Pensions: You're Not Too Young (Pt1) - BOD015

0:08I'm Kate and this is my dad Pete. Hello. And we're here to teach you all the money lessons we were not taught at school. There's no judgment, no jargon, just real talk about how to handle your money.

0:22Pete:Here we are again. Here we are again. What are we talking about this time? This time we're starting a topic that you are like weirdly excited about. You were like, I can't wait to talk about it. You were like this for saving and investing. Yeah, I was. Maybe to a lesser extent. Not quite so bouncing off the walls with excitement. I was quite excited with investing and saving. Only because I'm quite good at it. Yeah. If I say so myself. Pensions, big part of my life. Yeah, they are. Well, there you go. We're talking about pensions. I do not say that to that point. I'll just give it away. That's all right.

0:52Pete:Weird spoiler. There's also a title that they've clicked. That's true, yeah. Pensions. They've probably worked out. We're talking about pensions. and because it's that meatier topic, we're taking it over two episodes. We've got to. It is a hugely massive and messy topic. It'll be over like lots of episodes over lots of years, but initially just a couple. Cool, we'll start with two. And it's easy to think we don't need it, but the moral of the story that you're going to learn by the end of this one is we absolutely are not too young. Definitely not too young. To be thinking about them. And the numbers don't lie.

1:25Pete:and we're going to kind of tease that because we're going to get some numbers towards the end which just show you how important it is to think about now. Oh, tantalising. But before any of that, it's time for Wanky Word of the Week. It's time for Wanky Word of the Week. One more episode left before I have to have a button. Yeah, I gave you an ultimatum. An alternator. An alternator. I gave you an ultilator. It sounds like something from like Phineas and Ferb. An alternator. I've never once in my life watched Finneas Have you not? Perry the Patopus? Nope Great but Dr. Doofenshmint's the bad guy Craig comes up with he's a bit like Megamind he comes up with ridiculous inventions they've always got stupid names Arachnus Dethicus Will instantly paralyze Ah get it off The spiater Even the smallest bite from Arachnus Dethicus Will instantly paralyze Have you ever seen Megamind?

2:24Pete:Great film. Definitely a film for adults. Much more for adults than that film. It's a children's film. There's lots of things for adults. It's a classic example of when movie studios make a kids' film but make sure it's entertaining for the adults who are forced to watch it too. Yeah, yeah. The adults laugh their heads off and the kids don't know why. I don't understand why. Shrek is a fantastic example of those. Yeah, exactly. What's this week's Wanky Weather Week? Auto-enrollment. Yeah. Yeah, that's not a word that exists in any other sphere of life, is it? So auto-enrollment started, I believe, in 2012.

3:02Pete:And it is the mechanism by which you are automatically enrolled into your workplace pension. So when you join a new employer, they have to have a pension scheme in place. And you will be automatically enrolled into it as long as you meet certain criteria. After your probation, surely. Yeah, usually. Yeah. Yeah. Automatically enrolled and you have to opt out. If you want to. If you want to. But of course, most people, nobody watching this, of course, most people are very passive when it comes to their finances. So they just like can't be arsed. They don't ever think about it. And the thinking behind auto-enrollment is it's a positive nudge for people to do the right thing.

3:41Pete:So if you're basically saying, look, we're going to automatically enroll you, you can get out if you want. But you have to actively do it. Yeah, people have to actively choose not to save for the future. whereas if they're automatically enrolled that happens automatically so that's what auto-enrollment is interesting, I imagine we'll be going yeah, we'll talk about employer pensions and all that sort of stuff a little bit later on but let's talk about mindset why do I need to care about my pension when I'm 23 or in my 20s, 30s it's a good question, there's a million other things on your mind and pension obviously the word is associated with old age yeah, like you well I can't draw my pension yet so I'm not old clearly so relative I know right but so because pensions are associated with old age and that feels to you like a very long way into the future it's understandable why you might think can I not just defer thinking about this yeah um so much else on on my mind yeah whatever even though they are associated with old age I hate to say it and this is such a crap old person thing to say it comes really quick i swear to god i feel like i'm 23 still and yet i'm looking at my 23 year old so you know i am now within spitting distance of being able to access my pension i can get it in six years time if i want to my pension right so it comes on you really really quick and also the money you put in when you are younger is a massive proportion of what you end up with I'm going to give you those numbers later.

