The BIMTech Podcast

Episode 5 | Pensions Unpacked: Why Early is Always Better

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In this episode of The BIMTech Podcast, Matt McGuire sits down with financial advisor Al Hughson to dive into the crucial topic of pensions. Whether you're just starting your career or already established, understanding the importance of contributing to your pension early can make a significant difference in your financial future. 

Yeah. Okay. Well, I’m here today with Alistair. Hello. Hi. Thanks for coming in. Alistair is a friend of mine. But, more importantly for today, he's, a financial advisor. Who's coming in to give us a bit of, well, sort of upgrade our knowledge on what we think. You're going to feel financially enlightened by the end of this hopefully. That’ll be it. I'll know everything. Yeah. I'll be after your job. Yeah. Am I getting paid for this? No. Not at all. Yeah, so, thanks for having me on. Yeah. I was saying to the boys before, I’ve done like a very brief interview, but this is my pod debut, so thanks for having me. Thanks for the invite. I know you were saying before about how did I get into this or like how did I end up being a financial advisor. I think. I never expected to be in this position. I don't suppose you grew up, did you, thinking... No....when I get older I want to be a financial advisor. I don't think anybody does, to be honest. It's probably one of these jobs that you probably just either see an opportunity for or you get, you know, you just sort of fall into it, which I was very much in that category. I think, from, what is it like as a career and a job? I think you don't have to be the best at maths, because, you know, you don't have to be rain man and know everything. You’ve just got to have a good calculator. You've got to have a really good solar charged calculator. As long as that's charged up or your phone, you know the maths sort of, you know, is one element to it. But I think just being able to sit and talk to people because I think financial advice. I don't think it'll ever go to this robo advice that they're talking about where, you know, you’re chatting to AI and it's telling you what to do with your pension. Because no matter how good it is, there's probably always an element of, I still want to talk to somebody face to face and have a brew and tell them about what I'm worried about and things like that. Well when you’re giving up your money to somebody, you want to know who it is, don't you? Yeah, exactly. Exactly. And I think, there used to be a quarter of a million financial advisors in the UK, pre you having to have any sort of formal qualification. And then as soon as they brought in, you know, a regulation to say every adviser has got to be qualified to a minimum standards. I think they went from a quarter of a million advisers to about 20,000 in the space of a year or two, because a lot of advisors can't be bothered. You don't want an advisory who says to you the 10 to 1 at New Markets a good bet. Exactly. So, yeah, there's a massive lack of financial advisors being able to replace the amount of older financial advisors that are retiring. Because when you probably think of a financial advisor immediately, you might think of someone, you know, older, in sort of pinstripe suit and tie, very formal. And I was disappointed when you come in today and there was no pinstripe suit. You said it was dress down Tuesday. So, you know, the landscape of financial advice and pensions, which we're going to come on to, all that's changed so much in the last 20, 30 years. It used to be very straightforward, you know, you work in a company, you get a final salary pension, you retire at 60. You get that for as long as you live. There’s nothing really complex about it. It’s so much different nowadays where people have 4, 5, 6 jobs before they're even 35, and they've got all these little bits of pots of pensions everywhere, and they don't know what to do with it. They've lost the paperwork, you know, those sorts of things are the new problems that people are facing, when they're trying to manage their retirement planning and the pensions and stuff like that. I think there's like 4 billion pounds of unclaimed pension pot money. That doesn’t surprise me that. I've got to admit I'm one of them people. Really? I get a statement that comes through every so often from a different company. And I go oh, I didn't realise I had a pension with them. There won't be a massive amount. Because it'll be when I was somewhere for a short period of time. There'll be maybe 3 or 5 grand in it but, I keep thinking to myself I need to sort of bring all them together at some stage. And I guess these are the sort of things that you're here to tell us as well. Like, you can do all that sort of thing. Yeah, I think mainly just knowing where your stuff is. Like, I say to clients, you know, if you had 20, 30 grand sat in a bank account that you've forgotten about, chances are you probably wouldn't have forgotten about it. You’d know exactly where it was. You'd probably know what interest rate you getting on it. You’d know who it was with, all the rest of it. But, with a pension pot people seem to think, oh, it's just something over there that is just, I don't know what it is. I don't know what it's doing. I just know I can't have it till later. Yeah. I think because it's so far in the future, like, people just don't think about it because they think, I mean, especially when you're a lot younger and you're thinking, it’s 30 years before I can even touch that. So I'm not that bothered about it at this moment in time. Yeah, I suppose just understanding. Okay. How much of I got, how many pensions of a got, what does that give me as a sort