“I Don’t Get Money!” Back-to-basics special on pensions, savings, car insurance, energy and more

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1:29Martin Lewis:I do wonder what that's going to be about. And today it's an I don't get money pod only special. I asked you to tell me what are the things about finance you just can't get your head around. And today I'm going to try and help you understand it. A back to basics if you like. And the questions we're going to cover include how do pensions work? When you get an energy bill, what is a unit of energy actually? What's the difference between saving and investing? And isn't investing just gambling? Why doesn't Section 75 credit card protection include additional cardholders? Why does my car insurance cost go up if I have a no-fault accident?

2:10Who's responsible for faulty items? Is it the retailer or is it the manufacturer? And finally, what is a bond? Play the theme tune. I got bills. I gotta pay. So I'm going to work for the world and everything I've got a mouth, I've got a feet So I'm going to make sure everybody's

2:38Martin Lewis:OK, so we're pod only today and this is a Tell Us special. It's all about what do you not get about money? And we're going to go through a whole potpourri of subjects. Now, what I specifically put out is I asked you, what is it about money, personal finance and consumer rights that you just can't get your head around? I want to go back to basics this week with easy practical explainers. So do get in touch. We were flooded with your questions. And I've got in front of me a list of the order of which came up most commonly. By far, the biggest was all about pensions. It's pensions that many of you just don't seem to be able to get your heads around.

3:15Martin Lewis:So we're going to try and help that. Also, then it was savings and investing, then energy and bills and inheritance and family protection, followed by credit scores and credit cards, insurance, tax, self-assessment, then student finance, followed by broadband and finally consumer rights. We're going to try and get as many of those as we possibly can in today. And we've had such a good response. I'm probably going to do a part two on this next week to answer some more of your questions. Joining me today in this pod only special. Well, who else could it be? It's podcast producer Simon. Hello, Si.

3:46How are you? I'm excellent. Thank you. I'm delighted to be speaking to you. The sun's shining. We're all good. Quick question. Yes.

3:53Martin Lewis:You've got a big list, I mean a really big list of questions, so much so in this I Don't Get Money special. I think we'll probably be doing part two next week. What do you think's best? Should we be going through this topic by topic or should we be taking a potpourri, a selection out, so we get a really broad spread of questions answered today? I like to cover as many topics as possible. I think it's good to get as much information out there on various different places and I like the word potpourri. Okay, right. Well, it just brings up everything smelling of roses. So what's your first question?

4:25Louise has got in touch. She wants to know about investing versus saving. Plus, because she can't explain it, a very simple definition of compound interest. I still see investing in the stock market just like gambling, and that's because 80 % of the market is speculation. It just feels too far removed from real things. After all, it's not the profit a company makes. How are all the tech companies worth billions when they don't make any money.

4:48Martin Lewis:Okay. So let's start with the easy bit, investing versus saving. When you save, you are putting your money away in a form of deposit account, it's called. And the money that you put away is guaranteed. The capital, what you've saved in there is guaranteed, well, up to£120 ,000 per person per financial institution under the financial services compensation scheme anyway. And the amount that you get on top, the interest, is at a pre-disclosed rate. So you know in advance what you're going to get. Now, there are a couple of wobbles to that. If it's a variable rate account, you might be told you're going to get four and a half percent.

5:27Martin Lewis:Chase is the top paying easy access account at the moment, but that's variable. So they could tell you in future that lowering the interest rate, at which point you can take your money out and put it elsewhere. In a fixed rate savings account, well, it is fixed. So you're locked in at that rate for a set period, but you generally can't take your money out. The only other slight hybrid to this is premium bonds, which are a form of saving because your capital is protected. The money you put in is always protected. But the interest that you get is dependent on a prize draw. That's still under the savings definition there.

5:58So the advantage of saving is absolute safety under a certain limit anyway. You know exactly what you're going to get. It's guaranteed and you can get your money out at any point that you want with ease. The disadvantage of saving is, on average, compared to investing done right, you don't get as much.

6:18Martin Lewis:Plus, the amount of interest you earn is being eroded by inflation. So if your savings are 4.5 % and inflation is 3%, your actual growth is 1.5%. But in certain times, we've seen it where the top savings account are paying 2 % and inflation is 3%. When that happens, your savings aren't really savings, they're losings. Because the amount of money that you put into savings, the purchasing power is being decreased. So if you put£1 ,000 into savings, when you take it out, you might have£1 ,100. But to buy what£1 ,000 would have bought you when you first put it in would now cost you£1 ,150. So in reality, your purchasing power is gone.

