Hello, I'm Shirley Ballas and welcome to Rewirement, the retirement podcast from Legal &; General. We'd always planned to launch our series today, but whilst we've been recording, just like everyone else, we've had to find new ways of doing things with the coronavirus outbreak. In our new series, we'll still be exploring what it means to retire in today's world and how this can be an opportunity to reset, reinvent
and rewire. Planning for retirement is a longterm game with great rewards at the end of it. And making the move from work to retirement is not something anyone likes to do with a bump. But for many, the current
coronavirus pandemic has caused uncertainty and raised unexpected questions. There have been plenty of headlines about changes in the stock market and pension values, but it's time to cut through the worry and take a measured look at what really is going on. I want to help you feel in control of the future and put your mind and mine at
rest. So, we've made this special episode to help you deal with the urgent questions many of you are asking. I'm joined by the experts from Legal &; General. We have Chris Knight, CEO of retail retirement, and Sarah McLeish CEO of financial advice. And Holly Mackay of Boring Money is here to make sense of it all too. How are you all adapting to the situation?
As best we can, I think.
I've got two young children in the house, it's the homeschooling that's driving me nuts.
Yep. Same here. I have a five and a seven year old at home. So, the school are doing a brilliant job, but like every other family you just have to do your best and multitasking across teaching, cleaning, running businesses. And I've started up a hairdressing salon now, as well. So, COVID Cuts, we call it.
Well, it can't last forever. Chris and Sarah, before we get into all the detail. What's your view to anyone looking at a change in their pension right now?
Oh, Shirley, look, this Coronavirus has filled our life with a lot of uncertainty and angst. People might have looked at their pension funds and seen a bit of a drop. And that's not a fun thing to have to do, obviously not to have to see. You might have quite a few different types of pension arrangements and you probably need to get them all together in one place, and have a look, and see what they really are.
Get all the facts because some pensions come with really valuable, important guarantees, for example. And you should really think through and take advice, get yourself informed on what to do with those, especially. You don't have to necessarily do anything. I'm not saying stop, but take your time. Think about what's important to you in your life and get yourself
informed before you act. And as we always say, you must shop around to get the best deal for yourself.
Well, I agree with Chris. I mean, pensions and most investments for that matter, they're designed for the long term for a marathon, not a sprint. So, if you can postpone making any big decisions about your pension savings, then that's got to be a good thing. But if you do need to access your... understand your options or access your pension more urgently, then I'd really recommend speaking to
a financial advisor. If you don't have one, ask your friends, if anyone can recommend one or failing that, visit unbiased. co. uk, which is a website that shows all of the regulated advisors in your local area.
We're being asked lots of questions around retirement planning at the moment. I'm going to sort these questions so we can talk about everyone's different needs. We've got people asking questions who are post retirement, people just about to retire, and people who are a little way off. Let's quickly explain some of the terms we're going to be discussing today. Chris, what are dividends, drawdowns, and annuities?
Thanks, Shirley. These things can all be a bit confusing to get separated out in one's mind. Now look, a dividend is generally an income that you receive if you're the owner of a share in a company. Equity, if you like. And most companies pay their dividends out once or twice a year, and most companies aim most of the time to maintain
those dividends or even grow them over time. But, they're not guaranteed and the dividends can be cut or even, or even stopped. And we've seen quite a lot of that from companies in this current crisis. Now, drawdown, that's a bit different. That's when you create income for yourself
by drawing down money from your pension fund. Usually, that's when you're in retirement and its great flexibility because you can draw down how much you want when you want. But, of course, obviously once you've drawn it, once it's gone, it's gone. With drawdown, usually sort of benefit or peril from the ups and downs of the market. Obviously
when it's up, it's good and it feels good. But, when it falls, then the amount that you can take or you might be able to take as future income from that pot as a future drawdown income can reduce, as well. Annuity's usually an income that you buy from an insurance company and the most common type of annuity is one that pays you every month or every year for as long as you live. It's not flexible, but
it is guaranteed. It's guaranteed both by insurance company itself, and there's a statutory backup guarantee behind that, as well. You can buy an annuity that pays an income to your family, your loved ones, even after you've passed away. And you can also get what we call fixed term annuities. That's a product which pays an income for a period of time, and then maybe a lump sum at the end.
That is a bit more flexible with respect to sort of encashment options. Then, you can change your mind, do something else with the money that you get at the end of the end. So, hopefully, that's a good separation of those three different, important concepts.
Okay. Sarah, what are lifetime mortgages?
