A Little Bit Richer

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

Hello, and welcome back to A Little Bit Richer, with me, Iona Bain. This is the podcast that helps you understand your money, grow it, and make it work harder for you, and it's brought to you by Legal & General. Many people have workplace pensions through their current job, and possibly previous employers too, and if you've had some time being self-employed, then you might have what's called a SIPP or personal pension. Pensions might appear fairly similar at face value, but there can actually be significant differences that you need to be aware of, and understanding those differences is actually really important.

Iona Bain: Today, I'm really pleased to say that we are welcoming back to the podcast Mike Crossley from L&G's Workplace Savings team. Part of Mike's job is to cut through the complexity and support people with their pensions and retirement savings. Mike joined us on a previous episode of A Little Bit Richer to talk about combining pension pots, but today he's here to help us simplify the main types of pensions and talk us through their differences. From the level of involvement needed from you to the amount of support you will receive and the fees that you'll pay, Mike is going to help us understand the pros and cons so you know what's best for you. Mike, welcome back to A Little Bit Richer.

Mike Crossley: Thank you.

Iona Bain: Good to see you again. To get us warmed up, can you explain in 30 seconds or less why it's important to understand the differences between a workplace pension and a SIPP? Are you ready?

Mike Crossley: Yeah, absolutely. A self-invested personal pension is a pension chosen by you, so you choose the provider, you choose how much to put in, and you choose how it's invested. A workplace pension, on the other hand, is set up for you; you pay in via your employer. Both types of pension will benefit from something called tax relief, where there's a little government top-up, but how all of that works under the bonnet can be quite different, which I'm sure we'll get onto.

Iona Bain: That was an excellent overview, Mike. And as you mentioned there, one of the big differences between workplace pensions and SIPPs is how contributions are made. Can you just talk us through that in a bit more detail?

Mike Crossley: One of the really important things about a workplace pension is that your employer will normally pay into it as well as you. So that means for every pound that you put in, there's usually some money coming in from your employer and some money coming via the tax relief that you get on contributions as well. A SIPP, on the other hand, you're normally paying into yourself, and although you can gain tax relief, you're not getting that top-up.

Iona Bain: Can we talk about how much your employer contributes to your workplace pension and how much you, as the individual, puts in?

Mike Crossley: Yeah, so this will absolutely vary, and in a lot of ways it's an important part of your overall pay package. Under auto-enrolment rules, most people have to have at least 8% of their salary paid into their pension. At least 3% has to come from the employer, and the remaining 5% from you as an individual. But different companies will set up different contribution levels.

Iona Bain: How valuable is that employer contribution to your workplace pension?

Mike Crossley: It's incredibly valuable. I'm going to give you a really simple example. Imagine your employer matches the contribution that you make on a sort of one-to-one basis. If you wanted to get £250 a month paid into your pension, if you're doing that via your workplace pension, you might pay in £100. You might get about another £25 of tax relief, depending on exactly how it's paid, and then £125 from your employer. So that £250 going into your pot every month is only costing you £100.

Iona Bain: Right, and so the tax relief and the employer contributions are really combining to boost what you could get further down the line.

Mike Crossley: Yeah, I know a lot of people think of this as free money, so that top-up that you're getting from your employer and the government through tax relief combined.

Iona Bain: With your workplace pension, do you have to actively opt into that, or is that done for you?

Mike Crossley: Yeah, when you join a new company, you'll usually be automatically enrolled into the company pension. The really important thing, though, is to check those contribution levels. I have a phrase called "catch the match." This is where it's really important to check how much will your employer potentially match. Don't assume they're going to automatically put you in at the maximum amount to get the highest possible employer contribution. They might put you in at the minimum. So that's something that's well worth checking.

Iona Bain: That's almost a hidden hack, a cheat code, really, to get more money in your pension.

Mike Crossley: It can make a really huge difference. Imagine if you start, and you're paying in 5%, your employer's putting in 5%, they might match up to another 5%, so you could potentially go and double your contribution and get twice as much. This can make a really big difference, especially when you think about how that builds up over the years.