7:00Martin Lewis:And the reason people go to investing is investing can beat savings. The returns can be better. But investing is about volatility. Investing is where you put your money away in the hopes of far greater growth than saving, but understanding that you have to take the risk that you could end up with less than you started with. And if you go for very high risk investing, let's say you buy a single share and that company goes bust, you can lose all of your money. So the way that beginners should look at investing is, I should only do it on money I'm putting away for more than five years and money I don't need.

7:37And in that case, if you put it in a broad spread of investment and you want to be going into thousands of different firms, for example, something like a global index tracker, then hopefully over the long run, your investments will beat saving. And the reason I talk about a broad spread is if you have one firm, It could rapidly go up or down and then you have to take your money out. You could be taking on a down you could have lost. But if you're invested in an index tracker that mirrors the performance of 3 ,000 different firms, that spreading of the risk means things don't go up as quickly and things don't go down as quickly, but hopefully will outperform saving over the long period, over that five years.

8:18I'll come on to compound interest in a second. Let's just carry on with this. I think the next bit Louise asked was she said it felt a bit like gambling investing, didn't she? Yeah, yeah. So there is a real difference between investing and gambling.

8:31Martin Lewis:There's also something called speculation. That's slightly different. That's where, you know, there's no underlying asset value and you're just hoping that somebody else will be willing to pay more than you in the future. But when you're investing in bonds or in shares or in other assets that actually are material, you know, when you have a share, that literally means you own a share in a company. Now, I suspect we wouldn't talk about somebody who sets up their own business as gambling, even though there is success and failure involved in setting up your own business. Well, when you buy in a share in the company, you're literally, you own a small proportion of a company.

9:04And it's very similar to setting up your own business. And for me, the fundamental difference between investing and gambling is this. When you gamble, the house takes a cut. So by definition, on average, less is given back than is paid in. It is a closed loop, if you like. It's a closed circuit of money. That isn't the case in investing. If you invest, if the firm does well and is selling lots of products and is doing its wares or has good technology and money is coming in, then everybody can gain and the total amount of the investment can be worth more both with the

9:42Martin Lewis:income that comes in and the growth in the share price. That's the fundamental difference to me between gambling and investing if you're investing in something that has a real asset behind it like a share or a bond which is an IOU for a company. Now you asked in there how could tech companies be worth billions when they don't make any money? Well some tech companies do make money and they make enormous amounts of money. Google makes a huge amount of money. Nvidia's making a huge amount of money. I believe it's making lots of profits. As for why they don't, that's because valuations in the markets are based on predicted future profits.

10:17They're not about today. And it's interesting, when a company releases its results, when it puts out its profit and loss accounts, it might have increased its profits by 20 % year on year. But if the markets were expecting it to have increased its profits by 25%, you would see its share price drop because the markets are looking on expectations, not on the current. So the reason that tech companies can be worth billions when they're actually making a loss is it's about the predicted expectation of future gain that is being priced in. Sometimes that will be right, in which case the people who invested in the long run will do very well.

10:57Sometimes that can be wrong, in which case the people who invested at those high valuations will do very badly. So there is always an element, you're right, of guesswork and risk involved. I'm not going to call it gambling, but we'll call it guesswork and risk involved. That's why you're spreading. As a beginner, you want to spread across lots and lots of different companies. Well, hopefully overall, if there's growth in world economies, then your investment will grow too. Final bit of your question was compound interest, wasn't it? Yes. Are you understanding? I know that so far making sense. Okay.

11:30Final bit of the question. Compound interest. Compound interest, we'll do it on savings first, and then I'll talk about it with investing. Compound interest just means you get interest on the interest. So let's put it like this. We're going to do really simple numbers that you couldn't get right now. You've got£1 ,000 that you put in a savings account at 10 % interest. After the first year, the interest is£100, which is 10 % of£1 ,000. So you now have£1 ,100. In the second year, you don't just get interest on your initial£1 ,000. You also get interest on the£100 interest you earned in the first year.

