Ask Us Anything: Should you be worried about a 'pension crisis'?

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0:49Hello, everyone. Hope you're well. So we've got some mini episodes for you here where we go through some of your biggest finance questions. Paul asks for our first question, what are your thoughts on a pension crisis for millennials or Gen Z when retirement comes around? Over to you. It's carrying the whole load as usual. I can do it if you want. Yeah, please. Yeah, of course. I'm really passionate about this. So I think there's been a shift in pensions over a generation from we could rely on the state pension to we rely on company pensions and defined benefit schemes. So now it's very much on the individual.

1:25We've seen this in a shift from those defined benefit, where defined benefit is the amount of money you get is defined. The benefit is defined. So these are the kind of pensions you get in public services where people get like a guaranteed income for life, very generous, very valuable pensions. They're like gold dust. Versus defined contribution schemes, which is the amount you get is defined how much you pay in. And that shift means that it's really on the individual. The pension crisis is simply that people just aren't saving enough. They aren't taking it seriously enough. The companies that they are using to save are ripping them off in terms of fees.

2:01And the approach that's happening inside of the pensions is too cautious. So you've got this combination of high fees, low risk investments, and not enough contributions in. All someone needs to do to fix that is pay attention, log on, figure out what's going on inside their fund, and ask themselves, can I pay more into this because it's a really tax efficient way? we all will get old. Not all of us. I mean, you know, some statistics are, some people die young, but most people will get old. So yeah. Way to put a nice positive spin on that. Yeah. Also, a lot of people don't know what's in their pensions.

2:34Like you said, they don't know. It's a bit too cautious and they don't, some people like me don't even know who your pension's with. Well, my old work-based pension. So yeah. So finding out where your pensions are and then kind of jiggling things around to make them a bit more lucrative, I guess. You just repeat what I say. Pretty much. and then I take all the credit. I know it's great. Next question. Ooh, Thrifty Mum. Thrifty Mum asks, good name. Should I reduce my pension contributions? That's what you bring the context of the previous question. Should I reduce my pension contributions in order to pay off debt quicker?

3:09Oh, okay. So I would almost certainly say no, personally. No. Oh, okay. I thought the first move is always to clear your debt before you start investing. Otherwise, if your investments aren't returning more than your debt, you're losing money, right? Yeah. But first of all, there's a return baked into a work-based pension scheme. I'm assuming work-based, it might not be, but like you get a tax advantage there, which is very generous. 20 % up to 40%. There's national insurance benefits as well. I highly doubt the debt will be, you know, so it is, there's a massive return there in terms of the tax incentives that you get.

3:45So unless the debt is above 20%, the pension, even in the worst cases, is probably better. And secondly, I think there needs to be like, that is priority number one. Like the pension should happen before anything. And even someone who is up to their eyeballs in debt should be paying into their work-based scheme, just as a given at the minimum requirements. Because again, you are going to get old. That is going to happen. And the most powerful thing that you can deploy to make sure that you have a large pension is time. And you don't get that time back. that money disappears from your pay packet without you even really noticing it was there.

4:20So I personally would use that. I mean, that's just me. What if it's not a work-based pension? If it's like a SIP or something, yeah, you could dial that back if you want, but you're still getting the tax benefits within a SIP. With a SIP, with any money you pay in, you get tax relief again. So again, there's a significant benefit there without even talking about the benefit of the return in the market over time. if you can hear little footsteps this house is infested with rats no it's toothless come on toothless so what are the this is the producer's dog you can't see her but she's lovely she's actually rescued by tom hardy which is an interesting fact yeah how do you not know that i don't know you should put it on camera yeah tom hardy rescued a load of staffies and toothless was one of them named after the dragon um from how to train your dragon not because she's got a lack of teeth.

5:21Santico underscore San said what's the sweet spot percentage of pension contributions based on monthly income? Go on T. Yeah so 17.23 % I did the numbers. I crunched the numbers earlier just while he was reading the question I just run the numbers quickly through my head. I have no idea. David take it away please. So I'm drawing on the expertise of some of the guests that we've had, Lisa Conway Hughes had a rule, was it like half your age? Oh yeah, that was a good one. Half your age as a percentage? Of your income that you need to save. Yeah, so whatever your age is, half it and that's the percentage that you should be paying into your pension.

5:57I think, you know, if you're putting 15 % of your money away into pension, that's another one I've heard. So I know that when they were doing analysis of global pension trends, the World Economic Forum, who whenever you mention then people like, oh, conspiracy, you'll earn nothing and be happy, which they did say. But anyway, they said that they think that people should be paying 15 % in and most people only pay 5%. I know with the match that you get from work, you'll get into about 8%, but I don't think that that's enough. But when we're talking about retirement savings, it's not just a pension, it's your ISA, it's downsizing your home.

6:35So look at it like holistically and look at the whole picture, but I certainly think that like 10 to 15 % is a benchmark, but most people as well will increase as they get older. So as they're approaching, you know, if you consider at the age of say 55, soon to be 57, you can take 25 % of the value of your pension tax free. And if you, if you're working through employment, you can put that money into that pension before tax. So you've got a way there of, if you're 50 going in seven years, anything I'm putting into my pension i can like take a big chunk of it tax-free so it's really efficient to do that because you just you just totally circumnavigate the tax system so like you know the year before i retire i'll be sticking as much of my wage in as possible so give yourself some slack on like most people will pay more money into their pensions as they get there but obviously the benefit of compounding or to maximize compounding time is a key component so you know whatever you can afford i would say and i think people should be trying to get to that 10 range but you know you get to that includes match contributions from the employer and also look at things like your isa as well and all of that stuff so my guess of 17 wasn't too bad no no i see crunching those numbers in there yeah yeah yeah i think most people would say 17 and wince really hard because that's a lot but what we're saying is you pay in four percent you get one percent tax relief your employer might put in three percent you know you're you're eight percent now already you've got an iso that you contribute to that's like a bit you've you've bought a house and you'll downsize maybe so it's all your savings in terms of not just what you're putting directly into your pension but this is this is the point around having like a an understanding of how all these assets work together to get you to that point because just saying to someone put 20 into your pension most people say i don't i can't afford that but then when they look at it they're actually quite near that percentage anyway and they only need an extra couple of percent to get them there.