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Why Workplace Pensions Matter So Much · A Little Bit Richer

0:01
Kia: Hey, hey, it's Kia and you're listening to A Little
0:03
Kia: Bit Richer. Pensions - we all know it's good to save
0:06
Kia: into one, but it's so tempting to put it off until
0:08
Kia: retirement's closer. It's understandable, but if you're wanting to get A
0:11
Kia: Little Bit Richer, you've got to think about your long-term
0:14
Kia: financial journey too. Let's get into this more. Today, I'm
0:18
Kia: talking to Kim Brown, Legal & General's Pension Scheme Director. She's
0:22
Kia: going to explain more about workplace pensions. But just before
0:24
Kia: we get into this, it's worth saying that you're likely
0:27
Kia: to have a workplace pension if you're working for a company.
0:30
Kia: If you're working for yourself, you can save into a
0:32
Kia: personal pension and we'll cover this topic in a later episode. Okay, Kim,
0:35
Kia: let's break it down. What's the difference between a state
0:38
Kia: pension and your own pension savings, and why is it
0:40
Kia: important to have both?
0:41
Kim Brown: So the state pension's paid for by the government when
0:44
Kim Brown: you reach, currently, age 66. Research we've done on 22 to 32
0:48
Kim Brown: year old shows that 22% of that group are looking
0:52
Kim Brown: to rely solely on their state pension at retirement. Now,
0:55
Kim Brown: the state pension is 10, 000 pounds a year, provided you've
0:58
Kim Brown: had 35 years or more in national insurance contributions. So
1:01
Kim Brown: provided you're willing to wait until age 66 to start
1:04
Kim Brown: and provided 10, 000 sounds enough for you to live on,
1:07
Kim Brown: then the state pension should give you that basics. If
1:11
Kim Brown: you think that actually that isn't quite sufficient for your
1:13
Kim Brown: needs or what you picture your retirement to be, you
1:15
Kim Brown: might want to look at what you can save for
1:16
Kim Brown: additionally through things like workplace or personal pensions.
1:19
Kia: Okay, that's brilliant. So let's touch on workplace pensions then.
1:23
Kia: So how exactly do those work?
1:24
Kim Brown: So if you are 22 years of age or older and earning 10,000
1:28
Kim Brown: pounds a year, your employer will automatically put you into
1:31
Kim Brown: a workplace pension. So we call that automatic enrollment. You can
1:34
Kim Brown: choose to join even if you don't meet that criteria
1:36
Kim Brown: and ask to be automatically enrolled. So why, I guess,
1:41
Kim Brown: workplace pensions and I think there's two big selling points
1:45
Kim Brown: of workplace pensions. In addition to the already great thing
1:48
Kim Brown: you're doing, which is putting money away for retirement, you
1:50
Kim Brown: get the benefit of employer contributions into your pension scheme.
1:54
Kim Brown: So currently, your employer has to pay 3% of your
1:57
Kim Brown: salary into your pension for you each year on your
1:59
Kim Brown: behalf. You also get money from the government. So if
2:03
Kim Brown: you're a basic taxpayer and you want to put a
2:05
Kim Brown: hundred pound a month into your pension, only 80 quid
2:09
Kim Brown: will be taken from your salary. The other 20 pound
2:12
Kim Brown: is paid for by the government under what's called tax
2:14
Kim Brown: relief. So the difference I think with pensions above things
2:18
Kim Brown: like ISAs, which are other good saving vehicles, is that
2:21
Kim Brown: two key additional sort of free money for you as
2:24
Kim Brown: an individual.
2:25
Kia: I think when it comes to workplace pensions, let's just
2:28
Kia: dive into employee contributions a little bit more I think.
2:30
Kia: So when you contribute let's just say 5% to your
2:33
Kia: pension, how does that work from your employer, their contribution
2:36
Kia: into it?
2:37
Kim Brown: Yeah, so if you're paying 5%, which is the AE
2:38
Kim Brown: minimum, your employer pays 3% in your salary. A number
2:42
Kim Brown: of employers will pay additional amounts. So you can think
2:45
Kim Brown: about increasing your contribution and seeing if your employer will
2:48
Kim Brown: match that.
2:48
Kia: So that's just extra money from your employer, almost like,
2:52
Kia: I think the way I like to see it is
2:53
Kia: like a deferred pay rise or deferred money that you're
2:55
Kia: getting from your employer that you're going to have, maybe
2:57
Kia: not right now into your bank account, but you'll have
3:00
Kia: it at later date, I think is a good way to look
3:01
Kia: at it.