12:07So in the second year, you get 10 % of£1 ,100, which is£110. So after the second year, you now have£1 ,210, pounds, not 1 ,200. After the third year, you get interest on the thousand, interest on the hundred, and interest on the 110. So it's 10 % of 1 ,210, which is£121. So after the third year, you now have£1 ,331, not£1 ,300. And the net effect of that over the years is by, you know, within a 10 % interest, you would have doubled your money within seven years. Because of the interest on the interest means everything grows quicker. Now, it's important to understand it works the opposite way in debt.

12:59In debt, it means the person who's lending you the money gets the compound interest. So the longer you borrow for, the worse it is. And compounding does work effectively in investing too, in certain circumstances. I'm going to keep this really simple because that's what this is all about. So if you invest in a basket of shares, many of them will pay dividends. That means that the shareholders are getting a percentage of the profit from the company paid back to them each year. Now you can choose to have that dividend paid in cash, or you can choose to reinvest your dividends. If you reinvest your dividends, that means the dividends you're being paid are buying more shares in the company.

13:37Martin Lewis:So the amount of shares in the company you own is increased each because of the dividends. And of course, if you do that the next year, because you've got more shares and all of those shares, including the ones that you just got in dividends from the previous years, pay dividends, then you're getting dividends on your original shares plus dividends on the dividend shares and so on and so on. So in effect, you can also get compound growth within investing too. And I think I'll stop there.

14:08What have you got next? We're going to switch topics and go to energy now and we actually have a caller this week. Lovely. We're actually joined by Alana in Hamilton. Alana, how are you? Hi, I'm good, thanks. Hello Alana, very nice to have you on board. So this is all about I don't get it. What is it that you don't get that I can try and help you get? So for me, it's energy usage. I understand how the price per unit works, but what I don't understand is the actual units themselves. Like I can't visualise or quantify what a unit actually looks like in everyday life. I've got no way of knowing whether what I'm being charged is actually accurate or even reasonable.

14:58I just need to trust that the metre and the bill are correct. That's just one thing I've never been able to get my head round. OK, well, it is an imperfect science in this

15:10Martin Lewis:because some of it is always going to be a level of guesswork because there isn't something tangible you can get hold of that you can grab. But let's see if we can get you at least a step further. Energy is measured in kilowatt hours. So when you go to most appliances, let's say your oven, do you have any idea what the wattage of your oven is? No, no idea. I know my microwave is something like 1 ,200 watt. That'll do. We'll take the microwave then. I'll trade you a microwave for another. So you've got 1 ,200 watts. Now, a kilowatt is 1 ,000 watts. So your microwave at 1 ,200 watts, if you had it on full power for an hour, it would use, because it's 1 ,200 watts, 1.2 kilowatt hours.

15:58Does that make sense? Yeah. So you take the wattage, you turn it into kilowatts, which is 1 ,000 watts. And then if that is on and running consistently at that power for an hour, it's a kilowatt hour. Now, in electricity under the price cap now, on average, that's 26p.

16:16Martin Lewis:So a microwave on for an hour, you know, would be a little over, probably about 30p of electricity usage. Let's do a few more other things. An oven can be 1500, 2000 watts. So you would think if you had it on for an hour, that would use about two kilowatts. In reality, it would probably use less because when you use an oven, it heats up. And then once it's at the main temperature, it doesn't need to heat anymore until it drops down a bit. And then it heats again. So it isn't on full power the whole time. Same with your fridge. Your fridge is about 300 watts, a typical fridge. So if that were on for three hours, you would think it would use one kilowatt hour.

16:57But actually, again, your fridge is cooling down, then stopping and the compression and hopefully the insulation means it doesn't need to do it again. So a fridge is probably using about 30, 40p a day, more typically. A plasma TV, 10 to 20 hours worth of use would be a kilowatt hour. So the big thing to understand, stuff that uses a lot of energy, heating. anything involving heating kettles oven domestic heating because heat is pure energy that you're needing to pump into it things that are more subtle like a television will use less energy because it's not trying it does create heat you know you will feel the heat coming off it but it's trying to create light which isn't it doesn't take as much oomph as trying to create electricity so that's the sort of idea you need to look at the wattage whenever you're buying an plans look at the wattage and think how long will i have it on for and will that run consistently at that power and if it does you know a thousand watts on for an hour is a kilowatt hour and that is the unit of electricity as for gas it's just too complicated does that get you anywhere i mean i'm not sure that helps it may be a bit yeah it does help a bit what could i do to get you further that's just the thing though isn't it it's like you know it's not something physical that you can hold in your hand or you know something something that you can measure you know like for example like a mobile phone you know i know how many minutes i'm using i know how many texts i'm sending yeah it's just like you know for me you know gas and electricity because it's not something you can physically see and without you know going all around your house and you know totaling up the wattage of every single appliance you're using well but the other way to do this is do