5:16Because it has the most time to compound.

5:17Pete:To compound, to grow. And so it's so, so important. That's why auto-enrollment is a good thing. Yeah. Because otherwise you wouldn't do it. Because it does feel so far away. Case in point, my paperwork for my pension at Jackson's, Jackson's came in a month or so ago, and it said proposed retirement date, obviously, you know, as if I was to retire at state pension age. 2068. that sounds a long way to the future awful just 42 years hence of work yeah actually that'll only take you to 65 your state pension will be later than that great so probably even longer 2077 probably 2072 71 or 72 probably by then now that is disgusting yeah it'd be weird to think only a guy I was born in 2003 you'd be in your 60s in the 70s there's a good chance you might make it to 21 2100 you'll be 97 oh I kind of want to on principle I remember in 2003 I don't remember anything from 2003 I don't remember what happened breakfast this morning so it's you know the problem with anything finance related particularly deep into the future is that it's weirdly abstract well for that reason I think you know it's like if we look forward to next year's holiday we can get excited about that not for the Christmas or a big birthday coming up, but like retiring, it's like, what?

6:47It's like a really, really long time to go. Yeah, and like, you know,

6:51Pete:that's why I don't really like the word retirement, even though we kind of have to use it because everybody understands it. Whereas financial independence, not having to work is quite, you know, worth cheering for. Yeah, that sounds nice. That makes you want to start earlier, actually. Well, right. So really, the reason why you should care is that your pension, and we'll get into exactly what that is because that word covers a lot of things, your pension will be the backbone of your financial provision one day. It will be probably the biggest pot you have. And so it is important. Honestly, everybody, I deal in my day job with fairly wealthy people and in every case without exception, they've got big pension funds.

7:31So what happens then if I didn't have a pension, if I didn't do it?

7:35Pete:Well, you'd be less likely to be financially independent one day. You are far more likely to be poorer to have your life experiences cut back because you can't afford things. Yeah, that sucks. It does. And it always does. Honestly, it would be great if everything was paid for us. Well, the economy would collapse. Well, you know, unless you've got very wealthy parents and unless you are guaranteed to inherit or you're a trust fund baby or whatever, chances are you've got to work to pay for stuff. It's from friends, isn't it? that so you guys all have jobs yeah that's how we buy stuff yeah we all have jobs see that's how we buy stuff right and so and that is also this there will come a point where you don't want to or are unable to work because you're too old and knackered and then you need something to fund you yeah that's why pension is important the next section is quite fun titled free money free money right so what is a pension word pension covers about 15 different things of course it does so its first use is there is something called the state pension which is a state benefit so it's paid to you by the government from state pension age which is currently 66 soon to rise to 67 it'll probably be 82 when I get there it'll probably be 70 it'll certainly be 68 great Right.

9:02Pete:But, well, it does make sense because we're getting older. Yeah, we're getting older and we can work a longer year. So the state pension is paid to you currently from age 66, soon to be 67, and is dependent on how much national insurance payments you have made while you've been working. Right? So that's the first kind of use of it. Back, not so much now, unless you are working for the government, like if you're a nurse or a civil servant or a policeman or whatever, then if you're in those kind of jobs, you still have these kind of pensions. but it used to be the case with bigger companies. They're called defined benefit or final salary pensions.

9:36Pete:And all that meant was you worked for a company or for the government for most of your life. And when you came to retire, they would give you a guaranteed income, a pension. All right? How's that any different? Because the company pays it rather than the government. Unless you work for the government in case they're paying. In that case, they're paying you twice. They just pay you and pay you and pay you even though you don't work there anymore? Yeah. Because you've given your time there? Yes. Huh. I mean, that's the gold standard, right? Yeah. Defined benefit pensions. Do we have those? No, nobody has them now.

