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Sorting your finances during lockdown with Lynn Beattie and Faith Archer

Find out Lynn Beattie (Mrs Mummypenny) and Faith Archer (Much More With Less)’s top tips for managing your finances during lockdown.

Mrs Mummypenny: My lockdown spending diary 2020

PensionBee customer and Founder of Mrs Mummypenny, Lynn Beattie, compares her spending diary with Faith Archer, of Much More With Less, in the first month of lockdown.

During unprecedented times Faith (from Much More With Less) and I wanted to do something a bit different for PensionBee blog readers. Something that was entertaining, interesting, and thought provoking. Everyone loves a spending diary, right? Particularly in lockdown times. And to make it more fun we compared to each other.

We started on the 21st March, the day after schools closed, and wrote our diaries for a month until 20th April. You may have noticed that I’ve been publishing my own weekly spending diary posts on Mrs Mummypenny. I’ve already written six posts on weekly spends, thoughts and feelings and what we’ve been up to. This post is an added dimension of comparing one household to another.

So firstly, a bit of background. Faith and I do very similar jobs, both personal finance experts, writing on our own websites, for the media and our wonderful partners including PensionBee. Faith has two children, girl 12 and boy 10, and a husband. I have three boys, 12, 10, 7 and am divorced. We both live in four-bedroom houses, Faith in Suffolk, me in Hertfordshire. Faith’s house is a beautiful period house with a big garden full of flowers. Whereby my house is more modern, built in the 70s with an AstroTurf garden, with sadly very few flowers (footballs kill them)!

An overview

A spending diary is literally everything that we’ve spent money on for an entire month. Including all essential and non-essential spending. Even if it’s £1 on a newspaper it goes in the diary. We kept a detailed spreadsheet and categorised our spending in the same way.

In total Faith spent £2,362 and I spent £1,793.

Essential bills and spending

I’ll start with the essential bills. Firstly, the biggest bill (a mortgage) is missing for both of us. Faith is mortgage free (oh the dream!) and I’m on a mortgage holiday during corona times.

My bills for the month came to £333 and Faith’s came to £906. A big difference very simply explained by council tax and energy costs. This month was a break month for me council tax wise, saving £150 on my regular ^{_corporation_tax} discounted Band D council tax, whereas Faith paid (sorry my eyes are watering) £308. There’s not much that can be said here, or savings to be made. It is what it is.

Our energy costs are different as well. Faith decided to forward purchase heating oil whilst prices were low, costing £394, but it turns out the prices dropped by a further 5^{_personal_allowance_rate} after her purchase. Ouch. Plus Faith paid £50 to Bulb for electricity, compared to my £92 direct debit to Octopus for electricity and gas.

This leaves just £142 on the remaining bills for Faith and £241 for me. Mobile costs are very different for each household. I have four lines on my EE account, and it costs £92. This has now been renegotiated down to £50 from May, via switching my phone contract over to Sim only. Faith’s mobile costs for three lines are just £23. She’s done super well to get these costs so low!

Also, our broadband costs are vastly different. I pay £38 a month for super-fast Virgin (although I did get £170 cash back when I took out the contract!), Faith pays just £15 to Plusnet. I know Plusnet won’t work for me, we simply live too far away from the BT exchange in my village for the speeds to be high enough. Entertainment wise I also have Netflix for £8.99 a month, Faith must be the only person I know without it!

Groceries

Well what can I say, we both spent a fortune here. I spent £425 on a combination of two Aldi big shops, Co-op treats, top-up shops and Mindful Chef deliveries. I’ve been doing a big Aldi shop every two weeks and then popping to village butchers, corner shop and Co-op for any essentials in-between. I estimate that around £100 of the £425 was booze alone (insert shocked face emoji). I love to treat myself with Mindful Chef food, the dinners are amazing, restaurant quality, healthy and I love the cooking process. Save yourself £10 off boxes one & two if you sign up, search for the offer via Google!

Faith spent a similar £478 on groceries, a combination of big Morrisons deliveries, fruit and veg box deliveries and the milk man. Plus, some shopping for her mum who lives close by. Proving that shopping local unfortunately does cost more money. But is also supporting local business that might otherwise go bust.

