit with some pretty hefty tax charges, That was officially scrapped, and so savers would have reacted to that and, you know, changed their behavior as a result. And then six months later, we had the proposal to bring pensions into the scope of inheritance tax from April 2027.
• 2:39
  So, you know, this this this sort of constant changing of of the goalposts, you know, it risks disincentivizing savers, and that's clear from some of the results of of the survey. So sort of the first task for the government is to try and, you know, deliver some consistency to the pension tax framework. You know, we're we're we're already sort of seeing another example of the potential, you know, pitfalls of not doing that at the moment in in the lead up to this year's autumn budget. The the the rumor mill is is sort of running wild yet again through fear of of changes to pension tax, notably around the the tax free lump sum, but also upfront tax relief as well. And so savers are concerned that the rules are gonna change, then, you know, yeah, it's gonna make them, you know, less likely to want to engage with their pensions.
• 3:29
  So I think that's that's really the the first port of call for the government. And and I think we should also note that that pensions or one of the the main reasons that people choose pensions is because of the tax advantages. That's why they choose them over other vehicles. If they're gradually eroded, then naturally, it's gonna put people off using them. You And, know, the the tax advantages don't just encourage people to save, but they encourage people to save more than what they perhaps would have done before.
• 3:55
  So, yeah, that's that's one for the government. I think what we'd really like to see is some commitment to to leave, the pension tax system alone for the time being. I mean, that's that's the sort of the the the private pension space, the the state pension as well. We know there's a lot going on with that. There's a newly launched review on the state pension age, and we appreciate that that that could change.
• 4:18
  But the sooner that we get the outcomes of this, the better. Because, again, you know, if people don't know when they're gonna receive their state pension or, it's unclear when they're gonna receive it, then that can affect how they engage sort of with their retirement plans as well. So, yeah, this is this is something that we're urging the government to do.
• 4:38
  Kyle Caldwell: Changes to the pension system and indeed speculation that there may be potential changes, particularly in the road up to a budget, it just dents confidence. I mean, I mean, ultimately, if you invest in in a pension, you invest in for your your financial future in later life, it's a long term horizon that you need to adopt. Yes. In terms of policies, there's a lot of short termism going going around and, you know, the the constant shift in the goalpost. I think I just find it deeply unhelpful.
• 5:10
  I mean, whatever your political persuasion is, you know, the Labour Party have backed themselves into a corner by saying that they're not gonna raise income tax VAT or national insurance on working people. And that's why there are lots of rumors that and they may be looking at potential changes to the pension system because they need to balance the books. In my view, any government should be trying to encourage more people to take responsibility and take control of their financial future and to consider how much they're investing into a pension and then work out whether the amount they're actually investing, whether that's gonna be enough to give them what they need and what they want to do at retirement. I also think AWOC doesn't help is the there's been a constant sort of game of musical chairs with the pension minister post, you know, since Steve Webb stepped down in 2015. I was I was looking before we came on the podcast.
• 6:08
  There's there's been eight different pension ministers, and I I think that's deeply unhelpful. Maybe it's viewed as a bit of a junior position within governments and a stepping stone onto potentially other things. As I've mentioned, you know, investing in a pension is a long term game, and I think that with pension policy, the same long term mindset should be adopted. Now the next finding that we're gonna cover from our survey is the lack of financial knowledge. Now there's lots to unpack here.
• 6:39
  So just to give some examples. So our Great British retirement survey found that only one in fifteen, 7% said that they received sufficient financial education in school. And we also found that two thirds said that they'd have liked to have more financial education in school. And we also found in our survey that older workers, they risk making poor retirement decisions due to their lack of financial knowledge. So, Craig, how can the lack of financial knowledge be addressed?
• 7:14
  Craig Rickman: Well, I think the first thing to say on that, this is something that the government has recognized and is kinda seeking to help in in some shape or form, with its targeted support regime, which will be available to providers, from April year. And this will allow, yeah, pension providers to sort of guide people towards suitable financial products and decisions. So that's a good thing. But beyond that, there is obviously a lot more that that can be done. If you look at the sort of going to the the roots of it, you know, financial education in in schools, trying to expand that, broaden it to include things around pensions, so how pensions work, how the state pension works, how tax relief works, scams as as well.