10:06Pete:Nobody's in those schemes now unless you work for the government. If you're a civil servant, if you're a nurse, if you're a teacher, they get a defined benefit, a DB pension. So that's another usage. Most of us these days just pay into an account, a pot. And so at its purest, simplest form, a pension is simply a kind of investment account, which has, remember when we talked about wrappers and all that sort of stuff in the investment thing? A pension has a specific set of tax rules and a specific set of access rules. So what makes a pension different from an ISA, different from a, I don't know, GIA or an investment bond?

10:42Pete:These are all wrappers or tax accounts. A pension has certain tax rules and certain access rules. That's what a pension is at its kind of simplest form. Okay. A pot that you put money in. Make sense? Yep. Cool. So I've heard of something called employer matching. Right. What is it? What is it doing? So these days, employers have to provide a pension scheme to their employees, which is basically just we'll choose a provider of pensions and we'll make it available to you when you're working for us. Right. So ours at Jackson's is with Royal London. Yeah. Okay. So we basically organize it. You join it, auto-enrollment.

11:23Pete:So you join it automatically after your probation. And then the money that goes into it is taken through payroll. So you never see it. It comes out of your payslip. Okay. Right? How much? It does depend on the employer. So 4 % usually. 4 % of your salary for an employee. Why do they pick such random numbers? What's wrong with 5 %? Well, technically speaking, 5 % goes in.

11:51Pete:So if you're a basic rate taxpayer, you pay 20 % tax on your income, right? So if you earn£100, you want to get to keep£80 of it. Sure. Right? So you would have to pay£20 in tax to the government. Yeah. So if you put that£100 into your pension instead, all£100 is now yours. It's in your pension, but it's all yours. Instead of you getting£80 of it, £20 go into the government, all£100 goes into your pension. So you pay 4%, the government pays 1, technically. So that's 5%. Sometimes I sit and I do these, I think, like, it impresses me how much you know. Like, I realise just how much you know, but I'm also like, fuck me.

12:31There's so much to think about.

12:33Pete:So technically 5 % of your salary goes in, but you would have paid a fifth of that to the government in tax. So in which case, it's good. So that's a little bit of free money. Instead of paying it to the revenue, it's going into your pension. The employer match, though, is that your employer has to pay in as well. They have to? Yeah, 3%. So it's not matching? They just put some stuff in? Some employers match. Okay. All right. we will be doing that soon spoiler alert don't tell your colleagues yeah so we will match you know this is going on the internet right oh yeah do I need to cut that out no it's fine alright no we are working towards that and matching up to a higher amount don't tell your colleagues shh everyone don't tell everybody shh mum's the word

13:16Pete:so but the employer matches extra money on top of your salaries that's why we call it free money as long as you're in the scheme they have to pay it. Yeah, because you haven't earned it. It's not coming at your pace there. That's questionable. But yes, it's not coming out of your salary. Yeah, you've earned it by being there in a sense. Yeah, well, they will say, look, here's your salary and we'll pay into your pension. Yeah, if you weren't in the pension scheme, you wouldn't be getting that. Exactly. So if you opt out, they don't have to pay it in. Look, that really beautifully led me into the next question.

13:42So by turning down my pension scheme, opting out, am I turning down free money?

13:46Pete:Of course you are. Yeah, because your employer doesn't have to pay in. Yeah. It may not be free money you feel the benefit of now, or it won't be free money that you feel the benefit of now, but you will feel it later. Yeah, so using those figures from earlier, if your contribution is£100, essentially, we would, let's just do that, that's 5%. So we would do£60. Yeah, it's a lot. So you've only paid£80 and yet£160 has gone in. Yeah, it's a lot. It's doubled your money overnight. So you've only put in£80. £20 would have been taxed, but that's gone into your pension as well. So that's a contribution, if you like, by the revenue.

