#6 - Pay Into Your Pensions with Faith Archer
Transcript from interview #6 - Pay Into Your Pension with Faith Archer
Welcome to the I ALSO Want Money podcast, where our mission is to democratize, demystify and demasculinize making money. I'm your host, Nicole Kyle, and I'm here with my co-host, Sophie Holm and ally, Harrison Comfort.
Everyone, on today's episode of I Also Want Money, we are talking about pensions. Everyone's favourite topic, saving for retirement. We want to give a big welcome to freelance journalist, and money and pension expert, Faith Archer. Welcome, Faith. Thank you so much for being here.
Faith Archer: 0:45
I'm very glad to join you.
So for our listeners's benefit, Faith is an award-winning writer. She has an incredible blog, Much More with Less, which I highly encourage everyone to visit. Our episode today is definitely for the working woman who has probably one of the most under optimized financial benefits: the workplace pension. That's what we're going to focus on with Faith today. So Faith, what is the one thing women should know about their pensions, but don't?
Faith Archer: 1:17
You get free money! That is the thing I find most exciting about pensions compared to virtually any other way. If you pay into your workplace pension, your boss pays you extra free money on top! The government pays you extra free money on top as tax relief. Turning down the chance to be in the workplace pension is like turning down a pay rise. You get free money. So the vast of majority people, unless you're a super high earner, you can stash away up to £40,000 a year in a pension and get tax relief.
Tax relief. What is the brass tax on tax relief?
Faith Archer: 1:56
You get tax relief based on the amount you pay in income tax, so your basic rate taxpayer is gonna be 20%. if you earn over £50,000 a year, you're a high rate taxpayer, you're going to get 40% tax relief. Additional rate tax is 45% tax relief. You know, those are big amounts of money to be added to what you're putting into a pension. So in practice as a basic rate, taxpayers, you put £1 into your pension. You'll get 25p added, so that the total contribution ends up being £1.25. That tax relief of 25p, is 20% of the £1.25. Yes, put a pound in, get 25p added automatically on top as a basic rate taxpayer. If you are a high rate taxpayer, you can claim another 25p back in tax relief on your tax returns, or some employees actually sort it out so the money gets taken off your payslip.
So what should we be paying attention to, when we're reviewing the terms of our workplace pension to make sure we're optimizing it?
Faith Archer: 3:02
The first thing that you need to check is, can you get anything more? As you've highlighted, people now in the UK, you are automatically signed up for a workplace pension. for eligible employees unless you choose to come out. So if you're earning more than £10,000 a year, and over 22, your employer is gonna whack you straight into that workplace pension. And they will sign you up for the minimum, which currently means that you pay 4% off your eligible earnings into that pension that just gets whipped straight off your paycheck. But then the brilliant part is your employer thens add 3% on top and you get another 1% in tax. And if you're a higher rate taxpayers, you could get even more tax relief back. So that's the minimum that's going in. But there's a lot of bosses out there that will actually give you more free money. So there are employers that will match extra contributions. There are also employers that, perhaps if you pay in extra on top of the minimum contributions, they'll pay an extra too. So check. Don't leave free money on the table.
Employers match your extra contribution. Is it up to the employer to decide if they want to do that or not?
Faith Archer: 4:14
By law, is this idea that you pay 4%, your employer pays 3%, and then you get the 1% tax. Really, that's that's the minimum. You can't demand anything more, but there are a lot of employers out there that are more generous. So find out if your employer is one of them.
So who would you suggest, we ask that?
Faith Archer: 4:33
Well, start by having a look at whatever information you've been given on the pension. You might have some paperwork. There might be part of the company website for employees that tells you about pensions. Speak to HR, or see if it's a big organization, it might actually have a pensions department.
For people that started focusing on the pensions a little bit later - guilty as charged over here, how do you attempt to bridge that gap that you're talking about?