• 8:04
  We know that's a that's that's still a big problem. So, you know, better financial education will will will have a could have a big impact, but that will only that will only support future savers. So the other part is to, you know, what to do about it now. So, obviously, targeted support is is one element, and we'll have to see what what happens with that. The other is, wake up packs.
• 8:29
  So these are currently sent to age 50, and, essentially, they're designed to just just to give people a bit of a jolt, really, to say that, you know, your retirement will be approaching at some point in the next however many years. So for those who are 50 at the moment, they'll be receiving their state pension at age 67, but we know that some may want to retire before that. So it's designed to, yeah, give them give them a bit of a jolt to to engage with their pension savings and and and get themselves in a position in later life where they can retire on their own terms. But they're sent to age 50, and while that gives people some time, to make a difference to later life, kinda think that that giving them some extra time would would be beneficial. I mean, there's a huge difference between saving and engaging with your pension over seventeen years compared to twenty seven years, for instance, if the if the wake up packs were sent to age 40.
• 9:24
  So I think that could make a big difference. And the other is to try and, unpack and and kinda get away from financial jargon. I think the industry has made some pretty big improvements to this over the years, but there's still a long way to go. And people who are probably not as or haven't been as as familiar with their finances as others may find it difficult to to try and pick apart what the what the terms mean. And so to try and simplify it and make it easier to understand for people, will make a big difference.
• 10:00
  And that's obviously that's obviously something that that isn't just on the government. That's on providers like us as well, interactive investor, and that's something that we're trying to do.
• 10:09
  Kyle Caldwell: Well, I completely agree. And I'd I'd love to see financial education adopted in all secondary schools. I think, you know, obviously, not just investment, but all the key personal finance topics as well. I mean, some some of the topics are, you know, a bit too far away to think about, like, you know, obviously, when you leave school, you're not gonna instantly buy a house. It's gonna take time to build pot of money up to get a house deposit.
• 10:33
  But I think, you know, concepts like compounds, and I think it can really help to, you know, obviously, know, you leave school. You can get credit card quite quickly and quite easily. I think it's an important concept to learn is how debts can accumulate and how they can grow over time. I think a lot of people find that out to their costs later on without knowing that that's gonna happen.
• 10:56
  Craig Rickman: Yeah. Well, that actually happened to me when I was 18. It was something that I wrote about a couple of years ago. I got a call from my bank who said, would you like a credit card? I said yes.
• 11:06
  And then, you know, fast forward six months, and I'd racked up, you know, a a a level of debt that was un unmanageable for me. I was still studying, and I was doing a bit of part time work, but the part time work was was barely covering the interest. So, I mean, my in the end, my parents had to had to bail me out, and it was I mean, I had I had I had to pay them back. They didn't just let me totally off the hook, but it was an important lesson to learn. But it's something that if I'd have had the correct education at school or or just better education around finances at school, it's something that I could have been avoided.
• 11:45
  And it's I guess it's something that would have happened to a lot of other people, and could have even could have been more severe. I mean, I managed to catch it fairly early, but it could have been worse. And, yeah, I totally agree what you say. That really does illustrate the importance of of people having a good grip because, yeah, with with credit cards and and the level of interest rates that that are charged, debt can snowball really, really quickly. So, yeah, I I couldn't agree more with that point.
• 12:14
  Kyle Caldwell: Another thought I had, Craig, in terms of improving financial education is related to when you have a a child or have children. So I remember when our first was born, and we were given, like, a a bag that has some vouchers in. It was things like getting a couple of quids off nappies. I mean, they were obviously at this gratefully received that. But I remember when when I got that bag, was thinking that it would be great if there was some information in there regarding how to save and how to invest for the child because I think that's a real key thing for a new parent to consider.