3:01
Kim Brown: Yeah, I love that. That's the key thing about workplace pensions.
3:04
Kim Brown: You've said it better than me. Free money from your employer
3:06
Kim Brown: and free money from the government a s tax relief.
3:08
Kia: I mean, what's better than free money? Right? What's better than that? Right, so as we've
3:13
Kia: mentioned, pensions are important, however, most people don't start taking
3:17
Kia: notice of their pension and their pension savings until they
3:20
Kia: get older. So what's the best thing someone who's younger
3:23
Kia: and listening can do to help keep track and remain
3:26
Kia: on track when it comes to their pension savings?
3:28
Kim Brown: So I think it's about saving as early as you
3:30
Kim Brown: can, as much as you can. If you start saving
3:33
Kim Brown: in your early twenties and even in your early thirties,
3:36
Kim Brown: you are benefiting from the magic of compounding. So that
3:39
Kim Brown: can make a huge difference on the ultimate pension that
3:42
Kim Brown: you'll end up with. So if I give you an
3:44
Kim Brown: example of how that works, I'm going to use our names.
3:46
Kia: Go for it.
3:46
Kim Brown: So if we've got a Kia and a Kim.
3:48
Kia: Yes.
3:48
Kim Brown: If Kia and her employer together are contributing to 2, 000
3:52
Kim Brown: pounds a year to her pension and has done so from
3:56
Kim Brown: the age of 19 to 30, we project that that will give
4:00
Kim Brown: her an outcome on retirement of 243, 000.
4:04
Kia: That's a good amount.
4:04
Kim Brown: That's an all right amount.
4:05
Kia: Yeah.
4:05
Kim Brown: That's a good amount.
4:06
Kia: I think Kia's happy with that.
4:09
Kim Brown: If you take Kim, similar details, her and employer pay
4:12
Kim Brown: in 2, 000 pound a year, but she starts at 30, but
4:15
Kim Brown: she saves all the way up to 65. So Kim's
4:18
Kim Brown: been saving for 35 years as opposed to Kia's 11, but
4:22
Kim Brown: her outcomes is expected to be 10,000 pounds less so 236,
4:25
Kim Brown: 000 at retirement. So that just shows you that impact
4:30
Kim Brown: of starting early and what the compounding does to your
4:33
Kim Brown: eventual pension outcome.
4:34
Kia: I think that's a key thing. I think compounding is
4:37
Kia: often this word that is mixed up with investing isn't
4:40
Kia: really explained. I think the way you've put it is
4:42
Kia: so useful to everyone that the earlier you start, the
4:46
Kia: more of an impact it can have and it almost
4:48
Kia: makes it a bit easier to keep going in your
4:50
Kia: savings and stay on track with your savings, I think.
4:53
Kim Brown: Exactly that. And your example earlier of free money, if we
4:55
Kim Brown: come back to that, that 2, 000 pound a year, Kia
4:58
Kim Brown: and Kim, they've both only paid a thousand each. The
5:01
Kim Brown: additional 250 from the government top up the tax relief
5:05
Kim Brown: and the 750 from the employer. So you're doubling the
5:08
Kim Brown: money and by investing it earlier, it's also then working
5:10
Kim Brown: for you.
5:10
Kia: We love that, don't we? We love that, we do. So let's come
5:14
Kia: to where we are right now. So right now, money is
5:16
Kia: unfortunately really tight and it's easy to be tempted to
5:19
Kia: reduce how much people save into their pensions. I know
5:22
Kia: it's definitely a toss up. Do you take the money
5:24
Kia: now or do you still keep saving the amount that
5:26
Kia: you have been? So what would you say to someone
5:28
Kia: who's considering reducing the amount that they contribute to their pension?
5:31
Kim Brown: I think everyone is going to have different circumstances and
5:35
Kim Brown: I think my key thing would be make sure it's
5:37
Kim Brown: a considered ask, so understand what you'd be getting in
5:40
Kim Brown: your pocket today and that point I just made on
5:43
Kim Brown: what that could look like over time. Now, if you
5:45
Kim Brown: need your money in your pocket today, you need your
5:47
Kim Brown: money in your pocket today, but it is a good
5:49
Kim Brown: deal and so you need to be considering what it
5:51
Kim Brown: could be impacting you in the future.
5:53
Kia: I think that's a really good point. I think it's
5:54
Kia: important to always just sit down and review your finances.