Faith Archer: 5:00
There's a really easy rule of thumb about how much you should be paying into your pension. And that is, take your age on half it. So if you are starting to pay into a pension when you're 24, which I would highly recommend, start doing it as soon as you possibly can! So if you're 24, then you might want to pay, you should be aiming for 12% total going in there. And that does include the tax relief and the stuff from your employer. But if you wait till say, you're 34 which is still, you know, still don't don't think it's too late. But if you wait until you're 34, then you're looking at paying in 17% off your income. So as you can see, the longer you leave it, the more you're gonna need to pay in to end up with a decent retirement. The issue is fundamentally: if you pay less into a pension in the first place, you can end up with getting less out. And the reality for a lot of women is that if you take time out, perhaps to look after children or look after other relatives. And if you go back to work part time afterwards, then for a lot of women, they end up with gaps in their pension contributions or times when the contribution is significantly less. So that means, although in our twenties many women have very much similar sized pensions to men by the time you're hitting retirement age, traditional retirement age, perhaps in your sixties, there is a really significant pension gender gap. So I think women in particular really need to focus on maxing paying more into their pensions in their younger years, so that they're gonna end up with a bigger pension sum when they want to retire.
We came across some data that said, the pension gap from a gender perspective can be 50% or higher. Why do you think such a vast inequality exists?
Faith Archer: 6:54
There's a number of factors that come into play first is the gender pay gap. So fundamentally, if you've got two people, where one is earning less than the other for the same job, then they can pay less into their pension. If you've got women taking time out, as I mentioned, to raise children or for caring responsibilities, that's going to cause a gap. If they subsequently go back to part time work, that's gonna cause the gap.
So, Faith. What are best practices for checking on our pension?
Faith Archer: 7:25
Well, if it's any comfort, I actually don't recommend checking your pension too often I genuinely mean that. I think certainly review once a year, if you want to get really into it maybe once a month. But I think daily fluctuations in your pension can be quite scary and especially with pension investing, it's for the long term. If you're in your twenties or thirties, you're investing over a 20, 30 or 40 year horizon. You have time for the stock market to come back up, so what you don't want to do is get freaked out by short term bumps along the road. But in practical terms about how to check, one of the issues right now is because people swap jobs and therefore they can build up different workplace pensions in multiple places. So a really key thing, I'd say is, if you're about to move jobs, change the email address on your workplace pensions, so that you can actually still access the data. You know, find out how to access it when you're not an employee because one of the main reasons why a lot of people lose track of their pension is that their workplace sets up with their workplace email address. If you don't have the same e-mail address, it's much more difficult to get hold of the information.
It's such a little, but such a significant detail. I definitely wouldn't have thought of it. And I imagine many, many people don't think about just changing their email address from their work email to the private email. So it's a really great tip. Just thinking about, millennials, changing careers every 3 to 5 years, etcetera. Like all of these different trends, you will end up having a lot of different pensions and pension providers. What's your recommendation around consolidation and when you are in that process of evaluating that, what can you demand from pension providers?
recently checked my pension and was frankly horrified to see the amount of fees that I was being charged.
Faith Archer: 9:39
I think you guys have put your finger on it that one of the big things to check if you're considering whether to leave pension money where it is, or move it somewhere else, is the fees, because that's one of the few things that you can control. None of us can control the markets. We can control how much we pay to invest in the markets. So having a look back, there may be two kinds of fees that you're looking for because typically, whoever is running the pension will charge one fee for the platform, for the service of running a pension and then also, there will be fees involved with whichever funds you are invested in. So, having a look back at your pensions, what are the fees you're paying for the pension itself and for the funds you're invested in. Also to have a look at what fund your money is invested in. Here's the thing. Most people, as we've identified, when you get your pensions paperwork with your new job, your eyes just glaze over it, like oh, my god, There are far more exciting things to do here. That's the trouble. Your money will then just go into the default fund. It's something crazy, like 88% of employees, that money just goes in the default fund. I'm not saying that it's intrinsically bad. it's kind of a don't scare the horses kind of investment. It's solid. Whereas, if you're in your twenties, you have a brilliant opportunity to go for more exciting investments, for riskier investments. Yes, they're going to be more risky, but with that risk, there is a higher chance of return. If you're in your twenties or your thirties, you've got the time to take that kind of risk. Yes, your balance might bounce up or down, but it's got the chance to come up before retirement. So do check. Where is your money invested? If it's just in the default fund, is there a better option where you might get higher returns?