Yes. So, lifetime mortgages a much misunderstood term. Lifetime mortgages are a type of equity release. So, these are products that allow you to release tax- free cash or equity from your home without having to move out of it. So, you can take that cash or that's equity as one big lump sum, or you can take it as a series of lump sums as and when it suits
you. So, you may wish to take one lump sum now to buy a new car, another lump sum in two or three years time to do your kitchen, and so on. With some of the products now on the market, you can also take that cash or equity as a monthly income. So, you could top up your monthly
income by say 150 pounds, 200 pounds a month. These lifetime mortgages or activity schemes, they're usually repaid from the sale of your home after the last borrower or the last member of a couple or a household passes away
or moves into a care home. At that point, the money that is owed is essentially the toasted amounts of equity that you've released plus any interest that you've built up or rolled up, as we say over the lifetime of that loan. These products, the good thing about them is that they now come with a very broad range of safeguards and they have done in fact, for many years. One of these is something called the No- Negative
Equity Guarantee. That means that you can never owe more money than the value of your property.
What's just... For my interest, what's the percentage that they charge you for new equity release? So, if you take money out your house, what do you... What's generally the percentage you're paying back?
It varies. It varies hugely. The interest rates can vary according to your property value, the amount of money that you're trying to release from it, which we call the loan to value ratio. On average, interest rates at the moment can be anywhere between three and 5%. So, not dissimilar from kind a of standard residential mortgage.
Okay. Thank you. Okay. That's the jargon busted. Let's start with a few general questions. Holly, you're the CEO of the financial website, Boring Money. You must be getting a lot of questions right now. If someone is strapped for cash because lockdown has resulted in them losing work, what should they prioritize first?
Yeah, surely. I mean, we're getting loads of questions and there's an unprecedented use of the word unprecedented, at the moment. Really, at the risk of stating the bleeding obvious, if someone's lost their job and they're strapped for cash, the first thing to look at is cutting costs. There are some practical things we can all do. Switching utility bills can save a couple of hundred pounds a year,
checking your direct debits and your standing orders. These can really rack up and accumulate. So, go in and make sure you need all of those. Things like insurance renewals, don't just take the first deal of your offer to shop around. The next thing is debt. You know, debt... I think my analogy is it can be a bit like fat. You can have good debt and you can
have bad debt. The bad debt, the sort of saturated fat of the financial world are things like payday loans, credit cards, store cards. Those are typically things with really high interest rates and we have to focus on paying those off first. You can explore transferring a credit card on a nought percent plan, transferring that over. The last
thing is obviously mortgage holidays. There are some many sort of mortgage providers willing to talk to people and postpone or delay mortgage payments. So, those are the sort of most obvious areas I'd start.
Just learned a lot there. Should someone in that position stop paying into their pension for a while?
They could. I mean, these are odd time. Normally, Shirley, I'd almost never suggest someone stops paying into the pension. Pensions are confusing and they're full of jargon, but actually, what a pension gives you is some free money. That doesn't always come across. If you're a basic rate tax payer and you stick 80 pounds into a pension, the government will top that up by 20 pounds. This is
sort of quite often not so well understood. If you're a higher rate taxpayer, it can be even more. So, I think turning your back on a pension, just because it's full of jargon and it could feel a long time away, is quite often a bad move. What I would say though, is we have to be practical. We
can only spend the money we have coming in. If, as I've mentioned before, there is that debt lurking, those bad debts, those expensive debts, then for heaven sakes, we all have to prioritize getting rid of those first. So, normally, I'd hang on to the pension because it does give you a really good way to turbocharge your savings. But, if there is expensive debt, then we have to get rid of that first.
What's going on with company pension schemes when employees are furloughed?
Yeah, this is another sort of confusing area, but the bottom line is, if you've been furloughed, your boss still has to pay your national insurance contributions and your pension contributions. Now, at the moment, if you've got a workplace pension, the law says that your employer has to pay
3% on, what's called your qualifying earnings. So, just to give you an indicator, if you're earning 30, 000 pounds a year, then your boss will be paying an about 60 pounds a month for you. So, do check it out, but it's really important that people know that they are still entitled for those pension payments even if they've been furloughed.
As the stock market has gone down, is now a good time for people to be putting more into their pension pot if they can afford to?
Yeah, this one's really counter intuitive. It feels frightening at the moment, but I always think when the daily mail splashes the headlines out there about stock markets crashing, it's actually a really good time to think about investing or to pay more into your pension. Now, it depends on timing, as always. I wouldn't say that to someone in their nineties, they have very different timeframes to younger people.