of total pot? And then sort of looking at, you know, is it the right thing to do to consolidate? Do I have any really good benefits with these pensions that I'd forgotten about or I wasn't aware of? And I think just getting people to understand and engage with that process rather than just going, it's a pot of money, it’s over there. I'll just keep getting these letters from random companies. I don't know what it's invested in. I don't know how much I'm getting charged for it. You know, I'm not getting any advice on it. I think just having that understanding, that idea that it is your money, it’s your money with your name on it and treat it just as importantly as money that you've got sat in a cash account or a deposit account. I think that's really important. Yeah. When you say about consolidating it as well, is there charges associated with that generally because like I said, if I've got one that is only 3 or 5 grand. If I want to move that over to a different pension pot, would there be some fee for doing that? And is there a stage where it's probably not worth your while? You might as well just let it run its course and cash it in when you get to retirement. Most of these pension providers that you might have 2 or 3 small pots with generally they are set up by the employer because they're cheap and they're sort of almost a tick box for the employer. So if you've got lots of, you know, small pots knocking about, the chances are, again, I'll caveat this with each one is totally different and you'd need to check whether it's good, bad, indifferent or whatever before you do anything. But most of these small pots wouldn't cost you anything to consolidate them. Generally would be if your employer scheme offers, it's generally a good idea to have all of your money in one pot working with one investment strategy, rather than having 4, 5, 6 pots of money, all doing things very slightly differently, with no contributions going in every month, you're better off having it all in one. Having one clear defined investment strategy, as to whether you, you know, to keep it simple, low, medium or high risk. Yeah. You know, underlying investment. And you can spread it across them can’t you? You don't have to put it all in low or all in high. You can do a percentage of your pension goes into each can’t you? You can. And I suppose that's where the value of getting advice is. And I'm definitely not sort of saying this, oh, everyone come and speak to me about your pension. But the important thing to know is stocks and shares outperform any other asset class 99% of the time over any time period. So that gives you the confidence that putting all your money into stocks and shares funds, you know, if you’ve got longer than ten years until you're going to access your money. I’d just, you know, it's helping people understand not to be fearful of it. And actually that will give you better returns and better, you know, better growth on your pension pots. Yeah. Kind of leads us on to then about what you put into a pension and when you should put it in. I mean I know I was always told you put in as much as you can as early as you can, but I know you were telling me just before we sort of sat down about some statistics. I won’t put you on the spot and ask you to remember them figures off the top of your head unless you can. Well now you’ve mentioned it, now you’ve teed that up nicely I'll try and remember. So going back to you know, why you should start earlier is purely down to how compounding returns work. And what it shows is that, money that's been invested over a long period of time, quite simply, will have better growth than, you know, even a higher amount of money being put in, but only a very short space of time of investment. So trying to do my best to remember the figures that you said. To achieve, I think it was to achieve £300,000 in your pension pot at age 65. To achieve that, based on, I think it was five and a half, 6% average returns, each year. Someone who’s 25 would have to put in £250 a month, roughly to get them to that. If they did that every year until 65, someone who's 35. So you’ve got that ten year delay of basically not doing anything or thinking, oh I’ll sort that out later or, oh it's my retirement, it's ages away yet. Someone starting that journey at 35 will need to put over £550 pounds a month in. So what you doing is basically saying, right, that's not Matt’s problem today, that's Matt’s problem later on when you might have, you know, a young family at 35, you might want to be starting a business, you might want to be doing all these things that are going to cost money, you know, doing home improvements, that sort of thing. You're then asking yourself later to basically double what you need to put in just because you've decided not to start earlier, which I know is really important because especially I mean, I hate talking about the cost of living crisis, but they call it a crisis. The cost of living, as everybody knows, has gone up significantly. So I don't doubt for one second that people need or feel like they need every penny that's getting paid to them in their paycheck. But by deciding to opt out of company pension schemes is hugely detrimental to your financial well-being. Because by opting out and sort of saying that's Matt McGuire's problem in ten years time, I don't need to worry about that now. I'm living for the here and now. That's all well and good, but by opting out sooner, you’re basically causing yourself a larger problem later down the line. Even 5 or 10 years time. The other element to it is if you're opting out of a company pension scheme, you're basically saying, I don't want free money. That is pretty much exactly what you're saying, because by opting