5:57
Kia: And like you said, see if you reduce it by
5:59
Kia: a certain amount, how much does that leave you with,
6:02
Kia: if it's something that can help you or should you
6:04
Kia: keep your pension contributions the same amount. It is a
6:07
Kia: very unique decision to make and it's one that should
6:09
Kia: be well thought through as you said. So I completely
6:11
Kia: agree with you. Now, let's look on the flip side.
6:15
Kia: Is it worth, Kim, paying more into your pension if you
6:18
Kia: have the option?
6:19
Kim Brown: Yeah, so I think many of us dream about what
6:21
Kim Brown: that retirement could look like. We talk about every day
6:24
Kim Brown: is a weekend when you retire, but I don't know about you, but
6:27
Kim Brown: weekends can be quite expensive.
6:29
Kia: Oh, they can. They can.
6:30
Kim Brown: For me.
6:30
Kia: Depending on what you do, they can.
6:32
Kim Brown: So the research I referred to at the start, the
6:35
Kim Brown: expectations of 22 to 32 year olds and many are
6:38
Kim Brown: looking to retire age 60, and the earlier you retire,
6:42
Kim Brown: the more your pension has to do for you, the
6:43
Kim Brown: longer you're going to be relying on it. So there's
6:46
Kim Brown: things you can do as you go. So if you're
6:48
Kim Brown: getting a pay increase, think about is this a part
6:52
Kim Brown: of that you can add to your pension contributions, that
6:55
Kim Brown: you won't perhaps miss in your pocket yet today, but
6:57
Kim Brown: can go and look for saving for your future. Same
7:00
Kim Brown: with bonuses, part or some or all of your bonus
7:03
Kim Brown: can go into your pension and that'll be tax- free.
7:06
Kim Brown: I'd also think about it in particular life events. So
7:10
Kim Brown: career breaks can have a huge impact on your pension outcomes.
7:14
Kim Brown: We experience what we call the gender pensions gap, which
7:17
Kim Brown: is that women are walking away at retirement with half
7:20
Kim Brown: the pension pot of men. Some of the factors of
7:22
Kim Brown: that include cost of childcare, breaks for maternity, the increased
7:27
Kim Brown: likelihood of being a carer and also potentially walking away
7:31
Kim Brown: from work earlier due to symptoms of menopause. So I
7:34
Kim Brown: think it's about understanding and planning for particular life events,
7:38
Kim Brown: whether that's maternity or paternity leave. I know as a
7:41
Kim Brown: mum of a two- year- old, it's not top of
7:42
Kim Brown: your list, pensions, when you're doing some of these big things,
7:45
Kim Brown: but it should be on your list.
7:47
Kia: Just touching on what you said there then, obviously there
7:49
Kia: is that pensions gap. So if we're speaking directly to
7:52
Kia: women then, what can women do to almost help their
7:55
Kia: pension contributions and their savings?
7:57
Kim Brown: So I think there's a lot as individuals women can do.
8:00
Kim Brown: So they can plan, they can continue to pay maternity
8:04
Kim Brown: contribution, they can talk to their partner at a household
8:06
Kim Brown: level. The reason we have gender pension gaps or in
8:09
Kim Brown: fact pension gaps across a number of different minority criteria
8:13
Kim Brown: is multifaceted. So we need solutions across legislative change, we
8:17
Kim Brown: need employer policy review all in the support of producing
8:21
Kim Brown: more equality at pension outcomes.
8:23
Kia: I completely agree and I think it's important for people
8:26
Kia: to know the different ways that they can contribute, especially women,
8:30
Kia: and even the fact that your partner can contribute on
8:32
Kia: your behalf. I think a lot of people don't realize
8:34
Kia: that and there's different things that can help boost those
8:36
Kia: savings even when you just take time off and you
8:38
Kia: do have other responsibilities that require you and may not
8:41
Kia: be your pension so much. So I want to ask
8:45
Kia: you a question as well. When it comes to pensions,
8:48
Kia: a lot of people don't know how much they should
8:50
Kia: have in their savings. What does that look like? As
8:53
Kia: you mentioned in the beginning, the state pension is around
8:54
Kia: 10,000 pounds per year. How can someone, even if it's
8:57
Kia: just like an estimate, how can someone get a good
9:00
Kia: understanding of how much they should aim to have in their
9:02
Kia: pension pot?
