A Little Bit Richer

This series is brought to you by L&G, helping you build a future that's a little bit richer.

Iona Bain: Hello and welcome to A Little Bit Richer with me, Iona Bain, brought to you by Legal & General. Now, retirement can feel a long way off, especially when you're juggling your day-to-day life, family, and bills. But the truth is, the decisions you make about your pension today can have a huge impact on the lifestyle you're able to enjoy later on. And for many people, the most important place that saving actually starts is your workplace pension. So today we're going to recap the basics of workplace pensions, and joining me to break it all day is Tom Trennery from the Workplace Pensions team at L&G.

Welcome, Tom.

Tom Trennery: Hello.

Iona Bain: So to kick things off, let's do the 30- second challenge, shall we? Can you tell me why people should care about saving into a workplace pension in 30 seconds? Are you ready?

Tom Trennery: I'm ready. So the workplace pension is designed to provide an income in later life. Your contributions benefit from tax relief and your employer contributes as well. The sooner that you start to contribute into that pot, the longer you're giving that money to grow and future years' you will really appreciate that.

Iona Bain: Brilliant. 10 seconds to spare.

Tom Trennery: Wow.

Iona Bain: Nice work.

Tom Trennery: Good.

Iona Bain: Very well done. So I'm going to go out on a limb here and say that most people haven't really thought about why we have pensions, where they've come from, how they all started. I believe that you know a little bit about the history of pensions.

Tom Trennery: A little bit.

Iona Bain: So let's just turn into the rest is history for a moment. Tell me about the history of pensions.

Tom Trennery: Rest is pension. Yeah. It's funny that hasn't been done yet. So appropriately enough, pensions are pretty old. I think arguably the first pension was the Chatham Chest, which was set up in 1588. So this is pensions at its most basic. It was literally a chest. So it's a box that was set up for pensions to be paid to injured sailors from the Royal Navy. Money would go into the box and it would be in the chest and then it would be paid out of the chest to the injured sailors. So that was being held entirely in cash. I think modern investment theory might have a thing or two to say about that. And then there were also, there's a couple of other wrinkles. Charles I did then take that chest and use the money to pay off unrelated debts. So there were a few custody issues with that scheme. Yeah, that is technically a no- no.

Iona Bain: Yeah, it's a bit naughty of him.

Tom Trennery: A bit naughty. Also, it did predate the pensions regulator by about 410 years. So chance of regulatory intervention were minimal. Thankfully over the centuries, things have improved somewhat. In the 20th century, the main form of workplace pension saving was a defined benefit pension, or DB. And it was called that because the income that you received was relatively certain or defined. Nowadays, private sector workplace pensions are mostly defined contribution pensions. And they're called Defined Contribution (DC) pensions because the money that goes into the pension, the contributions are set. They're normally a percentage of your salary. And they are then invested, but you, the member, holds that investment risk. So what you get out of the pension is less certain.

Iona Bain: I had no idea that pensions have such a long history.

Tom Trennery: Yeah. Yeah, yeah. Yeah.

Iona Bain: It's absolutely fascinating. It's quite a simple concept, really. But could you just talk us through how a workplace pension works and why it's such a good place to start when it comes to building up money for retirement?

Tom Trennery: Yeah. So I guess it's worth saying at the top that you'll normally have your state pension, so that'll be coming your way, but that's relatively modest. So a workplace pension is really critical to build up the savings for your retirement on top of that state pension. So you've got your contributions going in. They benefit from tax relief. So the contributions are essentially tax free up to certain limits. And then huge benefit of workplace pensions, your employer will contribute as well. So typically that's kind of 3% of qualifying earnings, that's the minimum that the employer can pay, but some employers have more generous contributions. So it will go in and it will then be invested. It'll be invested in funds that are designed for the long term to grow as you go through your working life so that you have this pot that you can retire into.

Iona Bain: And so how do you know if the funds that your pension is invested in are the right ones for you and ensuring that your money is growing well?

Tom Trennery: It's a really good question. So first thing to say is, if you haven't selected a fund, your contributions will be going into what's called a default. And this will be essentially a standard fund that has been designed to suit most people's needs. But one of the great things about DC workplace pensions is that you can choose different funds. Each provider will have a fund range. So you can go into your provider account, and this might actually be a good time to say that L& G has an app where you can go into your account to see funds. Other apps are available, but L&G does have an app. So you can go into that and there's details on your fund and on the performance. You can also see more information about different funds on their fact sheets. There's a very wide range of funds that you can choose to invest in. I suppose there are a couple of things that I would just note in terms of fund selection, don't make changes too quickly. Pension funds are designed for the long term. They're not designed for frequent trading.

Iona Bain: Your money is invested as well. So presumably people do need to be aware of the risks of the stock market.

Tom Trennery: Yes, absolutely. So these funds are designed for the long term and it's natural that volatility will happen from time to time, but we typically see that over the long term, that volatility will level out, especially with a wide portfolio.

Iona Bain: If you're younger, is there an argument that maybe you could be looking at a slightly more adventurous pension compared to somebody who is approaching retirement.

Tom Trennery: Yes, absolutely. The earlier you start, I think the more risk that you can potentially take in order to potentially deliver higher returns, although of course those aren't guaranteed. We actually do see this in most modern default funds where you'll see this thing called lifestyling, where the funds will be higher risk, typically more growth focused in the younger stages of someone's working life. And then as you get closer to retirement, the funds will de- risk and move into types of assets that are perhaps less volatile and a little bit more certain.

Iona Bain: I've heard that described as the glide path.

Tom Trennery: Yes, the glide path. Ah, I've missed it. Yeah. There's a much, much better way to describe it than lifestyling.

Iona Bain: No. No, I just quite like the image of the plane coming into land.