out of a company pension scheme, I mean the minimum employer contributions as it stands today for an employee is 3%, which will end up going up over time. You're basically saying you know what? I don't want your 3%. And 3% if you've got a career of ten years, you know, under your belt so far and you've opted out through that time period. You've lost out on 3% every year. Plus, the growth that, that investment would have made over that ten year period. So you're losing out twice, really. I mean, who doesn't want free money? Like you're basically saying to your employer, like, do you know what, you can hire me because I'm cheap, because I'm not going to take your free money off you. And employees are thinking, why? You know, that's fine, but you're only hurting yourself. If you actually break down what that contribution is that you're missing out on. A lot of the time it's negligible. Yeah, well, I think the thing is as well, is what the employee contributes as well comes out of their salary before tax as well. So when they're contributing 5%, it doesn't feel like 5% in their actual take home does it. Because it's before tax I try and tell them it probably would feel more like 3% to them. And because then if they put five and we match five so there’s 10% potentially going in their pension for the cost of them of 3%. Yeah. But if then they opt out, they've lost what you're saying, that 7% plus the growth on it. Yeah I think the fact that you're actually putting in more than the minimum is great because I'll tell you now the amount of clients or people that we speak to that their employer is paying the bare minimum. You know, the fact that you're paying in more for your employees is great. Like, honestly, you don't get that everywhere. Even in some of these, I’ve got clients that work in big companies that are like, nah we might give you an extra percent because you've asked for it. Not just this is the standard, you want to help yourself. We're going to help you as well. That's great. And like you said, you’re losing out on that like, honestly, when you look at what that could amount to over a 25-30 year working career at a place, you know, it's huge. Like it makes a difference between having a really crap retirement and having a decent retirement where you can, you know, oh can we afford to go out for a meal? Can we afford this holiday? Things like that. You don't want that. Well I think what's sad is when you see some people retire and because they retire, they've got to change their lifestyle because they can't afford to go on holidays anymore and they can’t afford things like that. But what you need to do, like what you’re saying now, is plan early for that stage of your life, and know that you’re going to have the same standard of living. I think that... Or possibly even better. Yeah. I mean, I think that, you know, because we live in this sort of here and now sort of society where we were talking before about when you go on Amazon or any other website, the first thing you do is filter for how quick can I get it. Not how much it costs. So I think that people are wanting immediacy, they’d rather have something now than more later on just shows you that sort of way that a lot of society thinks nowadays. And I think, you know, looking at even if you're in your 20s and you think, do you know what? I'm really not interested. I know Al, what you're saying is gospel and you're great and everything and you know everything, and I'm listening to you, but I'm still not interested. I think that even if you said, look, I'm just going to save the bare minimum for now, and I'm just going to keep saving. I'm going to take my employee contributions and just get into the habit of that's what it is. It's just another tax, if you like. You’re taxing yourself for later. You know, even if you do that without actually considering what your retirement’s going to look like. I'm 35 and I look 40, but I’m 35. But even me thinking, now I'm, you know, if I'm 25 years away from retirement, I've no idea what that's going to look like. I don't know what I'm going to want or need when I'm 60, or you know how much the cost of living is going to be at that point. All I can do at this stage is be putting away a reasonable level of contributions knowing that's building up. And then when I get into my 40s or early 50s and you start to, you know, you become more aware of actually I'm now closer to the end of my career than I was to the start of my career. Running through those numbers becomes much more important, and actually understanding what that's going to give you when you get to retirement age. I think that's really, really important. Really important for people. Like Australia, great example this, because Australia started doing auto enrollment. I think it was maybe ten years before the UK. And now when we look at the average pension pot of a UK working individual versus an Australian citizen. The difference, I think the average UK pension pot is about 40 grand, which is peanuts. In retirement that would give you about 1,600 pounds a year, which is nothing okay. The average Australian pension pot, just because they started this process ten years earlier is over 100,000. So I think just looking at that as a comparator, we should be aiming to be doing what they're doing and their minimum contributions over there is 11% soon to be going to 12%. So the fact that you are giving or your employees are putting 10% in means that you’re sort of ahead of the game in that respect. So yeah, well done Matt. I'll take that! Yeah. If you go back even like, I don't know, 30, 40 years, probably 30 years, you know, your average life expectancy might be early 70s. Right. It's now, I think the average life expectancy for a man