During a normal month both Faith and I spend around £300 on groceries, so this is much more than usual budgets. My grocery spend made up 24% of my monthly budget. It was ^_basic_rate for Faith. On this note we have some colourful pie charts to demonstrate our spending. I love a pie chart, it’s my favourite graph to use for this kind of analysis (says the girl with a mathematics and statistics degree).

My pie chart is much more concentrated on four big areas, bills, groceries, work expenses and household expenses.

And here is Faith’s pie chart, with bigger chunks of spending on bills and groceries.

Car costs

My car costs are much higher than Faith’s as I have a car loan on my Toyota Hybrid CHR. This is a total cost of £186, including car tax. I simply couldn’t afford to buy a car outright, so have this super reliable and environmentally friendly car on finance. Faith had no car expenses. And neither of us put any petrol in our cars for the whole month!

Household expenses

These were high for me this month. This was due to an emergency house locks being changed (costing £120), new bedding, tap replacement parts and six months’ worth of contact lenses. A total of £247 or 14% of my budget. Faith didn’t have too many one-off strange costs in this category this month.

Work and business expenses

These were high for both of us. £254 for me and £156 for Faith. I have a virtual assistant (VA) which cost £120 this month. I also paid for a new email newsletter tool which will save me lots compared to my current tool (using Sendfox rather than Mailchimp). I spent £^{_state_pension_age} on a marketing course which was later refunded after the month period ended, because it was too basic for me. If you buy something and you’re not happy with it, get a refund! I also had podcast hosting costs and Microsoft costs.

Faith’s business costs were lower, but similar in type. She also paid for some SEO support similar to my VA. As well as IT costs, Microsoft and 1Tap pro (I have no idea what this is!!).

Fun money

We both feel that it’s important to have a fun money category in our budgets. This is money to spend on stuff just for us, and nobody else. This month I spent £26 on fudge (£18 alone on posh fudge), books, Audible trial (99p!!) and films (Once Upon a Time in Hollywood... £1.99 on Prime, I adore this film, and ADORE Brad Pitt on the roof scene).

Faith spent her fun money on Weight Watchers (how I laughed when I told her she had to put this in the fun category, sorry Faith), and flute lessons. Faith spent £72. Happy to report I have no husband fun money, Faith had £85 in that category.

Leisure and family spends

In here we include anything to do with our children and keeping them entertained. And it made me realise that I have been a scrooge here. Although shortly after the spending diary ended, I spent £70 on a new 3-metre pool for the garden.

I spent just £18 on books and a basketball net. The boys did get some new footballs too, but it was paid for by Nanny Vons Easter money.

Faith was more generous with £179 spent. This included piano lessons at £39, Yokie things (again no idea what this is!!) at £33 and various Nintendo gaming bits.

Eating out and takeaways

Faith did super well and spent nothing in this category when we had two Deliveroo deliveries for a Friday night treat spending £52.78. I can see this going up as takeaways start to re-open too. Already this week we’ve seen the Chinese and the Indian in my village re-open for socially distanced collection of takeaways.

Cleaner

Faith still pays her cleaner despite her not coming to her house, to help her out and keep her business going. I let my cleaner go last year, but think I’ll ask her to come back again after lockdown because I hate cleaning. It’s a luxury well worth paying for.

Savings and pensions

We’ve both taken these categories right down this month in transfer amounts. With the current times being so uncertain we’re both keeping more cash in immediate access accounts. Cash flow is king, and we simply don’t know what might happen to our self-employed income so money stays in cash. Faith did make a £100 contribution to her pension, I made £0. But I did auto-save £121.

Categories that have disappeared

This is so interesting to see! Petrol costs £0 for both of us. I easily spend around £120 a month on petrol previously. Childcare costs, school activities, school dinners and travelling to school have gone to £0 for both of us. Again, this was another biggish category probably costing around £150 a month for my three boys.

Charity contributions have gone, but I’ve since restarted this after the spending diary ended. I’m doing a May 500km challenge, where I will bike, run and walk 500km during the month of May. 1^{_personal_allowance_rate} of my turnover will go to Grief Encounter, as well as any money from my friends, readers and business partners!