• 12:51
  Obviously, not in the first couple of weeks when you're full of sleep deprivation, but, you know, at at some point down the line in in the first year or years, I think it's important if you can to to save your child's financial future and to make some investment decisions regarding that. And, also, I think there should be more education around the importance of using the the the stocks and shares junior ISA version as opposed to the cash junior ISA version. I'm I've not looked at the latest stats, but the last time I covered it, there were there was a greater proportion chosen in the cash version of the junior ISA, which to me shows that that just must be around lack of awareness that over an eighteen year time period is history books do indeed show. The likelihood is your investment returns are gonna beat cash.
• 13:45
  Craig Rickman: Yes. So I think you've touched on something really important there because, yeah, when you when you have a child, that's one of the most important times to review your finances, isn't it? You know, not just, you you know, looking out for saving, investing for their future, but making sure that you've got enough financial protection should anything happen to you, as well. So, yeah. So education around that point is so important.
• 14:07
  So, yeah, I I I couldn't agree more with that point.
• 14:09
  Kyle Caldwell: We're next gonna move on to the third finding that we're gonna cover from our survey, which is the pension gaps for women and divorcees. So of the around 9,000 people surveys, women expect to have saved a £150,000 on average when they get to retirement compared to 250,000 for men. Divorced respondents expect just 75,000 on average by retirement, and that's compared to 350,000 for married respondents. Craig, what can be done to try and narrow these very large gaps?
• 14:49
  Craig Rickman: Well, I think part of the answer lies in the auto enrollment framework. So what we know is that women typically take more time off work to have children, to care for elderly parents, sometimes both at the same time. And so auto enrollment, which is the the workplace pension initiative that was launched in in 02/2012, that seems like the one of the one of the best ways to address it. And and something, that we could do is to reduce the auto enrollment earnings trigger from £10,000 to £4,000. So at the moment, if you earn less than £10,000, you're not automatically enrolled into the pension scheme.
• 15:31
  Some companies may still do it, but under the rules, they don't have to. So if that was decreased down to £4,000, then that would support mainly part time workers, which, again, if if women are are looking after the children, which is typically what what happens, I know there's there's there's there's been a bit of a shift around that culturally, but that is still what happens most of the time. And if they're working part time, that would enable them to build pension wealth or have a better opportunity of building pension wealth while they've while they've taken time out of the workplace. So I think that's that's something that could help.
• 16:09
  Kyle Caldwell: As you mentioned, Craig, as women often take time out of the workplace in their thirties and forties to care for young children or to take care of the parents. This has a huge knock on impact on pension wealth later on. So they're contributing less, and then they're gonna struggle to catch up to men because of investment compounding. They're they're missing out on the investment gains as well as not putting the same amount of contributions in as well at the same time. It's it's a double whammy.
• 16:44
  And, also, the fact is that women do tend to earn less on average than men, which also contributes to this pension gender pay gap. You know, we talk a lot about compounds in on this podcast, so that which is the effect of how investment returns generate future gains and snowball over time. So if you are contributing less in your twenties and thirties, compounding isn't working as much for you as it is for people who are continually putting money into their pension and are continuing to work throughout that period. Craig, our research also found that there's very big gap between the self employees. Could you talk through this and what could be done to address this gap?
• 17:33
  Pension participation
• 17:34
  Craig Rickman: among self employed workers has been reducing for some time or is certainly a lot lower than it was in, say, the late nineties. So in the late nineties, around half of self employed workers actively contributed to a pension, and since it's it's fallen to about a fifth. So that's a big drop. I guess one thing we should mention is that, you know, you don't have to save into a pension for retirement. There are other ways to do it.
• 18:03
  So you can use ISAs. If you've built up enough of a business, that's something you could potentially use as well. You could use buy to let properties. So there's not, you know, there's not it's pensions aren't the only way to do it. Because of the tax advantages, they're the most popular way, and for a lot of people, probably the most effective way.
• 18:23
  So it's still a big concern. You should also note with with self employed workers that they they generally have, different sort of set of circumstances, than employed workers or different considerations. So, for example, cash flow is is tends to be more important. So, anecdotally, at at least, I know of some self employed workers who prefer to use ISAs because of the accessibility. But, you know, that that said, in in a lot of cases, that, you know, they still need to be thinking longer ahead.
