Hey, hey, it's Kia and you're listening to A Little Bit Richer. Pensions - we all know it's good to save into one, but it's so tempting to put it off until retirement's closer. It's understandable, but if you're wanting to get A Little Bit Richer, you've got to think about your long-term financial journey too. Let's get into this more. Today, I'm talking to Kim Brown, Legal &; General's Pension Scheme Director. She's
going to explain more about workplace pensions. But just before we get into this, it's worth saying that you're likely to have a workplace pension if you're working for a company. If you're working for yourself, you can save into a personal pension and we'll cover this topic in a later episode. Okay, Kim, let's break it down. What's the difference between a state pension and your own pension savings, and why is it important to have both?
So the state pension's paid for by the government when you reach, currently, age 66. Research we've done on 22 to 32 year old shows that 22% of that group are looking to rely solely on their state pension at retirement. Now, the state pension is 10, 000 pounds a year, provided you've
had 35 years or more in national insurance contributions. So provided you're willing to wait until age 66 to start and provided 10, 000 sounds enough for you to live on,
then the state pension should give you that basics. If you think that actually that isn't quite sufficient for your needs or what you picture your retirement to be, you might want to look at what you can save for additionally through things like workplace or personal pensions.
Okay, that's brilliant. So let's touch on workplace pensions then. So how exactly do those work?
So if you are 22 years of age or older and earning 10,000 pounds a year, your employer will automatically put you into a workplace pension. So we call that automatic enrollment. You can choose to join even if you don't meet that criteria and ask to be automatically enrolled. So why, I guess, workplace pensions and I think there's two big selling points
of workplace pensions. In addition to the already great thing you're doing, which is putting money away for retirement, you get the benefit of employer contributions into your pension scheme. So currently, your employer has to pay 3% of your salary into your pension for you each year on your
behalf. You also get money from the government. So if you're a basic taxpayer and you want to put a hundred pound a month into your pension, only 80 quid will be taken from your salary. The other 20 pound is paid for by the government under what's called tax
relief. So the difference I think with pensions above things like ISAs, which are other good saving vehicles, is that two key additional sort of free money for you as an individual.
I think when it comes to workplace pensions, let's just dive into employee contributions a little bit more I think. So when you contribute let's just say 5% to your pension, how does that work from your employer, their contribution into it?
Yeah, so if you're paying 5%, which is the AE minimum, your employer pays 3% in your salary. A number of employers will pay additional amounts. So you can think about increasing your contribution and seeing if your employer will match that.
So that's just extra money from your employer, almost like, I think the way I like to see it is like a deferred pay rise or deferred money that you're getting from your employer that you're going to have, maybe not right now into your bank account, but you'll have it at later date, I think is a good way to look at it.
Yeah, I love that. That's the key thing about workplace pensions. You've said it better than me. Free money from your employer and free money from the government a s tax relief.
I mean, what's better than free money? Right? What's better than that? Right, so as we've mentioned, pensions are important, however, most people don't start taking notice of their pension and their pension savings until they get older. So what's the best thing someone who's younger and listening can do to help keep track and remain on track when it comes to their pension savings?
So I think it's about saving as early as you can, as much as you can. If you start saving in your early twenties and even in your early thirties, you are benefiting from the magic of compounding. So that can make a huge difference on the ultimate pension that you'll end up with. So if I give you an example of how that works, I'm going to use our names.
Go for it.
So if we've got a Kia and a Kim.
Yes.
If Kia and her employer together are contributing to 2, 000 pounds a year to her pension and has done so from the age of 19 to 30, we project that that will give her an outcome on retirement of 243, 000.
That's a good amount.
That's an all right amount.
Yeah.
That's a good amount.
I think Kia's happy with that.
If you take Kim, similar details, her and employer pay in 2, 000 pound a year, but she starts at 30, but she saves all the way up to 65. So Kim's been saving for 35 years as opposed to Kia's 11, but her outcomes is expected to be 10,000 pounds less so 236, 000 at retirement. So that just shows you that impact of starting early and what the compounding does to your eventual pension outcome.
I think that's a key thing. I think compounding is often this word that is mixed up with investing isn't really explained. I think the way you've put it is so useful to everyone that the earlier you start, the more of an impact it can have and it almost makes it a bit easier to keep going in your savings and stay on track with your savings, I think.
Exactly that. And your example earlier of free money, if we come back to that, that 2, 000 pound a year, Kia and Kim, they've both only paid a thousand each. The additional 250 from the government top up the tax relief and the 750 from the employer. So you're doubling the money and by investing it earlier, it's also then working for you.
We love that, don't we? We love that, we do. So let's come to where we are right now. So right now, money is unfortunately really tight and it's easy to be tempted to reduce how much people save into their pensions. I know it's definitely a toss up. Do you take the money now or do you still keep saving the amount that
you have been? So what would you say to someone who's considering reducing the amount that they contribute to their pension?
I think everyone is going to have different circumstances and I think my key thing would be make sure it's a considered ask, so understand what you'd be getting in your pocket today and that point I just made on
what that could look like over time. Now, if you need your money in your pocket today, you need your money in your pocket today, but it is a good deal and so you need to be considering what it could be impacting you in the future.