Often in workplaces with workplace pensions, they will come to the office and have these open office hours. Is that the right place and time to ask some of these questions around the funds and risk profiles, etcetera?
Faith Archer: 12:01
There's a brilliant opportunity to do it. Just ask them: where can I put my money? What are the options here? Is there anything beyond the default funds? It's quite likely that they won't be willing to say, you, you should invest in this specific fund. But if you can get them to talk to you about what the options are on. You know, talk about the fact how, how many years you have ahead of you for the money to grow, and kind of help to narrow down which funds might be suitable. So then you can make a choice.
Not to call out our listeners, but I'm sure there's going to be some people who listen to this and get really excited, but then they're not gonna do anything. So, Faith, what do you say to that person in order to finally get them over the line?
Faith Archer: 12:51
They should think: do they ever want to stop working? Because if you think about it, if your work stopped today, if your income dried up today, how long could you afford to live? And I'm not just talking, shivering in a corner, eating baked beans. I'm talking, actually live and do the stuff you enjoy. How long would any money you've got last? And then, if. because for a lot of us, it wouldn't last very long. What on earth are you doing to make that any difference at the point you chose to retire? Because, fundamentally, the responsibility for finding a retirement has been thrown onto us. And, if you don't save enough, you're gonna be working until you drop.
So we know that millennials are different from generations that have come before them. We have a lot of different interests and passions. We move jobs a lot, for example. Some of us are in the gig economy, are contract workers, But for the folks who are in workplace pensions, is there a way to optimize them to the point where you could retire by 40? Could you retire early?
Faith Archer: 14:02
Definitely, you could retire earlier. The deal with pensions, the reason you get showered with this free money from the government in tax relief, is because they want to encourage people to save for the long term. So the strings attached is that the earliest you can get your money out is the age of 55. That might creep up a little bit in future. But if you think about it, the age for the state pension for most people in their 20s and thirties, it's already set at sixty eight. That's 13 years later. And again, that could potentially increase. So 55 might sound fairly early, fairly elderly, but you know, trust me. If you can aim to retire at 55 that's gonna be a damn sight better than having to work until 68, or work even longer, if you get to 68 and discover the state pension is worth next to nothing. And you just have to keep going.
So given the state of the world and where we're headed, uh, without tempting fate, a lot of us are talking about the R word, recession. If a recession comes to pass, what role do retirement savings play in that, and how should we be changing our approach in a recession?
Faith Archer: 15:18
Certainly, for me, you know, on my to do list after I come off this call is to pay more money into my pension because I'm looking at this massive...
Faith Archer: 15:26
Oh, good. Hope it's been inspiring there, Harrison. Basically, the markets have come down massively. Yes, I think there is fundamentally a chance that the coronavirus will tip us into recession. You know, I'm not sugar coating this. Things are not looking good out there for the economy. But unless you think that fundamentally global capitalism is gonna fail, markets will come up in the end. And if you're looking 10, 20, 30 years ahead, things are going to, I fundamentally believe things will be better than they are today. And so by investing now after the fall, I will get more for my money. And, I can watch that as the markets pick up, because they will. I don't know when. I don't know how much, but they will. I can watch that money grow in future. Now is a great time to be putting money in that you can afford to stash away for 20, 30, 40 years.
A potentially controversial question when, if ever, does it make sense for someone to opt out of a workplace pension?