• 18:58
  So, you know, trying to encourage more self employed workers to, engage with with pensions is a big task. And I think that one of the main things is increasing awareness. There's there's a lot of information. There's a lot of help out there from PensionWise to to Citizens Advice Bureau and regulated financial advisers too. So I think part of the job is to just, yeah, increase awareness and try and point people, point self employed workers in the right direction.
• 19:27
  The the other thing is is, again, going back to, auto enrollment, which we'll probably cover quite a lot in this, is to try and find a way of expanding auto enrollment to to self employed workers. Now, obviously, there are some practical challenges there. There's no fixed salary to deduct pension contributions from. That's the main one. There's no workplace to to pay the money in.
• 19:52
  Seven point workers tend tend to have irregular earnings. So any kind of system, auto enrollment system, would have to factor those things in. I think this is an area that the government looked at a few years ago, but nothing sort of further went with it. But I think it's the time to to revisit it because, you know, the risk is if self employed workers are reaching retirement, with insufficient savings, then, you know, we we could be reaching a, you know, a real crisis point. And many may wish to continue working, but if they're doing physical manual jobs, that may not be possible.
• 20:30
  So I think this I mean, this is in guess, you know, everything any of the sort of pension gaps and potential looming pension problems need to be solved, but this is this is certainly one of the biggest that the government and perhaps the wider industry too needs to tackle.
• 20:48
  Kyle Caldwell: And our fourth topic, in which I'm pretty sure we're gonna cover auto enrollments further, our survey found that low pension values are very commonplace across The UK. So the survey found that six in 10 pension savers expect to fall short of a moderately comfortable retirement, anticipating pension wealth of less than 300,000. Older workers have the lowest expectations. Two thirds of those in their early sixties expect pension wealth of less than 300,000 compared with 53% of those in their twenties. So, Craig, before we talk about what can be done to try and improve the situation, let's firstly take a step back.
• 21:36
  I think it's very helpful for listeners to know what are the ballpark figures for a comfortable retirement. So Pensions UK, which rebranded recently, it was formerly called the Pensions and Lifetime Savings Association. They published their pension projections for a minimum, moderate, and comfortable retirement. Could you talk us through those projections, Craig, and are they a good target to aim for?
• 22:04
  Craig Rickman: Sure. So let's have a look. Yeah. Pensions UK crunch these numbers every year, and they look at three different levels of retirement lifestyle. So so minimum, moderate, and comfortable.
• 22:16
  So and this is the the cost in retirement. So this is what you would need after you've paid tax. So this is what you would need money going into your bank account. So the minimum amount that you would need, and so this would be a very frugal retirement, let's say, that's 13,400 a year. To live a moderate retirement, it's 31,700.
• 22:42
  And for a comfortable retirement, it's £43,900 a year. So that's for a single person. If you're in a couple, then clearly, you'd you'd need more than that. So these figures assume that you will so we assume that you would get the the full state pension. You can translate those into pot sizes, which is how you know, what most people will be aiming for when they set a target.
• 23:06
  So to to accumulate enough pension savings for a moderate retirement, you would need somewhere between 330 and £490,000. For a comfortable retirement, somewhere between 500 and 40,000 and 800,000. The the reason for the the the sort of wide range there is because of annuity rates, and we know that this is what it's based on, and we know that those those can change over time. So are they a good target? I mean, in in reality, they're a guide more than anything else.
• 23:38
  They're just a guide to to help people think a bit more carefully about the the type of lifestyle that they want in retirement. You know, for some people, you know, having £30,000 a year, that they they'd see that as more than comfortable to live on. Others may need a lot more than that. That will depend on the lifestyle that you want in retirement and will probably also be dictated by how much you've been earning during your working years as well because most people will want a smoothish transition to retirement. I think one thing it does illustrate is the importance of getting the full state pension, which is currently just under £12,000.
• 24:16
  So as you can see, that would almost cover off the the minimum amount that you would need for retirement. Again, that's a minimum, or it could take a really big chunk out of the the the amount of savings that you would need to fund either a moderate or a comfortable retirement. But I think that, yeah, the thing is is is to get people thinking about what sort of retirement do I want and how much money will I need to be able to do the things that I want to do as an individual or as a married couple.
