Retirement: the longest holiday you’ll ever plan

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00:00:05 Steve

Hi, I'm Steve.

00:00:06 Tom

And I'm Tom, and we're communication specialists at Aviva. In today's episode, we're going to focus on Workplace Pensions and how they work. Before we get into all of that though, I wanted to ask Steve some questions and hopefully prove a point to you and the listeners.

00:00:25 Steve

Sounds a bit ominous Tom.

00:00:26 Tom

So, for everybody listening, Steve and I are really keen runners, and we recently entered the ballot for the London Marathon. Unfortunately, neither of us got in but Steve decided to go and book the Copenhagen Marathon. So, Steve, my questions are around that trip that you're going on to Copenhagen. To book the trip what research have you already done and roughly how much time do you think it's taken you?

00:00:49 Steve

Oh, good question. So yeh, you're quite right, Tom. So, when I didn't get through, I was a tad bit disappointed, so I quickly looked at other marathons in other capital cities. I wanted to make a bit of a weekend break of it all. And so, I decided on Copenhagen. Why Copenhagen? Well, I guess it was mainly down to the flights.

So, it was a cheap flight over to Copenhagen that I could catch, but also mainly down to the fact that it is the flattest course in Europe. And as you know, I might be a keen runner but I'm not a particularly good one, so flat is best when it comes to me.

00:01:21 Tom

So, your research has been focused around flights, around the marathon itself and probably a hotel. Yeah?

00:01:30 Steve

That's right. And elevations, of course. I can tell you the elevation rate of most of the marathons in Europe at the moment.

00:01:36 Tom

Good stuff. So, what are we talking in regard to hours spent?

00:01:40 Steve

Oh, I've spent on planning this trip, I've spent probably several evenings just making sure that it was the right one for me.

00:01:47 Tom

So why have I started the podcast off like this? I said I wanted to ask some questions to try and prove a point. Steve, like many of us, has spent hours planning a trip, planning a holiday. And the reason for today's episode is to talk about, you know, the longest holiday of our life, retirement. So, it's just trying to bring into focus that many of us spend time on a regular basis booking these trips, these holidays. But how much time do we spend planning for retirement? And that's what today's episode is all about. And we'll dive into pensions and how they work later on.

00:02:20 Steve

I see what you did there Tom, very clever.

00:02:23 Tom

So, before we dive into some of that, just a couple of bits I wanted to talk through, the first one, is that what we're going to talk about within today's episode is based on the current tax year and legislation, how we interpret and understand that. It's also worth noting that, with a pension plan, it's invested, you know like any investment the value of it can go down and it can go up.

And yes, we're here to give you lots of information and hopefully point you off towards where you can get more information after the episode as well. But it's just, again, you know, important to bear in mind that Steve and I are not here to give you any form of advice. 

I appreciate many of you may be listening and you've not gotten an Aviva pension plan, and that's absolutely fine as well. Feel free to hang around. We're going to talk about pension plans in general, so hopefully there will be some nuggets within today's episode that you can take away as well. 

So, I think where we're going to start Steve, is talking about different pension plans and actually something which I know is one of your bugbears. So, you know, the fact that the industry uses lots of acronyms and abbreviations.

00:03:28 Steve

The whole industry is just littered with acronyms and jargon and pension speak. So, some people may be familiar with concepts of just stakeholder pension schemes, personal pension plans, CIMPS, COMPS, occupational pension schemes. What does that mean? Well, in actual fact if you had to take all of those pension plans and all those pension names, you could quickly boil it down to two distinct categories.

The first category you would label defined contribution and the second category you would label defined benefit. Now a defined benefit pension plan Tom, and for anybody listening is a kind of pension plan that gives you an element of a guarantee or a promise. So, your employer usually has guaranteed to pay you a set amount of money once you hit your retirement age, the benefits are defined, which is where that name and that concept comes from. 

A defined contribution pension plan on the other hand tends to be the more commonplace workplace pension plans these days. A defined contribution pension plan is one where we don't know necessarily what we're going to receive at the end in terms of retirement income, it's only the contribution. So in other words, what we're paying in is that defined entity, that defined known entity. What we receive at the end is largely based on things like what we pay in over the years, investment performance and the charges that are taken from our pension provider.

00:04:48 Tom

Now, I suppose most of us as at today are going to be part of that defined contribution plan, so that pot arrangement. In regard to that defined benefit, I suppose many of the listeners potentially, you know, could have been part of that type of plan historically. So, they're no longer sort of actively in it, but they may have been in it in the past and also got a benefit within that particular plan/scheme that will be due when they come to retire. What else is it known by?