18:44Martin Lewis:you have a smart meter? Yeah I do yeah. And do you have an in-home display that shows you? No I used to I think mine's is like the first generation of smart meter so when I moved supplier the in-home display was sort of obsolete. I would go to your new supplier and I would ask them for an in-home display I mean that's what it is for what your in-home display does is it tells you generally in pounds and pence as opposed to in kilowatt hours how much you're spending and what your run rate is and people who like these and it sounds like it's something you're interested in if you keep an eye on it you'll be able to go oh you know that should be at running up 16p and it's at 19p i bet i've left the light on in the bathroom upstairs and you get so intuitive as to i mean wouldn't be that much but you get so intuitive as to what your in-home display is so i think the best way to get you through this would be an in-home display from your smart meter and i'd call them up and I get one because then at least well you would know what you're running on at any moment right I didn't know that I could actually ask my current supplier for one I thought I can't guarantee they'll give you one but you can definitely ask them there's nothing wrong with asking them for one you're entitled to one there are certain houses that can't have them for certain systems and it may be that they don't have one that's compatible with your system but I would absolutely get in touch and say I want an in-home meter and that's part of the having a smart meter as you should have that.

20:10Yeah. Okay. Thank you. That's a good idea. I'll try.

20:14Martin Lewis:Thank you so much for your call. I hope we helped a little bit. We might have got you a step further forward. Yeah. Yeah, definitely. Definitely. Thank you so much. My pleasure. Take care.

20:26Pensions was a huge one. We got so many on pensions. Leslie says, pensions, I am very switched on to everything else, but cannot get my head around them.

20:35Martin Lewis:Well, I think that's probably pretty representative. So let's just try and work this out. A pension, what we mean by it in common parlance, is saving towards the age when you'll be retired and no longer working. And if you think about it, our typical life expectancy is around 80 to 85 years. We're probably working 40, 50 years of that now. And so that 40, 50 years of work has to pay for the 30-ish years of not working. Now, you might say, hold on, some of that not working was when I was a kid. Yeah, true, but then you're probably paying for your own kids as a cross-generational subsidy. So, roughly, a pension is all about putting money aside so that you've got money when you retire.

21:20Now, the state does this automatically for you in many circumstances, and that is called the state pension.

21:29Martin Lewis:You don't actually save to that in a sense. You're not building up a pot of money for it. What happens with the state pension is every year that you work and earn over a certain amount, or if you have childcare responsibilities, or if you're on certain benefits, you get a national insurance credit. I tend to think of it like a token. It's an easy way to think of it. Think of it like a token. It's going into your national insurance piggy bank. Now, the rules state, if you have over 10 years worth of credits for the new state pension, which anyone retiring from this point onwards will be on, you will get some form of pension payment, probably be about a third of the full state pension.

22:09Martin Lewis:If you have 35 years of national insurance credits, so you've worked 35 years, say, or more, you will get the full state pension. Now, that 35 years is rough. There are lots of variables in there. Just see it as an idea rather than a fixed rule. You'll get the full state pension, which is currently£241.30 a week, around£12 ,500 a year. Worth noting, that payment is taxable. Now, when something is taxable, it doesn't mean it's automatically taxed. It means it counts towards your tax thresholds. You can earn£12 ,570 a year, most people, without paying any tax on it. So if you only had the full new state pension at the moment, you wouldn't pay any tax on it.

22:52Martin Lewis:But if you had any other taxable income, say from working or private pensions, which I'm going to come on to a moment, then in total, anything above the threshold would be taxed. So state pension understood, Si, are you with me? Yes. Okay. So that's the state pension in a nutshell. But remember, it's£12 ,500 a year, and that's only if you get the full new state pension. If you don't get the full state pension, it's less if you're not on the new state pension. The basic element of the old pension, which is for people who hit retirement age before April 2016, is less too. Even so,£12 ,500 a year does not, for most people, fulfil the requirement of what they will need to live in retirement, because most people would want roughly around two-thirds of what they were getting when they were working when they retire, and£12 ,500 isn't that, which is why you're going to want to be looking at getting a private or workplace pension as well.