Iona Bain: Yes, because if you don't ask, you don't get. Also, you mentioned about tax relief. This is something that applies to both the workplace pension and a SIPP. Am I right in thinking that?

Mike Crossley: Yes. Let me go through an example again and how that's going to work in a SIPP. So if we use this idea of perhaps £250 a month is going to go into your pension. Through the SIPP, you're not getting the employer contribution, perhaps because you're self-employed, but you do still benefit from that tax relief. In most simplistic terms, you might pay in £200 and then get a £50 top-up from the government. It's usually your pension provider who claims that and puts it straight into your account on your behalf.

Mike Crossley: One really important point to note about that, though, is if you are a higher-rate taxpayer, you can actually claim additional tax relief. So you'll get your basic-rate tax relief paid into your pension, that's your £50 going on top of your £200, but you might be able to claim the same again through your tax return if you're a higher-rate payer. You've got to remember to go and do that, because it won't happen automatically. When you do your tax return, a really important thing to remember and claim.

Iona Bain: For those who want to maybe be a bit more hands-on with their pension, are some types of pension better in terms of giving you that control and choice compared to other types of pension?

Mike Crossley: There can be some really fundamental differences between a SIPP and a workplace pension in this respect. So SIPPs were first created specifically for people who wanted access to a really wide range of investments, perhaps with the help of their financial adviser tailoring a portfolio to their exact preferences, their risk appetite. So you can find some SIPPs that will give you access to literally thousands of different investment types, to direct stocks and shares, government bonds. It might even allow you to invest in crypto-based exchange-traded funds or commodity funds, all sorts.

Mike Crossley: I think the really key thing to understand there is that choice is great, but you've got to know what to do with that choice. For example, for lots of people, they might have no intention of becoming their own fund manager and actually be very happy that their pension provider has just created a ready-made investment portfolio for them. But if you've got both the knowledge, the skills, and the confidence to self-invest, having that broad range of funds can be really useful.

Iona Bain: That's a really good way of looking at it, because people might be wondering, "Well, what actually happens inside my workplace pension? Do I have to make any choices there? Or are all those decisions taken for me?"

Mike Crossley: This is another area where there are some quite big differences between a workplace pension and a SIPP. When you get enrolled into your workplace pension, unless you specifically go and look for what funds are available and go and choose one for yourself, you'll go into something called the default investment option.

Mike Crossley: This is actually one of the things that I think is really strong about workplace pensions, because for the majority of people who don't want to go and choose their own funds and try and work out what's right for them, the default is a professionally managed fund which aims to give people growth, and it will usually vary how it's invested over time. Perhaps someone who's younger, with a long horizon to retirement, can take a little bit more risk. They'll often automatically begin to de-risk as you get closer to retirement.

Iona Bain: To be clear, when you're de-risking, what does that typically involve?

Mike Crossley: Yeah, it'll usually mean that portfolio of investments that's sitting underneath your workplace pension is just changing from perhaps things that might vary less day-to-day, week-to-week in value, less volatile, as we often say in the industry, which can be really important as you approach retirement. But on the flip side, when you've got a long way to go, you want to embrace a little bit of risk, and that's what will ultimately help get you the growth that will build your pot over time.

Mike Crossley: With the default investment, what's really important is that you're not having to really worry about any of that. You've got a team of professionals behind the scenes who not only select the investment, but have to make sure it remains appropriate, and it's performing well over time, delivering good value for money, and basically remaining fit for purpose.

Iona Bain: For those who are listening who maybe don't have a workplace pension, who are self-employed, and think, "Oh, that sounds quite good, and I'm not sure if I feel all that confident making choices about a SIPP," is there potentially a default option available with that or not?

Mike Crossley: Yeah, the really good news is that SIPP providers now have to also have a default investment for people who don't want to make a proactive fund choice. As well as that, many SIPPs will offer you simplified fund ranges or pre-built portfolios that can make the choice simpler as well. Yes, the SIPPs absolutely do help you in that respect too.

Iona Bain: That's worth bearing in mind. Now, let's just talk a little bit about SIPPs. Who could they suit potentially? We've talked about the self-employed, but are there other types of saver who might find a SIPP could really help boost their retirement prospects?