00:05:17 Steve

Yeah, sure. So, I think the bulk commonly known as final salary pension schemes or CARE, which stands for career average related earnings. And the rationale there is they are often linked to either the final salary or a career average of our earnings. So, they tend to go by those type of names. They tend to be in all honesty the preserve of government agencies these days and government bodies, so the likes of HMRC staff and NHS staff they don't tend to be very commonplace in the private sector these days, it tends to be the more defined contribution pension plans.

00:05:52 Tom

So many of us, you know, will have a defined contribution plan. Some may have a defined benefit. Something that brings to my mind within this is that many of us will be within lots of different pension plans. And we're not going to focus too much on it today in regard to retirement planning, but, you know, if we are thinking about retirement planning, it's just worthwhile understanding what we have got, what are all these different pension plans?

Because I'm definitely guilty of it, where I would look at one pension or one savings pot, whatever it may be. But actually, you need to look at everything that you have saved away and what does all of that amount to.

00:06:28 Steve

And that's right. It's all those building blocks, isn't it, really Tom?

00:06:31 Tom

Yep, so we touched a little bit on both of them two. Was there anything else Steve that you wanted to go into detail on?

00:06:38 Steve

No, I think we have kind of covered the concepts there, so defined contribution, as you rightly said, is the type of pension plan that the majority of people tend to be in these days. Defined benefit tend to be older pension plans or the preserve of government kind of bodies and agencies these days. But I think just to go onto the state pension, the state pension really is that bedrock of retirement income that we're likely to have when we hit our retirement age.

00:07:01 Tom

And I suppose probably something just to add in the sense of that defined benefit, defined contribution stuff, defined contribution, in essence, they will work in a similar way, it is a pot of money.

With a defined benefit, you know, as you said, there is normally a guarantee as to what we're going to get back at the other end. But it can work slightly differently from scheme to scheme. 

Very often, I know when we are talking to customers, members and potentially presenting to them we get questions around sort of historic plans and with the defined benefit it's often good to go and try and dig out a statement and have a look at that, maybe go and speak to who administrates it to understand how that particular plan works, as you said, is dependent on, you know, different factors sometimes as to what you're going to get back.

00:07:46 Steve

Absolutely.

00:07:47 Tom

Okay. So, moving on, talking about state pension. So, we said, as you just mentioned, that, you know, for lots of people that would be, you know, the bedrock of their retirement income. When we talk about the state pension at the moment, the full new state pension is £203 a week, not overly helpful for people that don’t work in weekly figures which most of us don’t.

So, if we convert that into an annual figure, right, it's just over £10,500 a year. So, as you said, it's a great start. I would imagine though for many we may need more than that. 

00:08:21 Steve

And the evidence shows that. That's really where the workplace pension plan comes in, isn't it, really, Tom? So, like you've said, the state pension is that bedrock of retirement income. It's a great foundation but it's not necessarily enough for the majority of people to be able to survive and maintain their standard of lifestyle on. And so, some commentators would argue that we need somewhere in the region about fifty percent to two thirds of our salary in retirement in order to maintain that same pattern of living.

So think about the state pension plan and then the workplace pension plan, and we should be trying to achieve that kind of level, from that, so it's all about those building blocks.

00:08:54 Tom

Yeah, and I suppose there's lots of again acronyms, lots of rules of thumb out there as well, isn’t there. In the sense of like you said, what I should be saving? what I should be trying to achieve? Okay, you know, good to have those in mind. But also, for many of you, whether it's an Aviva pension or it's with someone else, you'll have lots of tools available online as well.

So, like lots of like forecasting projecting and tools which could be helpful as well. So just worthwhile going away and maybe you want to have a look at some of that.

00:09:24 Steve

That's right.

00:09:25 Tom

So, in regard to that State Pension we said yes, it's ten and a half grand a year if I get the full new state pension. How do I know if I'm going to get the full new state pension? So, it's based on your national insurance record. So, you need to have paid 35 years’ worth of national Insurance contributions to qualify for that full new state pension. In regard to when you're going to get it back, it depends on your date of birth.

So, at the moment, the state retirement age is 66, but for many of us it could be 67 or 68. So GOV.UK, if you go onto the GOV.UK website, you can have a look at what your state pension may be and also what you may get back as well. So, a good place to point people towards, we will put it in the notes, the description of today's episode, but somewhere for people to go after the episode.