Faith Archer: 16:36
I think there were very few situations when your finances would be sufficiently dire that you need to opt out of your workplace pension. And this is in the context of discussions with an extremely experienced debt adviser that I know Sarah who blogs at Debt Camel. Her position is, even if you have hideous debt, that's if you can possibly afford to maintain your minimum contributions to a workplace pension, so that you get that tax relief, you get those employer contributions paying towards your financial future. If you could possibly afford to do that, do it. Opting out of your workplace pension, so you come blow the money on cocktails and holidays, not a great plan. I think you really would have to be in very, very dire financial straits before I'd ever advise anybody opted out their workplace pension.
I have to admit, I didn't even realise it was an option to opt out of your workplace pension?
Faith Archer: 17:36
No, no. It is true that you can choose to opt out. They switched it. It used to be the position that it was up to employees to choose to opt in on. Then they switched it. So now you have to choose to opt out. And due to general lethargy, we've seen workplace pension savings, the number of people participating, those numbers have soared. They've really gone up. And I think it's because, for a lot of us, we appreciate we probably should be paying into a pension. The brilliant thing about a workplace pension is that you have somebody waving a magic wand and they sort it all out for you. They take the money, they sort out a pension company. They sort out a fund, adndyes, there are ways that you might be able to optimize this, potentially by switching out of the default fund into something more risky when you're younger. But otherwise it is this magic wand that helps you save towards your retirement and does it for you.
Yeah, I'm glad that you said that Faith because as tempting as it can be to rationalize to yourself that: well, having this money now makes my quality of life so much better, not paying into your pension, to your point, does just leave free money on the table.
I think I have two big, I also statements from this conversation. One, I also need to pay more attention to my pension, and two, I also feel good about recently having moved all of my pensions into equity funds.
So Faith quickly on that note, do you have any guidance for how to select the type of funds you invest in in your pension, given your profile?
Faith Archer: 19:19
The main factors to consider are: how long you have to go before retiring? And, how worried you're gonna be if you see your balance going up and down? I think the technical term for that is probably what attitude to risk, which I'm not not sure. Sometimes the risk word is the most helpful. It might be helpful to think of it as volatility, and if you've got a longer time frame on you, you can cope with volatility. Go for something more risky in the hope of higher returns. And, in practical terms, what you might want to look at, is a fund that has a higher percentage of stock market investments to be called equities, as opposed to bonds which are more steady. They're a kind of loan. So higher the percentage of equities, the younger you are, because you've got more more time for those bets to pay off. You might also want to invest more globally. You might want to look towards emerging markets. Certainly for my children. I put money for them in global smaller companies because smaller companies do have the potential to grow massively, but a whole load of them will also fail. So that's one of those bets that I placed, that global smaller companies will do better than just a very steady fund based on long established businesses that don't have so much potential for growth.
Yeah, it's good advice, Faith. Just reflecting on this conversation, there's a lot of takeaways for me. I think one of them certainly is: there is money that I won't miss, and I should be putting that into my pension, right? It's just this reminder that what we do now will help us in the long run. In the interest of closing out, Faith, do you have an I also statement that you practice in order to remind yourself to maximize your pension?
Faith Archer: 21:14
I also wish that I had paid more when I was younger. I think my other I also is now that I'm getting closer to an age when I'm actually able to get my hands on the money, I also want to be able to choose when I retire. I also want that choice off if I work, I really don't want to be in the situation when I cannot afford to give up my job.
Faith, I think you summed it up really nicely. Thank you so much for your time today and your candor, in sharing with us. Not just advice, but also some insights into your own pension journey. It's been really insightful. For everyone listening, Please go read Faith's blog, Much More with Less. She blogs about a lot more than pensions as well. It's fantastic. We are all certainly fans here. Thanks, Faith, so much for the time
Faith Archer: 22:10
As you can tell I am very passionate about pensions. Pensions are what are gonna pay you to have the holiday of a lifetime. And I think that's exciting.
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