Today I was up at 4:30 am, after 7 hrs unbroken sleep. Happy with that. I walked/biked a huge 30km yesterday, at 95km in my May #500kmchallenge. On target. Wore my @griefencounter t-shirt all the way (and lipstick👄👄). Would love a donation 😍🙏https://t.co/THKwAv5PZ6 pic.twitter.com/dbVrZ9r2rg

— Lynn Beattie (@MrsMummypennyUK) May 7, 2020

Summary

I’ve loved doing this challenge and comparing to a friend with a similar lifestyle. I’ve learnt that I have work to do with my essential bills, and that I can probably get my mobile phone costs lower and possibly broadband. Also, that I’m glad I don’t have a huge council tax bill!

I would love to live mortgage free but realise that this is an unrealistic expectation given my current recently divorced situation and living in an expensive South-East location. Likewise, I’d love to be without my car loan, a work in progress, and more achievable. I have around £12k left until its fully repaid. Although at ^{_personal_allowance_rate} interest I’m happy keeping the payments at £175 a month!

I’ve learnt that I can be controlled and mindful with my spending when I need to. Cash is king currently and I’m doing everything I can to conserve the cash I have just in case I need it later down the line.

I’ve also learnt that I spent SO much on alcohol during the first month of lockdown. And I don’t regret it one little bit!

Lynn Beattie is a PensionBee customer and CEO/Founder of Mrs Mummypenny, a personal finance website. She is also an ACMA management Accountant, previously working in commercial finance for Tesco, EE & HSBC. Lynn is a single mum to three boys, living in Hertfordshire, and is the author of ‘The Money Guide to Transform Your Life‘ published in September 2020.

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Coronavirus (Covid-19) and the impact on your pension

The coronavirus has caused a lot of uncertainty in global markets. Our CEO explains some of the potential repercussions for your pension.

It has been a long time since I have seen the market crash. Eleven years ago, I stared at a legacy Bloomberg terminal wondering if the world’s major stock indices knew no bottom.

Since 2008, much has occurred to strengthen the resilience of the financial system, from bank recapitalisations to tougher regulations. But none of these actions can prevent the evolution of business cycles: production, consumption, markets, house prices all go up and down. This is a healthy and necessary long-term mechanism to keep our economies sound. Unless you believe this is the end of capitalism, you should expect a recovery in markets and pension balances.

You should expect a recovery in markets and pension balances

Nevertheless, it is always unpleasant to see such market volatility and to read reports of loved ones succumbing to illness. In the context of the events of the last week, I’d like to explain what we at PensionBee did to prepare and what we are doing next.

Your investments

The global financial crisis taught me something crucial: big is important. As markets questioned the health of the world’s major institutions and Lehman Brothers went bankrupt in 2008, the concept of “too big to fail” rapidly emerged. From the very inception of PensionBee, we made an important decision to only work with the world’s largest asset managers. All of our investments are managed by BlackRock (largest globally), State Street Global Advisors (third largest globally) and Legal & General (largest in the UK).

We have always insisted that all of our plans should benefit from 10^{_personal_allowance_rate} FSCS protection

These managers are responsible for organising the custody (or safekeeping) of your pension money and in turn only work with the world’s largest custodians, like Bank of New York Mellon. Furthermore, we have always insisted that all of our plans should benefit from 10^{_personal_allowance_rate} Financial Services Compensation Scheme (FSCS) protection, in the extremely high unlikelihood one of these money managers fails.

Within the investment products we offer, a core element of our proposition has always been diversification, meaning if one type of investment falls, another rises. Over the past week, we saw sharp drops in global equity markets (shares) accompanied by astounding price increases in bonds. As a result, while the FTSE 100 was down ^{_corporation_tax_small_profits} in four days, our diversified plans were more insulated.

A core element of our proposition has always been diversification

It is to be expected that most pensions around the UK are experiencing similar volatility and perhaps that is the reason most pension savers are not panicking. I have spoken to a few customers this week, particularly those in the Tailored Plan, our auto-pick option, to assure them that is where I remain invested, that is our default workplace pension plan and indeed that is the default pension plan for all of BlackRock’s employees. I have also spoken to several contacts who have seen this before and simply believe it is an excellent time to invest; after all, one might say investments are “on sale” and just in time for the end of the tax year.