But, my analogy here is, when we're investing in things for the long term, when do we think about buying them? So, if you're thinking about making an investment for your home... I kind of like (inaudible) as a cookware. It's really lovely, but it's horrendously expensive. Do you buy it when it's full price or do you wait until January and buy it when it's in the sale? In a way, that's how I think about the stock
market at the moment. There's some really brilliant brands out there that will recover from this things will kind of come back to normal, and now is a chance to sort of invest more in your pension, or your ices, and get access to those investments when they're on sale. So, don't necessarily freak out when you see sort of
headlines about lower stock markets. It can be a great time to access fantastic companies at lower prices.
Let's bring in Chris and Sarah with a few question for those people who are approaching retirement age. Chris, for someone who is planning on retiring next year, should they be putting this off if the value of their pension fund has fallen?
Well, Shirley, I think there's perhaps two aspects of this. The one is when people should stop working and retiring, and the other one is when they might want to access their pension funds. So, on the first one, I know lots of people have been having mixed emotions about wanting to carry on. I've heard people who were intending never to retire, have decided, " No, actually I've had enough of this. I want to
retire." For many people, working part time can be a good option, and we can see lots of more people doing this. You can help boost your pension pot. You help some money going further. You're not spending so much if you're still working, so that can really work for some people. So the second part is when to access your pension pot. It is scary when you see the
headlines in the papers. People should just check their pension pots because they may not have fallen just as much as they fear. Especially, if they've been in a life stage, or a lifecycle fund where they would have been in safer assets and not just in inequity. So, people have lots of options, and they just have to give themselves some time and space to consider those options before acting.
With all this uncertainty, would buying an annuity be a good or bad option at the moment?
Annuities can offer people real security and certain uncertainty in these times, which is obviously very valuable. I think there's often a misconception here. You don't have to take all your pension money and buy an annuity. You might just take a part of it and use that to generate income
that sort of meets your essential spending requirements. Once you've done that, of course, you've met your essential spending requirements, you can be a bit sort of freer and easier with the money that you have left. We always say to people that they must shop around to make sure
they get the best deal. The other thing that people perhaps don't know is that if you're not in such great health, then you can actually get a much better deal from an annuity provider and much higher level of income than if you are very healthy. Some people think it's kind of the other way around, but for annuities, that's
how it works. So, particularly, it's important when you consider buying an annuity, you think about your health and you make sure you tell your advisor and insurance provider about
that so you can actually get a great deal. So, I think annuities, be a lifetime annuities, the rest of your life, or fixed term annuities for a period of time, they can be a really good option for at least part of your money if you shop around and make sure you get the best deal for yourself.
Sarah, with returns on retirement plans being low at the moment, wouldn't it be better to take your pension in cash and stick it in the bank?
Well, Shirley, as Chris said earlier, when markets are uncertain, there's a huge temptation to switch your money into cash. That's a very, very human reaction, but of course, savings deposit rates are at an all time low at the moment with the bank of England interest rates being at this
new level. And more importantly, there is, as we said earlier, a risk that you then lock in any potential losses that at the moment only really exist on paper or on a computer screen. If you do lock in those losses, then you've forgotten the opportunity to allow your investments any time to recover when markets go back up as they eventually will. As we said earlier, pensions are
designed for the long term. They are designed as a long term investment, but if you do need to take money from your pension, if you do need to make that decision more urgently, then one thing I would say is it's really important to be up to speed with the tax rules on withdrawing money from a pension. As most of us know, pensions allow you to take up
to 25% of your pension pot tax- free. So, if you have a pension pots of a hundred thousand pounds, say, you can take 25, 000 pounds of that with no tax bill whatsoever, but the remaining 75,000 will be subject to tax at what we call your highest marginal rate. So, that may be 20% if you're a basic taxpayer, 40% or even 45%, the numbers are slightly different in
Scotland, 21, 41 and 46%. So, if you were to take a large amount or even the whole amounts of that pension pot, then you could face a much higher tax bill than if you simply took smaller amounts over a longer period. So, as always, really important to take advice and to understand those tax implications.
That's interesting. 25% tax free, but on the other 75%, you're taxed at whatever bracket you're at right now. Right? So, if I'm in a high tax bracket time, I have to pay that tax. So, that comes off your pension... Interesting.
Absolutely. If you took you... If you did have a hundred thousand pounds and you took it all in one go, then that could push you into a higher tax bracket than you've potentially ever been in before if you've always been a basic rate tax payer. So, quite a lot to think about and lots of great free sources of information out there, like pensions wise that will explain carefully.
Boring Money, as well.
Boring Money, of course, of course.
Sarah, if someone is in say the early sixties and has seen their income reduced due to the COVID- 19 situation, and they now think they won't be able to pay their mortgage off before they retire, is there anything they can do other than sell?