00:10:15 Steve

Absolutely. So, you're quite right Tom. So, the thirty-five-year qualifying record isn't just about paid national insurance, so credits count in much the same way, shape and form, and you typically receive credits for a whole series of different reasons. So, if any of the listeners ever found themselves out of the workplace, for example, as a result of a redundancy situation, so long as they were in receipt of some kind of unemployment benefit for that spell, chances are they got a credit towards that record.

Things like statutory sick pay would count, maternity leave would count, people who've raised children and taken time off work to do that. So long as they're in receipt of child benefit payments, chances are they got credits towards that record as well. So, it is definitely worth people just double checking what their record looks like in GOV.UK, that’s definitely the website to visit.

00:11:02 Tom

Yeah and I think just to add to that, I've sort of termed it or phrased it as the full new state pension, again, you know, what do I mean by that? Back in 2016 now there were changes in state pension and how it worked, and again were not going to go into that in too much detail because we could go down a rabbit hole.

But as you said, again a great place for people to go is go and check their own, you know, historically it worked in a slightly different way and now it works in this new simpler format, which is well, obviously, what we just spoke through and touched on. So yeah, great place to go to check the state pension.

Also, a great place to go if maybe I want to try and track down misplaced lost pensions as well. So, there's something called the Pension Tracing Service on the GOV.UK website. So again, I'm sure many listeners you would have been part of several workplace pensions and potentially now auto enrolled into them. So again, some legislation a program that the government put in place all the way back in 2012 now was auto enrolment.

So that means that if you hit certain criteria eligibility, your employer has to automatically enrol you into a workplace pension. And that's why many of the listeners today will be part of a workplace pension plan. So, you may have potentially lots of pension plans, several different pots lying around, and maybe that's something that you need to find out, you know, where is that pension plan. 

I've misplaced it, lost it, which again many of us are guilty of that. I know we always say Steve, you know, we still receive correspondence don’t we and we chuck it in a drawer sometimes. 

00:12:38 Steve

Yeah, do we need to shred it. And I guess just to expand on that Tom, so another website, which again will pop the link in the description is the Money Helper website, which is effectively a website that's been sponsored by the Department for Work and Pensions. On the Money Helper website, there's some really good practical steps as to what steps people could take in order to try to track and pinpoint any lost pension plans down.

And, I would always advocate just having a bit of a methodical approach to these things. So have a little think about where you perhaps worked in the past and get in touch with your previous employers to find out if you have a pension plan with them in place. You may have taken one out with a bank, building society, for example.

There are some fantastic standard letter templates in that Money Helper website, so you don't necessarily need to, you know, think about the questions, there already there templated for you to use. But it links off to that GOV.UK website lost pension tracing service which is free and comprehensive to use as well and also several other agencies and bodies as well that can help you pinpoint any of the pension plans down, so that’s the Money Helper website.

00:13:45 Tom

Just moving onwards again, we said that a lot of people will be, you know, automatically enrolled into a workplace pension plan. And so, what we haven't touched on so far is why would I be part of a workplace pension plan? Again, there are several reasons why you may want to be part of the workplace pension plan. 

We're going to probably focus on the main two, which the main two are the fact the if you pay in. So, maybe not everyone is paying in, but if you are paying in, you know, you make your own contributions, then it's tax friendly, tax efficient in your favour. You know, as at today, quite simply, you know, if you paid £80 a year, a basic rate tax rate payer, you know, £100 is invested. The other one is the fact that, you know, you're paying in some money probably, and then also your employer is paying in some money as well. You know, part of the overall benefits package is that their paying into your pension plan.

00:14:39 Steve

And they have to pay in these days as well Tom, just to add. So, there are obviously different definitions, but the minimum employer contribution, generally speaking, is 3%. Always worthwhile just having a look at those contribution rates because what we tend to find it does differ from one scheme, from one employer to the next, and some employers will offer more generous contribution levels that might be fixed to what you pay in as well.

So, it's definitely worth just double checking what those contribution rates are. But everybody now should be entitled to an employer contribution.

00:15:09 Tom

Yeah, and I think just to just add to that, I appreciate that we're not sort of plugging contributions saying go and pay more. We appreciate the cost of living at the moment. You know, prices, everything's going up, but as you said, it is worthwhile again understanding how that works and it may be in the future if I pay a little bit more, get a little bit more from my employer, you know, is that something I want to think about and potentially do.