is 81 years. So if you're starting paying state pension out at 67, 68, that's ten, maybe 15 years that you're paying that out. Back in the day when people started getting their old age pension at 60 and they're only living till 68, 69 because of the working conditions, you know, developments in like health and social, developments in medicine, that wasn't as much of a burden on the government and on the taxpayer. Whereas now there's more people living longer in retirement. So that money's got to come from somewhere, whether we like it or not. That's why the government and, you know, the government is wanting people to take more ownership of their retirement. If you don't want to retire at 68, 69, 70 for when the state pension kicks in for us younger folk. If you don't want to work til you’re 70, you've got to start putting some money aside now so you can retire earlier when the state decides that you can retire. Yeah. Because ultimately that's what you’re waiting for. You’re waiting for the state to tell you when you can retire. So your private pension at the minute you can take out 55 can't you? Yeah. Will that go up as well do you think? So that age tracks behind a few elements of this. So first of all it's average life expectancy for a man or a woman. It’ll be no surprise to you that women live longer than men. I’m not going to say anything. It starts from average life expectancy. Okay. That then gives the steer on what the government sets as to when you can access your state pension, because obviously there's a limit to how much they can afford to be paying out through that course of average-ness. And then working back from that again is when you can access your private pensions. At the moment it’s 55. In I'm going to say 2028 might be 2026 or 2028. One of those two, it's moving to 57 before you can access it. In another ten years that might be, you know, 58, 59. And again, it's all down to how long we're living for. They don't want people to access the pension pots too early because if they deplete their pension pots too early and they live till they’re 90, 100, the problem there is that they're going to become solely reliant back on the welfare, you know, and back on the government, back on taxpayers again when they get into that latter stage of retirement. They want people to take ownership of their retirement by saving into their own pension pots. Having more control. It gives you more control, doesn't it? You're not waiting to be dictated to when you can retire. Yeah. You're taking that ownership yourself and saying, this is when I want to retire, because I've made a plan and I've made sufficient provisions to give me a decent retirement that I want. Yeah. And the other thing as well, if you've got your own private pension, you've got options with it haven’t you? When you get to retirement age, you can take, is it 25% of it tax free in a lump sum? So if there's something you've always wanted. I don't know whether it's a fancy car. Boat. Yeah, a cruise round the world or whatever it is, you can take that lump sum tax free. Yeah. And use that. Yeah. Exactly right. Yeah so as it stands you get 25% tax free cash, up to a certain limit. They used to have a lifetime allowance, how much you could save into your pension which has been scrapped. But I won't go into the details of that. But yeah, you get 25% of your overall pot you could take as tax free cash. Yeah. Okay. Again, giving you that luxury of, all right, we're going to do a nice thing or we're going to do this and that. Or I'm going to use that money to help my kids get on the property ladder. Yeah. Or I want to use it for whatever you want to use for. But then you think, all right, well that's great. That's 25%. What about the other 75%? The other 75% is taxable at your marginal rate. Yeah. So what I mean by that is everybody in the UK at the moment can earn£12,570 without paying tax. Anything above that between that and 50,000 is taxed at 20%. So if you say you wanted, you know, 15 grand a year out of your private pension because that's what, you know, it can afford to sustain. You've got 12,500 already tax free. So you're actually paying tax on 2500 of it. Yeah. Do you pay any NI(National Insurance) on pension? No. Right. No NI (National Insurance) on pension. But to help clients understand the taxation of their pension. We just say look at it like PAYE minus obviously paying, you know, national insurance contributions on it. Because that's how it’s taxed when we're paying clients out their monthly or annual income payments. It's taxed at source by HMRC. You know they've got the control over that. But there's still ways in which you can be cute with it. Like, you know, if you didn't need to take your, you know, 25% tax free cash, you could say, all right, well, I'm going to take my 12,500 of tax free income, or taxed at 0%. I'm going to take that. And then I'm going to take another seven and a half thousand pounds of tax free cash every year. So you're actually giving yourself 20 grand a year of totally, you know, tax free income. Yeah. Which is great. So what you're saying is that 25%, if you don't take it all in the first year, you can spread it over multiple years. Yeah. You don't have to take it in the first year. So you can take 5% for five years or something like that if you wanted. Yeah. That's right. Like you know, we don't have many clients that... we always ask the question, should I take my 25% tax free cash? We say what do you need it for? And they say well nothing. So why would you want to just have that sat in the bank earning, you know, a couple of percent in a savings account or leave that money invested. It's still growing throughout your retirement and all you're doing is just taking chunks