It is an excellent time to invest

In 2018, as markets threatened to turn sour, we learned that our customers approaching retirement and planning to spend their pensions would need more options. Therefore, we introduced our 4Plus Plan, which targets an annualised return of 4% over a 5-year period (consistent with rule-of-thumb recommended annual drawdown rates). We then also introduced the Preserve Plan, which only invests in highly creditworthy companies offering a low-risk, low-return option for our over 50 year old customers who plan to take a substantial part of their pensions in the next five years. We are confident the presence of these alternatives has put many of our customers’ minds at ease.

PensionBee’s planning

In addition to your investments, you may be wondering how our team is doing. We are a relatively young team and therefore our immediate health concerns are with our loved ones and those most vulnerable of developing respiratory complications from Covid-19.

We know that unsettled markets can be scary for our customers, so our priority is to remain as available to you as we are during normal times. We made a point of hiring and investing in training over 2019 and our 100-strong team is here to serve you as best we can.

Our 100-strong team is here to serve you as best we can

We are also trialling high-security work-from-home technology that will enable our continued availability to you should the government require the vast majority of people to self-isolate.

As I have explained above, your money is with the largest companies in the world, but you may also be wondering about PensionBee’s financial position. While we have invested in growth, aiming to help as many consumers as we can reach in the UK, we have never been the type of business to throw caution to the wind when it comes to our finances. Our largest external shareholder is State Street Global Advisors, alongside many other investors who have invested over £20 million in the business. Therefore our cash position is exceptionally strong.

Our cash position is exceptionally strong

We are aware that some businesses have started announcing redundancies and we have therefore already communicated to our team that while this period will require spending discipline, we will keep investing in our team and in our commitment to our customers. We are cautiously optimistic about a recovery in markets over the course of this year. 2009, the year following the global financial crisis, the S&P 500 returned over 33%.

To our new potential customers reading this, I encourage you to ask yourself whether you are with a pension provider who cares for its customers as we do, and is prepared for the uncertainty and opportunities that now face all of us. We encourage you to get in touch - we’re always here to help.

What is Open Banking and how does it affect your finances?

Open Banking has the potential to be hugely transformative for pensions. Find out how, what it is and how it could affect you.

Open Banking allows you to share your financial data with authorised providers, such as a money-saving app, bank or pension provider. It means that, with your permission, UK-regulated banks must share this information with authorised providers whenever you request it.

Open Banking explained

So how does Open Banking work, in day-to-day life? Take Moneybox, for example, which is an app designed to help you save money. It works by linking to your bank account, rounding up your outgoings and putting the remainder, plus any ad-hoc payments, into your Moneybox savings account for safekeeping. Moneybox relies on Open Banking to access your financial data so it can track your spending and transfer your funds.

The principle of Open Banking has been around for some time, but since January 2018, the biggest UK banks have been required by law to share your financial data with an authorised provider, with consumer protection offered by the Financial Conduct Authority.

Not sure if a provider is authorised? Check the ‘How do I know if my provider is authorised?’ section below.

A clear view of your finances

Open Banking has the potential to be hugely transformative for millions of people in the UK, in both the short and long-term. Millions of savers struggle to stay on top of their day-to-day finances, so the arrival of providers with apps to help unlock spending data, and see a complete picture of financial health, is revolutionary.

Not only can it help savers better manage their money, it can also empower you to make smarter financial choices. From money-saving apps like Moneybox to challenger banks like Starling, innovation in finance now relies on secure access to data. This in turn provides increased visibility and greater control for savers than ever before.

Opting out of Open Banking

Banking and finances are very personal aspects of daily life. The way you manage your money is entirely up to you, and if you don’t want to share your data through Open Banking, you don’t have to.

Remember, you’ll never be automatically opted in to Open Banking. Your bank has to share your data, but only if you’ve given explicit consent to a provider.