Tom Trennery: Yeah, it's very nice, isn't it?

Iona Bain: Tom, you mentioned earlier on about tax relief.

Tom Trennery: Yes.

Iona Bain: This can be quite confusing. So break it down. What does it mean and why does it matter? Why is it such a valuable part of a workplace pension?

Tom Trennery: Yes. So tax relief is a key part of pension saving. When I talked about workplace pensions being simple, this bit might be the exception that proves the rule.

Iona Bain: If anyone can make it straightforward, I'm sure it's you.

Tom Trennery: That's a lot of pressure. So there are two main forms of pensions tax relief. The first one is net pay. So that's where the pension contributions are paid before income tax has been applied to your salary. So your income tax is applied to your pay net of contributions, bit confusing. And then you've got relief at source, which is where the contributions have been paid after income tax has been applied, but then tax relief is added onto that. Basic rate tax relief is added on by the provider. So taking an example in a relief at source scheme, 80 pounds of contributions will have 20 pounds tax relief effectively added on, that gives you 100 pounds in the pot.

Iona Bain: So it really does add much more to your pension over time.

Tom Trennery: Yes. It's a huge benefit and a key reason why people should be saving into their workplace pension.

Iona Bain: So what you described there were two different ways of basically applying that tax relief, two pensions, but the outcome is the same. You're basically getting more money.

Tom Trennery: That's right. Yes, exactly.

Iona Bain: And people will build up lots of pension pots throughout their working life. Should they keep them separate or should they combine them all into one pension plan?

Tom Trennery: People building up lots of different pots is becoming a bit more of a problem in the UK, and there's been a lot of discussion in the industry about this. The government has been leading quite a long-running initiative called the Pensions Dashboard, which when launched, should give people a single view of all of their retirement savings. But actually, I'm just going to answer this question, I think, with a plug for a previous episode that you've recorded with Mike Crossley.

Iona Bain: Yes, I remember it well.

Tom Trennery: Yeah, yeah, yeah. So he's a consolidation guru and will answer that question a lot better than me. So maybe we can link to that into the description or something.

Iona Bain: Absolutely. We'll link back to this. The Easy Explainer on Combining Your Pension Savings.

Tom Trennery: That's it. Exactly.

Iona Bain: He explains all of that. So one of the challenges that people are facing is that they just aren't saving enough into their pension to make sure they have a comfortable retirement. Do you have any tips for people to help them boost that pension pot during their working life?

Tom Trennery: Yeah. I mean, the problem of adequacy as the industry calls it, making sure that you have enough in retirement is a really big one. And there's been a lot of industry discussion about this. How can we solve this problem? I suppose the first thing that comes to mind on this is compounding. There was this quote that came to mind, compounding interest is the strongest force in the universe, which was attributed to Albert Einstein. And then when I was prepping for this, I had a look. I don't think he said that. But someone said it and there's quite a lot of truth to it. The sooner that you start to save, the more time you are giving your money to grow. So that's very important.

 I suppose the other point I would make is pension calculators can be very helpful. You can go in, there's a MoneyHelper pensions calculator. Also, a lot of pension providers have a pensions calculator, so you can go on there, put in details and figure out how much you might need for retirement. The sooner that you do that, if you find that you're not on track, the more time that you have to potentially put money in and try to get back on track. I suppose the other couple of points are trying to save consistently. It might be worth looking at whether you can ramp up contributions and whether the employer will match those contributions, which can be a hugely helpful employee benefit.

So yeah, I mean, it's a big question though, and the government has actually set up a Pensions Commission that is going to be looking at the problem of adequacy across the UK. We have this wider problem, which is that people really aren't saving enough for their retirement and the findings of the commission are due next year.

Iona Bain: It's not an easy nut to crack though.

Tom Trennery: No.

Iona Bain: I'm guessing that for many people, the best that they can hope for is if they get maybe a pay rise or a bonus.

Tom Trennery: Yes.

Iona Bain: Maybe putting that into a pension is not a bad shape.

Tom Trennery: Yep. You should always try to keep the pension in mind when you see that sort of thing coming in terms of income.

Iona Bain: And I suppose just not opting out is a really, really good idea if you don't do anything else.

Tom Trennery: Yes, exactly. I mean, obviously there may be reasons to opt out. It's not possible to comment on everyone's individual circumstances, but if you do opt out, it's not just your contributions, it's your employer contributions that also stop and that's a really important thing to bear in mind.

Iona Bain: So as we wrap up today, what is a quick win for everyone listening and watching? What is one thing that they could do whilst they go off, make a cup of tea and wait for the cattle to boil?

Tom Trennery: Okay. Get on the apps of your pension providers, get into your accounts, try to figure out which pots you have elsewhere, take a look at your pots and familiarize yourself with your pensions. Understand the funds that you're invested in. There's a lot of information available, so get in there and get involved. And I think if you really find it interesting, there are pensions calculators out there. You've probably made the cup of tea at this point, but then you can enjoy your tea with the pensions calculator as you begin to map out your pensions journey.

Iona Bain: Oh, great and a pensions calculator. What more could you want?

Tom Trennery: Yeah.

Iona Bain: Thank you, Tom.

Tom Trennery: Thank you.

Iona Bain: Tom, that was so useful. Thank you. And we really hope this episode has helped you understand your workplace pension a little bit better. Next time, we'll be talking to Stuart from The Car Expert about all the different routes to get on the road with car finance. This podcast is brought to you by L&G. I'd love it if you could share the podcast and help others get a little bit richer too. You can keep up with the show on YouTube, TikTok, and Instagram at Legal & General. And if you've got a question or a topic you'd like answered on the show, get in touch on our socials. We would love to hear from you. Until next time, see you soon and thanks for listening.