14:22Pete:and your employer's paid another 60, your 80 quid has become 160 overnight. Yeah, that's pretty cool. There is no other financial arrangement which is as lucrative as that. Nowhere else can you double your money overnight at zero risk. That's why pensions are as cool as they are. Is cool the right word? I hear you ask. Not in the slightest. Well, I think so. Well, that is beneficial. Yeah, I should say so. Doubling your money. Yeah, okay, fine. Do you know what? It's cool. it's i'll give you that that bit is cool yeah yeah so how much should i be putting in you know how much we like the word should i know i'm just being their voice yes okay okay how much should i be putting in so under auto enrollment it's five percent gross for you and three percent for the employer right that just happens that just happens that's a great place to start there is no should honestly because everybody's different and you know if you're buying a house you're gonna have less disposable income.

15:20Pete:If you've got kids, you're going to have, you know, less disposable income. Budgets are tight, but you, I've never ever met anybody who's regretted putting so much into their pension. Nobody wishes they had less in their pension, put it that way. So, you know, there are rules of thumb as to how much you should be saving for the future, but they're all just completely arbitrary. So there is a kind of order of operations, emergency fund we've talked about. that's got to come first that's your buffer between you and the universe throwing crap at you that's your sort of what if I lose my job what if I go off sick for three months that's your sort of or what if I get a big bill I'm not expecting that's your buffer after that you should join your pension that's the next thing probably automatically and just pay in the five actually no you don't even need to have paid off your debts in order to join that scheme just do it just do that anyway because it's there and it's free money right so I sort of assumed you'd pay off your debts there right but but you can be in your pension scheme with a credit card debt yes you can exactly because it's not like you're officially losing much income what are you tired I mean as in it's not like being in your pension scheme is going to massively affect your ability to pay off a credit card well I mean you would have more take home pay if you weren't in the pension but I would say just join the pension anyway and budget what's left because of the free money from your employer and from the revenue it is totally worth it so if you have bad debt the order is you get your little starter emergency fund, 500 ,000 quid just to stop you getting worse into debt if something half nasty happens pay off your debt using the debt snowball we'll link to a previous episode on that then build your emergency fund to between three and six months of your monthly expenses if you can right then you start that's your foundation ignoring like life insurance and stuff like that with that foundation in place you can start building for the future so if you want to buy a house that's when you start saving for a house deposit so if you're doing that you want to be lifetime isis right super good all this time you're still paying into your pension right then as life kind of opens up maybe you've bought a house you know maybe you've had a couple of kids or whatever and things are a bit more settled, then you can continue to build and then you have to kind of decide, am I going to put money into an ISA or a pension?

17:48Yeah, you can start to purchase.

17:50Pete:Because you can't access your pension until your late 50s. No exceptions. You want to think about that, no exceptions. Well, unless you're very ill. Yeah, so it's not like, okay, yeah, you can carry on putting money in ISA, but you might, depending on the ISA, you might get a penalty for taking it out. It's not like that with a pension. No, you can't access a pension. It's that you cannot access it. But like we said, you don't invest money, you might need in a short term. Yeah. Right, where's my money actually going? So what's happening to my contributions? You know, are they just sitting in a pot somewhere?

18:19Are they being invested? Where are they going? What's happening with them?

18:22Pete:Yeah, good question. So a pension is a pot of money. It's just an account. So what really, what makes a pension a pension is things like the tax relief. The free money going in from the revenue, the money going in from your employer, if you are employed. I should say, by the way, if you're self-employed, you don't get that, right? So you ought to pay a little bit more in if you can. Start at 5 % and work up. Anyway, so where does the money go? If it's just a pot, it's just an account. Do you remember when we talked about ISAs? There are cash ISAs, which are basically just bank accounts, which are tax-free.