You can withdraw consent whenever you like, either by:

opening the app or website that’s using your data, and withdrawing your consent (this might vary depending on the app you’re using)
contacting your bank and asking them to withdraw access to your information (whether it’s just one provider in particular, or across the board)

How do I know if my provider is authorised?

Open Banking only works when you give your permission to providers, so you need to be very careful when choosing who can access your data. You’ll be protected by your bank, but only if you’ve shared your data with an authorised provider.

An authorised provider will:

Be regulated by the Financial Conduct Authority or an equivalent European regulator
Appear on the FCA’s Register, and/or the Open Banking Directory

I’ve spotted fraud on my account - what should I do?

The action you take will depend on the type of fraud that has taken place. If a payment’s been made which you didn’t authorise, contact your bank as soon as possible. They may pay the money back, and your liability often decreases once you’ve notified them, so speak to them immediately.

If you’re worried someone’s misused your data, or are concerned about identity theft, contact the provider you think is responsible. You can also report it to your bank and Action Fraud, the UK’s national reporting centre for fraud and cybercrime.

Open banking API access

Application Programming Interfaces (APIs) are one of the most common ways a provider will use Open Banking to access your data. They make it possible for your data to be shared and are widely used by technology platforms and providers, from Facebook to Airbnb, handing over information like your location, for example.

Open Banking APIs are generally considered safer than screen scraping (see below), as they come with tight security measures. At PensionBee we have our on API which allows us to share pension information, with the permission of our customers, with our Open Banking partners who include Money Dashboard, Emma, Starling, Yolt, Moneyhub and Lumio.

Screen scraping Open Banking

Screen scraping gives providers direct, read-only access to your financial data. Put simply, this means they can see your information, but can’t edit or modify it (unless you’ve given permission). This method has been widely used for years, but was due to be phased out from September 2019, in a move towards tighter security, with the Financial Conduct Authority agreeing to an adjustment period. Many providers using screen scraping Open Banking will now be in the process of transitioning over to APIs instead.

Is Open Banking safe?

It’s designed to be safe, and security is a big part of how Open Banking works. However, new technology always carries risk and to stay safe online you’ll need to do your own security checks, from making sure a provider is regulated by the Financial Conduct Authority, to being cautious over a request for your login details (only your bank will ever ask you for this).

Here are a few things to watch out for, if you’re looking for extra reassurance from a new provider:

Open Banking regulation - authorised providers need to be clearly regulated by the Financial Conduct Authority or a European equivalent. They’re also restricted to the job in hand, so if you’ve given permission for them to access a current account with one bank, they can’t just access your savings account too
Data protection/GDPR - as part of the General Data Protection Regulation (GDPR) which is now in force, the provider has to tell you exactly what data it will use, and how
Requests for login details - no one but your bank will ever ask you for access to your bank login details or passwords. If a new provider asks you for these, don’t share this information, and notify your bank immediately

Remember, you’re in charge of your banking and no Open Banking provider can legally access your data, unless you first give permission.

What does it mean for PensionBee?

We believe Open Banking can help us fix the UK’s long term savings crisis by including pensions in a complete picture of your financial health, and helping us better manage our day to day finances by:

Connecting your pension to a money app that enables you to see all your balances in one place - your today money next to your tomorrow money
Using money app features to scan your spending for wealth hidden in bad contracts and services you are overpaying for
Repurposing this money to top up your pension and build the happy financial future you’re working towards

As a rough guide, we suggest customers need contribute roughly ^_ni_rate of their current salary to their pension to have a comfortable retirement. Auto-Enrolment contribution rates are 8% (5% for employees and 3% for employers), so we just need to make up the remaining 7% to start to address the crisis.

Open Banking is here to help us make the most of our existing money and empower us to make smarter decisions on what we do with it now and in the future. With Open Banking come the tools we need to build the happier, more resilient financial futures we all want and deserve.

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How PensionBee's plans are performing in 2020 (as at Q2)

Find out the year-to-date performance of the PensionBee plans, when compared to the UK and US stock markets.

Over 2020 financial markets have experienced some of their most challenging moments since the 2008 recession. The British economy contracted by over ^_basic_rate in April and with many businesses closing and unemployment on the rise, it is likely the economic fallout from the crisis will continue for several years. Most investors will have experienced some degree of market volatility first hand, no matter how your pension savings are invested.