I think that's a really good point. I think it's important to always just sit down and review your finances. And like you said, see if you reduce it by a certain amount, how much does that leave you with, if it's something that can help you or should you keep your pension contributions the same amount. It is a very unique decision to make and it's one that should be well thought through as you said. So I completely
agree with you. Now, let's look on the flip side. Is it worth, Kim, paying more into your pension if you have the option?
Yeah, so I think many of us dream about what that retirement could look like. We talk about every day is a weekend when you retire, but I don't know about you, but weekends can be quite expensive.
Oh, they can. They can.
For me.
Depending on what you do, they can.
So the research I referred to at the start, the expectations of 22 to 32 year olds and many are looking to retire age 60, and the earlier you retire, the more your pension has to do for you, the longer you're going to be relying on it. So there's things you can do as you go. So if you're getting a pay increase, think about is this a part of that you can add to your pension contributions, that you won't perhaps miss in your pocket yet today, but
can go and look for saving for your future. Same with bonuses, part or some or all of your bonus can go into your pension and that'll be tax- free. I'd also think about it in particular life events. So career breaks can have a huge impact on your pension outcomes. We experience what we call the gender pensions gap, which is that women are walking away at retirement with half
the pension pot of men. Some of the factors of that include cost of childcare, breaks for maternity, the increased likelihood of being a carer and also potentially walking away from work earlier due to symptoms of menopause. So I think it's about understanding and planning for particular life events, whether that's maternity or paternity leave. I know as a mum of a two- year- old, it's not top of your list, pensions, when you're doing some of these big things, but it should be on your list.
Just touching on what you said there then, obviously there is that pensions gap. So if we're speaking directly to women then, what can women do to almost help their pension contributions and their savings?
So I think there's a lot as individuals women can do. So they can plan, they can continue to pay maternity contribution, they can talk to their partner at a household level. The reason we have gender pension gaps or in fact pension gaps across a number of different minority criteria
is multifaceted. So we need solutions across legislative change, we need employer policy review all in the support of producing more equality at pension outcomes.
I completely agree and I think it's important for people to know the different ways that they can contribute, especially women, and even the fact that your partner can contribute on your behalf. I think a lot of people don't realize that and there's different things that can help boost those savings even when you just take time off and you do have other responsibilities that require you and may not
be your pension so much. So I want to ask you a question as well. When it comes to pensions, a lot of people don't know how much they should have in their savings. What does that look like? As you mentioned in the beginning, the state pension is around
10,000 pounds per year. How can someone, even if it's just like an estimate, how can someone get a good understanding of how much they should aim to have in their pension pot?
There are different tools out there that can help you look at that. Most pension providers will have things like calculators online. You can look at what sort of age you're looking at, the type of experience you want to have at retirement. So whether that looks like one holiday a year, whether that looks like a holiday in the UK
or abroad, the type of lifestyle you're looking at. And then it'll help you calculate what you need to be contributing today and you can consider if that's sufficient, based on who you are, what wider savings you have and what kind of retirement you're looking for.
That's really useful. Have a look at pension calculators, have a look at some of the stats to kind of give you a good baseline and guideline for how much you should have saved. Love that. So Kim, pensions are also a form of investment and I know when you think of it like that, sometimes it can be so overwhelming because
the world of investing just seems so scary. So what is something that our listeners should consider on that side when it comes to pensions?
So I think that's a really good point. So pensions, like any investment, can go up and down and there is the risk that you could end up getting less than you put in. So that's something to be mindful of, but I don't think because it's investing people should just
focus on the more daunting aspects of investment. Investment, I think, is really exciting and really interesting and you as a person saving to a pension, your contributions are being invested and you can choose to make decisions about that if you want to. If you want to move away from the fund you're being put into, you can pick a fund that's higher risk, but potentially with higher reward
if that's something you're interested. You can also pick funds suited to your particular beliefs, whether that's religious beliefs or looking at funds that are more focused on ethical, responsible, sustainable investing.
I think that's great. I think it's good to be able to know that you can adapt things like your pension to suit your morals and your views and ultimately the risks that you want to save your money with, whether you want to be really high risk, like you said, maybe you're someone who's younger, for example. I know I'm a high risk person, I don't mind, let's go for it. Or you want to be low risk. It's completely up
to you and it's tailored to you. So I think that's a great point to make as well. Okay, Kim, we're going to wrap things up now. What are the three quick things that you can recommend someone does if they're wanting to use their pension to get a little bit richer?
So I think it's about keeping track of your pension. We don't have jobs for lives anymore. When you are moving jobs, keep track, you can also pull those pots together, that's your preference, under what we call consolidation. It's about looking at all those things we've talked about, about ways to get additional money in. So talk to your employer, see if there is contribution matching, if you can put any additional aside,
particularly in earlier years. And then I think it's about saving as much as you can for as early as you can so that your pension can start working for you.
Amazing. Kim, this has been such a great episode to learn more about pensions. And hopefully everyone listening knows that we can start early and get those pension savings rolling. We've been looking ahead to retirement, but let's bring things back into the present day a bit more. There's so many hacks to make sure you're getting the most out of working life, and that's what the next episode's all about, the
world of workplace benefits. And it's not just work from home and free lunches, there's so much more. That's out next week. But while you wait, if this stuff is working for you, then hit follow, tell your friends and come back next time. Until then, have a good week and go stick some money in your pension.