Mike Crossley: Yeah, aside from the self-employed, SIPPs might also benefit people who just want to have that extra bit of control, that extra bit of choice over how it's invested, and who want to be a bit more hands-on with running their pension. As a very broad rule of thumb, a workplace pension's a great option if you just want your pension to sit there quietly in the background and look after itself, and you just worry about making sure that it gets paid into every month. Whereas a SIPP is potentially really good for someone who wants to be a bit more actively involved, perhaps.

Iona Bain: Could a SIPP also be a useful top-up for somebody who maybe wants to just make sure that they are going to have a comfortable retirement and might be saving a decent chunk into their workplace pension, but aren't quite sure if it's enough?

Mike Crossley: That is absolutely something that you can do. Again, I'm going to go back to my saying that before you go and invest regular contributions into a SIPP, make sure you catch the match.

Iona Bain: Catch the match. Yep, absolutely. Are there any downsides to SIPPs that people need to be aware of?

Mike Crossley: The main thing to consider, really, is that you're responsible for a lot more when you're doing that in a SIPP. Not only choosing the provider, you're not going to have quite as many people behind the scenes looking after you, making sure that it's giving you good value for money, making sure that the investments are performing well. You've just got to take a bit more personal responsibility, I guess, when you're investing through a SIPP.

Iona Bain: If you are self-employed, is a SIPP the only way to save into a pension, or are there other options?

Mike Crossley: Yes, if you've never had a workplace pension or a pension before, you will need to open a SIPP or a personal pension in order to start saving into a pension. What people don't always know, though, is perhaps you're self-employed now, but you've got a workplace pension from a company you worked for five or 10 years ago. That workplace pension may still allow you to make contributions yourself, just like you could into a SIPP. Again, that could be a good option if it benefits from low charges, you're quite happy taking a default investment option or choosing from a slightly smaller fund range. Worth checking.

Iona Bain: Yeah, absolutely. Good backstop. Lots of us millennials have changed jobs several times over the years already and might end up with a few pension pots scattered around. Should you bring them together? What are the pros and cons maybe of consolidating those pensions?

Mike Crossley: Combining your pensions or consolidating them can be a really good idea. It can help simplify your finances, give you a clearer view, and perhaps allow you to benefit from your lowest charges across all your different pensions. However, consolidation isn't going to be right in all scenarios. There are some real watch points, like making sure that you're not going to lose any important guarantees or any special features that one of your old pensions has.

Iona Bain: Having said that, I imagine it's also possible for you to just keep your workplace pensions where they are, so long as you know that they exist, and you're keeping an eye on them.

Mike Crossley: Yeah, that's right. There's no single right answer as to should I consolidate or not. It's one of those "it depends" things. But again, if you're thinking about it, check the details, and if you feel confident to do it, you can usually do it without too much difficulty.

Iona Bain: We have previously chatted about this topic, and I urge listeners and viewers to go and check out that conversation, and we will include a link to that in the show notes. Let's talk about fees. Is there a difference in terms of the fees that you would pay on your workplace pension and what you would pay on a SIPP?

Mike Crossley: Yes. This is another area of potentially big differences. Again, it's going to come down to who your employer is and who your pension provider is. Let's take how that works in a workplace pension first. A really important thing to understand about workplace pensions is there is something called the charge cap, and that is 0.75% per annum, and that has to cover both pension administration charges and any investment charges combined.

Mike Crossley: That's really important because it means even if you're working for a really small company who may not have access to the cheapest workplace pensions out there, nobody is basically getting ripped off. That charge cap protects everybody. If we think about people who work for larger companies, it's a bit like bulk buying. Large companies can often negotiate with pension providers and get quite big discounts from the ongoing charges that their employees are paying. Again, another really important thing to check.

Iona Bain: If you hear that percentage, 0.75%, to most people, that doesn't sound like a lot. It's less than 1%. But why does that matter when it comes to pensions? Why do fees potentially really add up over time?

Mike Crossley: Yeah, so I guess a really simple way of thinking about what that fee is doing is it does reduce the overall investment return that you're getting from those investments that are sitting in your pension. So the higher the fee is, it's just taking a little bit off the top.