of tax free cash as and when you need it, whether that's for you know, your annual holiday, whether that's, you know, to give you that, you know, regular income that you need, you know, there's all sorts of things that you can do with it to be cute with it and minimise your tax when it's coming out the other side. Yeah. That’s all good. And what about people who say, well, rather than put money into a pension, I’d rather put it into property and invest it myself in property or something, because everyone always goes, one thing that never goes down is property. As long as you keep your money in property, it will always go up. And if you could buy somewhere and whether you did it on like one of these landlord mortgages, you get somebody in who's paying rent in it, they're paying the mortgage whilst you're still earning and you're not taking anything out except when you get to retirement age you could have a property that's mortgage free and that rent that you then get in becomes your pension, for example. Yeah. We get asked this all the time as well. Is property a good investment? I've got absolutely no issue with people that have got that sort of passion for property that is they either see it as a, you know, a side career or you do it as a part time thing. All they do it, you know, alongside a full time job and things. What you need to think about I suppose is before you decide that property is the one for you, that you're going to use that strategy as a retirement plan. Make sure that you've worked out the tax situation on that because, you know, it's all great saying, well, that's going to give me a 1,000 pound a month. Yeah but what have you already spent? How much is the interest? What's the capital gains tax? What's the income tax on it? So I think it's making sure you understand all that which, you know, if you go speak to an accountant they will be able to give you that. Yeah. Give you a breakdown of that. Obviously you have to pay. But it'll give you a breakdown of whether that's a good plan or not. It's all interesting stuff. Yeah? Well... You're going to go Rightmove in a minute aren’t you. No it's good, it's good to know. I think I've learned a few things today. Yeah. Good I’m glad. I feel like I've talked loads. Well, that’s the idea of these, I just sit here ask the odd question, then just sit and listen. Yeah. Yeah. I don’t have to do too much. Yeah. But one of the things that I just thought was funny, when you said earlier, you said about, when you were growing up, you didn't think, yeah, I want to be a financial advisor or anything. As you were saying it, it just reminded me of Jamie Carragher talking to, Gary Neville. And he said, growing up, he says nobody ever says, I want to be a fullback when they go on about being a footballer. It’s normally a fullback or a goalkeeper isn’t it. But yeah, I suppose going back to that, nobody tells us about money really when you're going through high school, college, university. Nobody tells you about what is a mortgage, like, how does a mortgage work. What is a you know, what does APR mean on a credit card? What happens if you take an interest free overdraft out from the bank while are you studying? What happens if you can't repay it? How does credit work? You know, how do investments work? How do pensions work? Nobody teaches us this stuff. And it's. You know what? Do you think it should be a subject at school then? Do you think there should be something that teaches... Absolutely....everybody about that. I mean, I would have. Benefited from it. Every single person would have benefited. Yeah. If you’d have had to do some sort of, even if it's basic financial education, just knowing how credit works. Yeah. I remember when our kids were at school and we should have probably took the leaf out of his book, but the headmaster at the school, at the primary school, he was telling us what he does with his own kids is every month he gives them 100 pound each. But then he makes them out of that. Pay him rent back, contribute to bills, and he tells them what they have to contribute each month and that to get them used to dealing with money and where your money goes and everything. And at the time I remember him telling us and we were like, wow, that's a great idea. Then went home and did nothing about it ourselves. Well, that's the thing. Like, you know, we speak to parents and grandparents that know nothing about pensions. They come to us with all this paperwork and say, I've got all this. I've no idea what to do with it or what I'm doing with it. So how are we expecting people that are parents and grandparents to be able to relay knowledge down to children and grandchildren that they don't have, and no one's going to do it for us, it’s our responsibility to get clued up and go and get advice, or go and learn, you know? You know, even just going on YouTube like this. You put in how does compound interest work or how do pensions work or what is a SIP? Is that one of the, is it in the top ten of searched things on YouTube that? It’s unlikely but. Well you know it's all there, like there's loads of like great videos and like little calculators and things that you can use, you know, and if you're not ready to sort of go and get some financial advice, there's loads of stuff that you can get clued up on that. But yeah, I think, you know, financial education is a big thing. And just trying to help people understand what they do now has a huge impact on what they might get at retirement or what they might have in 10, 20, 30 years just from compound interest or compound growth. It's massive. So, yeah, I hope that's been useful. No, that's been great that. Yeah. Cheers for that Ali. You’re welcome. Thanks a lot. Thank you very much. Cheers.