Well, Shirley, what I would say to anybody who does find themselves in that situation, your first port of call should be your current mortgage provider. So, you will have seen in the news that mortgage providers are being asked by the government to provide mortgage payment holidays. So, speak to your mortgage provider, understand what relief is available to you
before you do anything else. The challenge, of course, with downsizing or selling up at the moment is, of course, that the housing market has grown to something of halt. It will, of course, come back. But, the timeline for buying and selling houses at the moment has extended considerably.
So, if you need to... if you are in that situation, if moving out isn't an option for you at the moment, if you aren't able to access some form of relief from your mortgage provider, then of course, equity release could be an option to consider. There are also now some active release products on the markets where you can pay off the interest on these loans every month so
that it doesn't build up over time. So, it behaves rather than like a traditional mortgage product, but as the term lifetime mortgage suggests, these products are designed for a lifetime. They're designed for the long term. So, they should never be seen as short term fixes or ways of
getting yourself out of a short term problem. They do require really careful consideration and they should always be taken alongside expert advice.
All right, let's talk about older homeowners. Where do you stand if we're planning on downsizing? The housing market is pretty much frozen at the moment, so these people can't move anytime soon.
Again, Shirley, as we said with pensions, if you can ride this out, if you can wait, if you can postpone that big decision about downsizing, then that's got to be the best thing to do. So, try and ride this out, wait until the housing market recovers, and if you do want to downsize, then try and postpone that decision if you possibly can.
Now, moving onto some questions from people who have already retired. If someone is drawing their pension income through an investment portfolio, their income will be affected as shares and dividends have fallen. Do people need to revisit their plans and the income they are taking from their pension pot?
Yes, Shirley. Now is absolutely the time to revisit those retirement plans, but perhaps not in the way that you think. What we often see is that in times of uncertainty, people draw more income from the pension drawdown fund because they're seeing their investments fluctuates. In fact, they should actually be doing the opposite. As we said earlier, it's really important to allow your investments time to recover, to
avoid locking in some of those losses. As I also said before, it's so important at this time to take really good advice. If you don't have an advisor, as I said, do you go to unbias. co. uk to find a regulated advisor in your local area.
It makes me feel really grateful for my financial advisor, by the way. Learning so much. Okay.
Absolutely.
Holly, anything you'd like to add there?
I think the bottom line is at the moment, if you can avoid it, try not to sell, try not to take money out of your pension. Is there any other cash you have that you can use? Can you use your state pension? Is there any other rental income? Anything down the back of the sofa? Just anything you can do to try and not sell at the moment when prices are at rock bottom, because all you're doing then
is locking in losses. So, try and sit tight and look to other income sources if you possibly can.
Now, let's talk about people who are retired and bought an annuity with their pension funds. A lot of people choose this option because they want the security of a regular income, but is this likely to be affected too? Chris, what do you think?
Well, Shirley, this is quite an easy one to answer. So, if you have an annuity and you have an income coming through, that is guaranteed, so that is the benefit. So, it doesn't matter about the performance of the stock market, or the performance of financial markets, or the economy, that money is guaranteed. That's why we think, for some people, there are great options in times of uncertainty like these.
Nobody likes to think the worst, but some people have asked what happens to pension payments from an annuity if they die?
Well, that's a great question. I agree. It's not much of a fun topic to talk about, is it? I think people need to check with their providers. So, if you're receiving the annuity that's come from a defined benefits, maybe a company scheme, a pension scheme, often these come with a
what's called spouse benefits. So, the pension does carry on, or maybe two thirds of the pension carrot carries on after the sort of main pension owner, if you'd like, passes away. So, it's good to check and make sure you understand that. If you have an individual annuity, then at the time you bought it, you would have chosen, there
are various options that you can take. So, if you are about to buy an annuity, which is a perfectly sensible thing to be thinking about doing at this point, then you should be checking out what those options are. So, many annuities you can buy with a spouse benefits, as I said, or that pays to your spouse, your
children, or somebody else. A annuity keeps paying after you've passed away either a lump sum or for a period of time. So, that's often an option that we would encourage people to consider.
If someone's not quite at retirement age, but worries that something like Coronavirus could happen again, are they better off just putting their pension money into a savings account?
Well, this is a really difficult one. I guess, if you put your money into a savings account on about February the 15th of this year, you would now be feeling quite smug in that you've avoided all the losses. Normal wisdom, conventional wisdom in the market is that over the long run, having your money in a savings account, isn't the best thing to do. If you just think about inflation,
for example, savings accounts, interest rates are very, very low. 1.1% would be a good rate for a savings account at this point. Over time, inflation does eat away at the value of that cash. Conventional wisdom says not a savings account, but obviously these are difficult, difficult times. That's not what I would be doing, but people have to sort of make their own minds and get good advice, as we always say.