00:15:31 Steve

It’s a key benefit at the end of the day isn’t it. 

00:15:33 Tom

Yes indeed. Yep, exactly that. There's something worthwhile touching on Steve that you might want to explain in a little bit more detail, around the contributions is how those contributions are taken because I suppose again employers may do that in a slightly different way.

00:15:51 Steve

Yeah. So, it does differ again sadly from one scheme to the next, but some employers will take the contribution from your top line of pay.

So, before tax and in some instances before national insurance, if they operate a salary sacrifice or a salary exchange initiative or program. So, it will come from the top line rather than the bottom line. Other employers will deduct it after you have paid tax, in that eventuality we as your pension provider are able to claim the basic rate tax relief on your behalf, so able to add 20%, on top of that contribution that goes in, to top up that pension plan, so £80 becomes £100.

If you are a higher or additional rate taxpayers, you are able to claim additional tax relief that you are due through self-assessment or by contacting HMRC at the end of the tax year.

00:16:40 Tom

There's also, whilst we're talking about our contributions and how we pay in, if anyone has got any questions, I suppose in regard to contributions, whether it’s an Aviva pension plan or a pension plan elsewhere, with that it's normally you go to your employer to find out how that works. They might have your contribution structure on say like an intranet.

As Steve said, a good place to check would be your payslip. And again, normally speaking, any changes to those contributions are done through your employer because what happens is, is that your employer obviously takes it from your salary, from your pay, and they pay across to the pension provider. So, the pension provider is not obviously in control of that process. 

So, all those changes are normally done through your employer. Just worthwhile bearing in mind as well. So, we talked about contributions there. We've also talked about employee and employer contributions, and I suppose the main benefits of paying in. Within that we've probably talked on as well, the factors as to what I'm going to get back from a contribution-based plan.

So, I know you mentioned a little bit earlier on, but just to recap, we have a pot of money. Yes, we can't touch until later on in life, but what that pot is going to be worth is, is based on three factors. So, what goes in, so we're talking about contributions there. How that money performs. So, it's invested, as we said, it could go down, it could go up in value and the charges that are being deducted as well.

So, I think we’ve probably touched enough on contributions there. So yes, that's one factor, in regard to the investments though, Steve, do you want to give us a bit of a whistle stop tour of like hands on and the hands off approach, so where people's money is invested normally?

00:18:21 Steve

Yeah. So, most workplace pension plans will offer people choice when it comes to investments. So, people can either be hands on and choose how, where and when they would like their money to be invested from usually a wide variety of several different investment options and set programs. Alternatively, they can be hands off, in which case they go into what's called a default investment solution.

Now, to make life easy for people when they join the workplace pension plan, most people these days are automatically enrolled into that hands off, into that default investment solution. And typically, how a default invests is it tends to invest more in the likes of stocks and shares in the early years. And then as a member, it gets closer and closer and closer to their selected retirement age. The objective of most of these hands off strategies is then to start to consolidate what that person's built up and then de-risk. And it can be anything from five, ten, fifteen years or more ahead before a members selected retirement age, it's always worth just double check the scheme literature. So yeah, I guess it all boils down to two choices Do you want to be hands on or hands off?

If you don't remember ever choosing an investment option, that to me suggests that you are in a hands-off strategy, that default investment solution.

00:19:39 Tom

In regard to the hands-on approach, as you said, there is lots of choice. There's normally sort of that, that menu of different funds. That's right. When we're talking about funds, there is different elements of risk. There are stocks and shares, which is normally deemed as those areas which are deemed higher risk. And then we'll obviously go down the risk spectrum. And you know, when we're talking about, you know, other areas which are deemed lower risk, with a hands off approach it would slowly, gradually, automatically be doing that on our behalf.

00:20:10 Steve

And to make life easier for people. All of the, there is an industry standard now, so all pension providers will grade the riskiness of a fund on a ladder of risk geometrical scale from 1 to 7. So, seven suggests it's a more risky fund. Category 1,2, 3 suggests less risk. Most hands-off strategies tend to fall in the middle of that spectrum, so they tend to be a medium risk fund, kind of a category 4 kind of fund.

That’s where most hands-off strategies would fit. But it’s always worthwhile checking with your investment guides as to the makeup of the fund that you're in.

00:20:44 Tom

Yeah, I suppose those investments guides, yes, your employer may host it again on an internal intranet, you may have. But also, you know that investment guides are put together by the pension provider. So, you normally will be able to find that if you log into your online account or maybe your pension provider house that on a website for your particular pension scheme/plan as well.