18:55Pete:And then there are stocks and shares ISAs, where you are investing in stuff, funds usually inside the ISA. Pension is like the latter. in almost every case there will be funds inside the pension investing in stocks and shares and stuff in your employer's pension there is a default fund it's a fund that everybody goes in automatically and it's usually fairly middle of the road we will get into optimizing that because you're 23 right starting to pay into a pension you're not going to be able to touch this for at least 35 years can you imagine how long how much compounding is going to happen oh yeah so it doesn't matter if markets go down quite a bit right because we know they'll go up and then they'll go down yeah and we know they'll go up more if you have a riskier investment if you hold more shares so you should be not in the default balance fund.

19:59Pete:We need to look at this. You've only just joined. Literally in the last month. So we need to look at this. We don't need you in the default fund. We need you in the highest risk option because you've got 35 years before you can even touch it. And to use some proper wanky terminology, I'm not that risk adverse. Averse. Averse. You know what I mean? I don't mind risk because I know if it drops, it's going to come back up. It is. Yeah, yeah. And I've got time. You've learned that. I've learned it. And I've got time. If it's five years before my pension I can take, I'll probably be in a less risky fund.

20:39Pete:Oh yeah, totally. Potentially. Because I don't want a big drop that's going to take seven, eight years to reduce. To come back, sorry. Yeah, yeah. But at the point where I've got 30 years for anything that happens to bounce back. Yeah, you you should take you should be aggressively investing utilising that yeah so your contributions are being invested is the short answer to the question pension's just a box it's just an account it's what's inside it that matters that's where you make your money are they safe? define safe I don't know you ask the question you mean can you lose it? yeah if you can in certain pensions most people listening to this wouldn't have this option but there are certain pensions where you could and I've seen clients where their entire pension fund is invested say in Tesla shares every single thing every single thing in their pension is held in Tesla shares do you like heart sink well it's you know I could have charged him£5 ,000 for a report in which we said don't be so stupid right but you know you need to sort of couch it in better terms than that So with investments, remember we talked about diversification, spreading it around.

21:55That is in Pensions Part 2. Is it?

21:58Pete:Yeah. Okay. Well, spoiler alert for Pensions Part 2. If you're investing, you should spread your money around. Multiple eggs or multiple baskets in which to put your eggs, shall we say, right? And so as long as you've got your money spread around, and we'll talk about what that actually means then next week, then no, you can't lose it all. Its value might drop temporarily, but it will always come back. Because in the... Come on, Kate. Turn your brain on. Unlike that couple whose entire pension was in Tesla shares, if Tesla goes bust, they are fucked. Royally. I mean, literally, they will lose everything with no recourse.

22:41Like, tough, it's gone.

22:43Pete:It's disappeared, literally. Because you own... I feel like that was a good use of an F-bomb there. Yes. That's exactly it. They have lost everything. It doesn't matter whether you or I think Tesla is a good bet. There have been plenty, multinational, multi-tens of billion dollar companies that have gone bust historically. Yeah, like... AIG. American Insurance Group. Huge. I mean, one of the biggest insurers on the planet it went bust in the great financial crisis. I was thinking like Debenhams. Yeah, not a multi-billion dollar company. No, but it's a big company. People might have shares in it.

23:24Pete:I've been around for 100 years. Yeah. It's Debenhams, surely. They'll be fine. Yeah, yeah. Nope. Nope. Right, so some massive companies have gone completely bust, and then if you own shares in those, they are then worthless. Which is fine if you've got 2 % of your pension in those shares. Yeah, because that's just almost a rounding error. Yeah. But if you're holding 100 % of your pension in a single company share, then that's a proper high risk. You might as well go to Vegas. Yeah, that's not high risk. That's just stupid. That's betting. Yeah, it's putting all your... Yeah, sorry. We're in no judgment place.

24:00That's stupid.

24:01Pete:It's betting. And it's like people who only invest in crypto. You are going to love pensions part two. All right. So you know how when you've got an ISA or even just a pot in your bank, you can open your bank account and you can look at how much is in there. Can you do that with your pension? You can. Most pensions these days have, you know, at the very least a website you can log into and see the value of it. If not on that. I should do that. I should do that. I imagine it will be measly. It will to start with, yeah, yeah. But you'll see it rise. Yeah. It might be good to see where I started.