9:03
Kim Brown: There are different tools out there that can help you
9:05
Kim Brown: look at that. Most pension providers will have things like
9:07
Kim Brown: calculators online. You can look at what sort of age you're
9:10
Kim Brown: looking at, the type of experience you want to have
9:14
Kim Brown: at retirement. So whether that looks like one holiday a
9:17
Kim Brown: year, whether that looks like a holiday in the UK
9:20
Kim Brown: or abroad, the type of lifestyle you're looking at. And
9:23
Kim Brown: then it'll help you calculate what you need to be
9:24
Kim Brown: contributing today and you can consider if that's sufficient, based
9:28
Kim Brown: on who you are, what wider savings you have and
9:30
Kim Brown: what kind of retirement you're looking for.
9:32
Kia: That's really useful. Have a look at pension calculators, have
9:34
Kia: a look at some of the stats to kind of
9:36
Kia: give you a good baseline and guideline for how much
9:38
Kia: you should have saved. Love that. So Kim, pensions are also
9:42
Kia: a form of investment and I know when you think
9:44
Kia: of it like that, sometimes it can be so overwhelming because
9:47
Kia: the world of investing just seems so scary. So what is
9:50
Kia: something that our listeners should consider on that side when
9:54
Kia: it comes to pensions?
9:55
Kim Brown: So I think that's a really good point. So pensions,
9:57
Kim Brown: like any investment, can go up and down and there
10:01
Kim Brown: is the risk that you could end up getting less than
10:03
Kim Brown: you put in. So that's something to be mindful of,
10:04
Kim Brown: but I don't think because it's investing people should just
10:07
Kim Brown: focus on the more daunting aspects of investment. Investment, I
10:11
Kim Brown: think, is really exciting and really interesting and you as
10:14
Kim Brown: a person saving to a pension, your contributions are being
10:17
Kim Brown: invested and you can choose to make decisions about that
10:20
Kim Brown: if you want to. If you want to move away
10:23
Kim Brown: from the fund you're being put into, you can pick
10:25
Kim Brown: a fund that's higher risk, but potentially with higher reward
10:28
Kim Brown: if that's something you're interested. You can also pick funds
10:31
Kim Brown: suited to your particular beliefs, whether that's religious beliefs or
10:34
Kim Brown: looking at funds that are more focused on ethical, responsible,
10:37
Kim Brown: sustainable investing.
10:38
Kia: I think that's great. I think it's good to be
10:41
Kia: able to know that you can adapt things like your
10:43
Kia: pension to suit your morals and your views and ultimately
10:47
Kia: the risks that you want to save your money with, whether you
10:49
Kia: want to be really high risk, like you said, maybe
10:51
Kia: you're someone who's younger, for example. I know I'm a
10:53
Kia: high risk person, I don't mind, let's go for it.
10:55
Kia: Or you want to be low risk. It's completely up
10:57
Kia: to you and it's tailored to you. So I think
10:59
Kia: that's a great point to make as well. Okay, Kim,
11:01
Kia: we're going to wrap things up now. What are the three
11:03
Kia: quick things that you can recommend someone does if they're
11:06
Kia: wanting to use their pension to get a little bit richer?
11:09
Kim Brown: So I think it's about keeping track of your pension. We don't
11:13
Kim Brown: have jobs for lives anymore. When you are moving jobs,
11:15
Kim Brown: keep track, you can also pull those pots together, that's
11:18
Kim Brown: your preference, under what we call consolidation. It's about looking
11:22
Kim Brown: at all those things we've talked about, about ways to
11:24
Kim Brown: get additional money in. So talk to your employer, see if
11:27
Kim Brown: there is contribution matching, if you can put any additional aside,
11:30
Kim Brown: particularly in earlier years. And then I think it's about
11:35
Kim Brown: saving as much as you can for as early as
11:37
Kim Brown: you can so that your pension can start working for you.
11:40
Kia: Amazing. Kim, this has been such a great episode to
11:42
Kia: learn more about pensions. And hopefully everyone listening knows that we can
11:46
Kia: start early and get those pension savings rolling. We've been
11:49
Kia: looking ahead to retirement, but let's bring things back into
11:51
Kia: the present day a bit more. There's so many hacks
11:53
Kia: to make sure you're getting the most out of working
11:55
Kia: life, and that's what the next episode's all about, the
11:58
Kia: world of workplace benefits. And it's not just work from
12:00
Kia: home and free lunches, there's so much more. That's out
12:03
Kia: next week. But while you wait, if this stuff is
12:05
Kia: working for you, then hit follow, tell your friends and
12:08
Kia: come back next time. Until then, have a good week
12:11
Kia: and go stick some money in your pension.