So, not in a savings account, then where?
Well, I think, if you're brave and Holly was talking about this earlier, you could say stock markets have fallen and this is a great buying opportunity. I think, if you're some years away from retirement, that's probably what you would do. As you get near to retirement, then your pension provider, your saving scheme, will have lots of different options that you
could check the more balanced view of things. I think if you were sort of in your fifties and early sixties, then again, personally, it's a personal choice. I think I'm a balanced say lower risk funds... Something to do, actually. Many company providers, you can go on a website and get this as well, help you... have some questions, and it's like quiz, if you like, to help you understand
for yourself your risk appetite. How do you feel when stock markets fall? Does that really stress you out? Are you likely then to sort of fall into a trap that Holly was talking about earlier about sort of selling when prices are low, rather than being able to hang on until things recover? So, that's sort of risk appetite and risk tolerance is very personal thing for people.
Holly, anything you'd like to add there?
For me, I think there's just... When we think about risk, we don't like risk. We associate risk with doing silly things, with bad outcomes for our family. So, suddenly when we're in a financial environment and people talk to us about risk, a lot of us just turn our backs on it and say, " That doesn't sound like a good idea. I've worked hard for my money. I don't want to take any risk," but it comes down to
timeframes, Shirley. For anyone that's saving up for the future and has got more than 10 years on their side before they're going to need their money, why would you leave it sitting in cash when interest rates are up to
historic lows? Your money's going backwards, almost. So, you know, for me, if I'm talking to people, if they've got long timeframes on their hands, then I think actually it's risky not to look at the stock market because you know your money's going to sit in cash and frankly, do stuff only for long term.
Technical term there, Chris. (inaudible)
No, I agree with you. If you're 10, 15, 20 years away from retirement, I a hundred percent agree with you. I think the challenge really is for people that are two,
three, four years away from retirement. I think, first of all, as we've said, it may not be as bad as you fear... as people fear from the headlines, when they at their actual pension funds, they may not have come down anywhere near as much because they may have been already in more of a balanced portfolio, but it's for
them. It's what's the right thing to do now? You're feeling under pressure to do something and helping people navigate through that to try and separate out what they can do. What they ought to avoid is what we're all about. Isn't this what you're all... what you're about in your websites, what we're all about.
Holly, some people are in a fortunate situation and have continued to work from home during lockdown. That has meant that they have saved quite a bit without paying for travel, not buying their morning coffee and lunch, no weekend outings. Should they use this money to pay some extra off their mortgage or top up their pension?
Ah, this is a really hard question, Shirley. It's a bit like asking, I think who should win strictly. By the way, I'm still outraged that Kareem didn't win last year. The answer is personal to you. It depends on circumstances, age preference. But, if you think back to earlier, I talked about financial good fats and bad fats. Mortgages are typically good fat. Interest rates are very low and
they're a sensible part of someone's financial plan. Now, if you think about pensions, people have got to remember that when you pay in, you get free extra top- ups from the government if you're a basic rate tax payer, you pay an 80 pounds. Bing, the chancellor waves his magic wand, and another 20 pounds appears, so that's extremely
compelling. There are also contributions from your employer, too. So, on balance, I'm in the pension camp, but... and there's always a " but", that money is locked away. Once you pay it into a pension, you can plead, weep, and wail, but you cannot get that money out until you're
at least 55. So, it comes with that " but", but if you've got time on your side, then I would always typically favor a pension just simply because you'd get those extra top- ups from the government. You don't often, Shirley, get free extra top- ups from the government. I appreciate there are lots of terms and conditions and saying free money can be fraught with the legal risk, I'm sure.
I'm learning a lot. I want to thank you all. I can't tell you. It's just made me completely rethink. I'm turning 60 and you have made me rethink this whole project.
There you go. Secret to a happier life.
Here's hoping that's answered a lot of the questions you have about the impact. The current coronavirus pandemic might have on your retirement. You can find out more about retirement planning at legalandgeneral. com/ retirement. This episode was a special one off, but this series, Rewirement, is all about helping
you plan ahead and get the most out of retirement. So, although you might have more pressing day- to- day worries at the moment, hopefully the tips and information in this podcast will help you focus on a brighter future ahead. Next time, we'll be getting to know the inspiring rewirees who are looking to the future and sharing their hopes for their later years. Subscribe on your podcast listening platform
and make sure you don't miss this. I'm Shirley Ballas and I'll catch up with you next time.