• 24:44
  Kyle Caldwell: So, Craig, what could be done to improve the situation? Of course, also enrollments was introduced around fifteen years ago. It's undoubtedly been a success. I don't think you could argue against that. Is it now time for a rethink in terms of the amounts that workers put into their pensions and the amount that employers contribute?
• 25:07
  So at the moment, for those that qualify, every monthly paycheck, employees put in at least 5% and employers put in 3%. Craig, how much more does this need to go up by in order to address the risk of people not saving enough for their retirement?
• 25:27
  Craig Rickman: So, yes. Yeah. I mean, as you say, auto enrollment has been a great success in getting more people to save, but the concern now is that people aren't saving enough if they stick to those minimum amounts that you said, which is between employee employer is 8%. We should also note that's 8% of of qualifying earnings as well, which are earnings between it's just over £6,000 up to the the higher rate tax threshold, which is 50,270. Some employers will pay based on, you know, your your your full pay.
• 26:02
  There are different ways of doing it, but under the rules, that's the minimum amount, and that's what some employers will, adhere to. Yeah. So the thinking is that that the minimums need to increase. There are some challenges around that at the moment, for both, employees and employers. So for employers, the they're facing higher tax bills from from April with the national insurance changes, the national insurance threshold being reduced and the headline rate or the headline main rate being increased.
• 26:36
  So they're facing stiffer tax bills. So to lump them with with extra pension contributions for their employees might not be particularly welcome. And for employees, they're they're still battling against the rising cost of living. Inflation has come down significantly from the dizzying double digit double digit heights that we saw a few years ago, but it's still, you know, far higher than the Bank of England's 2% target. So prices are still rising, a lot faster than than we would like.
• 27:04
  And so, again, you know, if if they were to be paying more into their pensions or being paid paying more into their pensions by law, there is a risk that it could increase the number of people opting out of of pensions altogether. So that sort of balance needs to be struck. But I think rates so the the minimum rates do need to go up, and I think, we think they should go up to 12%, but they should be phased in over a period of time. And the government has said that nothing or auto enrollment rates aren't gonna change during this parliament. But then beyond that, to increase them, so maybe uptick minimum contributions by 1% a year over a period of four years will increase what people are paying into their pensions and boost their future financial security, and in a way that's palatable for both, companies and their staff.
• 27:55
  Something else that they could do would be to, expand, auto enrollment to to younger people. So it's currently age 22 is the the minimum age that you enrolled into a pension scheme, but it would be helpful if that was lowered to age 18, to encourage sort of more school leavers to save into retirement. A lot of point that you made earlier around investing compounding. You know, the earlier that people can start to save for retirement, the better.
• 28:21
  Kyle Caldwell: And as well as potentially increasing the minimum contribution for your pension under auto enrollments from current levels of 8% to potentially 12%. For me, financial education is is as we as we mentioned earlier on in the podcast, it's it's an important part of the messaging of helping people understand the importance of saving towards their retirements. And I think if financial education was strengthened, then there would be less opt outs in terms of pensions. And, also, peep people would potentially put more money into their pension if they understood importance of compounding, how their pension contributions benefit from tax relief, and how the employer contributions help to top up what you're putting into your pension. So our Great British retirement survey, it is a sober read.
• 29:14
  However, we hope that the issues that we've highlighted and how they could be addressed has provided us plenty of food for thought. As I mentioned in the introduction, I'll provide a link to our report below the episode's description.
• 29:29
  Craig Rickman: Yeah. And if you've if you if you found anything interesting in the findings that you'd like us to cover in the future, then, yeah, get in touch by emailing us at otm@ii.co.uk.
• 29:41
  Kyle Caldwell: Well, that's all we have time for today. My thanks to Craig, and thank you for listening to this episode of On the Money. If you enjoyed it, please do follow the show in your podcast app, and please spread the word. And if you get a chance, please leave a review or a rating in your preferred podcast app too. So those ratings and reviews, they really helped to get the podcast into more ears.
• 30:05
  So if you could spare the time to give us that five star review, I'd really appreciate it. We love to hear from you, you can get in touch by emailing otm@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the Interactive Investor website, ii.co.uk, and I'll see you next week.