Iona Bain: For those who are thinking about who to go and work for and looking for a good employer, sometimes these little things about the pension scheme can get overlooked, but actually they can make a big difference if your employer is offering very low or no pension administration charges, and if the scheme that they offer has got high contribution rates. Those things really matter.

Mike Crossley: Yeah, 100%. That combination of what's low charges and perhaps high contribution rates can be a real booster for getting a good pension pot together over the years.

Iona Bain: It's a golden combination. This is all a little bit different for self-invested personal pensions, for SIPPs. How do the fees work there?

Mike Crossley: With SIPPs, you'll see a huge amount of choice and a huge variation from different providers. There's no charge cap on the charges that you might pay within a SIPP, so it is down to you as an individual to determine what good value looks like for you. As a really broad rule of thumb, if you're setting up a SIPP now, and you use a ready-made investment fund or ready-made portfolio, you might be charged something like 0.5% to 0.9% per annum, possibly a little bit more, perhaps a little bit less.

Mike Crossley: There are SIPP providers out there with really low fees. Some even charge no administration fees. Others do things like they'll charge a pound amount per month, or they'll cap the charges so not charge beyond a certain value in your pension. That can be really good if you've already built up a quite big pension pot. Like everything, there's a big variation from different providers, and it does depend what you're looking for.

Iona Bain: Sounds like you have to do quite a lot of homework to figure out what each platform charges and whether that represents a good deal for you.

Mike Crossley: Yeah, and I think the simplest way of thinking about it is don't assume that the charges are going to be the same or very similar from one pension provider to another. Understand the basis of how you're being charged. Is it one single charge that includes everything? The investments and the administration? Do they separate them out? All these little differences, again, are just worth understanding before you choose your provider.

Iona Bain: Are there other charges that you need to be aware of?

Mike Crossley: Yes, on top of the administration charge and the investment charge that we talked about, it is possible if you ever had a financial adviser that they could be taking an ongoing charge as well. There's absolutely nothing wrong with that. All I'd say is if you are paying for a financial adviser, either for your workplace pension or more likely probably your SIPP, make sure that you are actually talking to that financial adviser, and you are getting ongoing advice. If you can't get in contact with your adviser, or you can't even remember who they are any more, talk to your pension provider or try and contact the adviser firm, and they can always stop the advice fee if you're no longer getting that ongoing advice.

Iona Bain: And charges aren't everything, of course. I imagine that you also want to make sure that your pension's being invested in a really solid way, and cheapest is not always the best, I'm imagining.

Mike Crossley: That's exactly right. Cheap can be great, but again, you've also got to think of what am I paying for? How broad a range of investments? How much work are they doing for me? What's the quality of the app or digital experiences? How good is the customer support? These are all things worth considering when you're comparing.

Iona Bain: Mike, this has been a really helpful conversation, and hopefully people will understand those differences between their workplace pension and a SIPP. But if people want to go off and make a cup of tea as they're waiting for the kettle to boil, what is one tangible thing that they could do to improve their pension prospects?

Mike Crossley: If there's one thing to do, it's go and check the exact amount you're contributing at and make sure that you're catching the match. How much are you paying in? How much will your employer match? Are you taking full advantage of it? Even if all you can afford is to increase it by 1% to get an extra bit from your employer, it can make a big difference to your long-term prospects.

Iona Bain: Great. That's such good advice. Thank you so much, Mike.

Mike Crossley: Thank you.

Iona Bain: That brings us to the end of this episode, and we hope this conversation has been helpful and illuminating. If you did learn something new or useful, please do go ahead and share it because you never know who else it might help.

Iona Bain: Next time, we'll be joined by Anna Brading, financial educator and author. She's also part of a national campaign, Invest for the Future, helping to make investing easier to understand. We'll be digging into, yep, you've guessed it, investing, why it is such a valuable way to build long-term wealth, and how you can get started even if you don't have heaps of spare cash.

Iona Bain: This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok, and Instagram @legalandgeneral. A big thank you for listening, and see you soon.