So, you may like to go away and find that. Just one more thing that I wanted to touch on before we potentially move on, in regard to, you know, that hands off approach. You've got that menu of funds. Normally for each fund, yes, it's graded, but normally as well you have a fund factsheet or something similar to that. What do I mean by that, it is a document that's normally three or four pages long, isn't it, Steve? And it sort of really describes, you know, the objectives.

00:21:37 Steve

The philosophy, what it's done in the past. It will have the risk warnings associated with that particular fund. So, it gives really a lot of the granular detail to the makeup and the structure of the fund.

00:21:46 Tom

Yeah, exactly that. Yeah, so like you said, if you do want to go make your own choice, you've got all the information there to make an informed decision, that’s what I am trying to get to. So, we talked about investments there, so the fact that our pot is invested, that's a factor and we need to bear in mind. Probably the third and final factor in regard to a contribution-based plan is the charge, the charge is there, because the pension provider has costs associated with running that particular pension scheme and that is levied from the members pots.

And that charge is normally displayed as a as a percentage. So, you'll see that you were charged 0.50% a year, for example. So normally you will have a percentage and then it would say a year. A couple of bits on that, I don’t know Steve if you want to give us a sort of an example as to what this 0.50% actually means and then why is the charge different from pension schemes and how is the charge worked out as well?

00:22:56 Steve

Yeah, so, so I mean, I think when we talk about charges, nobody sends invoices or anything like that. The charge is deducted from an individual's pension pot automatically by the pension provider. On a charge of 0.50% that would mean in pounds shilling and pence every £100 that's invested 50p would be deducted in charges per year by that pension provider. Now because it is a percentage of the pot rather than what we pay in from one week or one month to the next, 0.50% on a £100,000 pension pot would mean that £500 be deducted in a year by the pension provider.

So again, the percentage is based on the pot size rather than what we pay in from one payroll run to the next. And there is a charge cap in the UK. So, the charge cap set by government is 0.75%, which means no pension default fund should charge any more than that 0.75%. So 75p for every £100 invested.

The economies of scale tend to play out here, so it tends to follow the bigger the employer and the more people who are part of that employer’s pension scheme the more preferential rates and terms employers are able to attract on behalf of their members and the charge on the hands-on fund range will depend on that fund in question.

00:24:16 Tom

Yeah, I think what you said in regard to the charges, I don't think I've used an analogy so far, which is quite rare for me. But I suppose the analogy is Steve, you go to buy one can of coke, I go to buy a crate of cans of Coke. I'm going to pay less per can compared to you. The bigger pension scheme, the more members, the more money under management normally the more that your employer could negotiate that charge down on your behalf. And that's something which at the outset, yes, they do. But then also they will continue to monitor that charge and, you know, potentially make a change in the future if they need to as well.

00:24:54 Steve

That's the thing, we touched on contributions, investment and charges. The easy way for somebody to get in touch and connect with those kind of things is through the pension providers website. So, log into your account online that will give you access to investment fund options that are available. How and where you invested at the moment, what you are paying in, and also that the charges that are deducted.

00:25:18 Tom

I think that probably brings us to quite a nice conclusion really, many of us will be part of workplace pension plan because we've been auto enrolled into it. But I suppose really the question is, you know, is that enough though? So, for some listeners it will be going away, doing a bit of homework, again, another analogy, or putting together in my mind a jigsaw puzzle.

You know, the more bits of that jigsaw puzzle we can put into place, the more I can understand. Am I in a good place? Are we on track? Maybe, do I need to take some action and the start of that process? It is actually, what we’ve just said. It's digging out those old statements, whatever it may be. Understand what's in this pot? What am I being charged? Where's it invested? Because the more of that groundwork that I can do, investigation, you know, hopefully the simpler things are going to be, you know, later on in life. And when I am sort of, you know, approaching retirement.

00:26:12 Steve

Absolutely. I think knowledge is power in that sense, isn't it, really? So just trying to understand what the contributions look like, how and where your invested and what those charges are.

00:26:21 Tom

Lovely, okay. Thank you, Steve. So, for today's episode, I think we're going to leave it there. So, from myself and Steve, thank you all very much for listening. As I said within the notes/description of today’s episode we will have some of those links we have touched on. But hopefully that has given you a bit of insight into how pension plans work and also answered some of your questions, and we will see you next time.