Last quarter we published a summary of how our plans performed in the wake of coronavirus. Our customers have found this comparison very helpful and many have requested an update. So we are pleased to present the year-to-date performance of the PensionBee plans when compared to the UK and US stock markets. We have chosen these benchmarks because our plans are diversified and most of our customers are exposed to movements in the stock markets of both countries. In addition, most of our customers will have exposure to other assets, including bonds.

Overall, global markets recovered from their lows in the second quarter of 2020. However, the UK and US stock markets are still down (-17%) and (-3%) respectively year-to-date representing an average of (-1^{_personal_allowance_rate}). Against this backdrop, our plans were resilient - most of our plans were only slightly down for the year, substantially outperforming the UK stock market owing to the benefits of diversification. Our plans for the over 50s have remained well insulated and our oldest customers in the Tailored Plan, as well as customers in our Preserve Plan, have recorded flat performance for the year, avoiding losses that may cause millions to delay their retirements.

As always, it is also important to compare this year’s performance to the long-term returns of the market, where most pensions are invested. Indeed, pension savers who have been investing for the last 30 years, as many pension savers ultimately will be, enjoyed cumulative returns of over 30^{_personal_allowance_rate} for the period (comparison of the UK stock market from 1989-2019). Long-term savers create healthy retirement nest eggs and that is what pensions are all about. PensionBee has been proud to offer sound long-term financial products in partnership with the world’s largest money managers, BlackRock, State Street Global Advisors, HSBC and Legal & General.

Remember that past performance is not a guide to future performance and this blog has solely been prepared for informational purposes and not with the intent to influence future investment decisions. As with all investments capital is at risk.

Savers under 50

Plan / Index ^	Money manager	Performance over H1 2020 (%)	Proportion equity content (%)^^
UK stock market	N/A	-17%	10^{_personal_allowance_rate}
US stock market	N/A	-3%	10^{_personal_allowance_rate}
Shariah	HSBC (traded via SSGA)	11%	10^{_personal_allowance_rate}
Match	BlackRock	-3%	68%
Future World	Legal & General	-4%	10^{_personal_allowance_rate}
Tailored (Vintage 2037-2039)	BlackRock	-5%	76%
Tracker	State Street Global Advisors	-6%	8^{_personal_allowance_rate}
Tailored (Vintage 2043-2045)	BlackRock	-7%	76%

Sources: Yahoo Finance, Investing.com and direct from the money managers. ^Price taken on the last day of the quarter. Past performance is not an indicator of future performance. Capital at risk. These tables do not take account of any fees that may be levied for a particular investment. Full fact sheets are available here: www.pensionbee.com/uk/plans. Plan performance may vary slightly from published factsheets due to timing differences and other negligible methodological differences. ^^Equity content refers to the amount of exposure each plan has to global stock markets and other listed risk-on assets, such as property.

All of our plans designed for customers under 50 years old have outperformed the average return of the FTSE 100 and the S&P 500 as a result of their emphasis on diversification. Most plans are invested in a range of assets such as shares, cash, property and bonds, usually across several different regions. This means that when one type of investment or market dipped, others rose. This quarter, American markets (represented by the S&P 500) outperformed the UK market (represented by the FTSE 100) and our customers benefited from this. US technology stocks have been significant beneficiaries of the transition to a digital economy and the Shariah Plan, which has substantial holdings in Microsoft, Apple, Facebook and Google, outperformed its peers.

While it’s been difficult for savers under 50 to see their pension balances fluctuating over the year, it’s important to remember that short-term fluctuations, including severe ones, are entirely to be expected and in fact contribute to the ability to generate healthy longer-term returns. Indeed, younger savers are unlikely to be negatively impacted by this downturn when they come to retire as the greater the decline in their plan’s value, the more likely they are to benefit from the future recovery of the stock market.

Savers over 50

Plan / Index ^	Money manager	Performance over H1 2020 (%)	Proportion equity content (%)^^
UK stock market	N/A	-17%	10^{_personal_allowance_rate}
US stock market	N/A	-3%	10^{_personal_allowance_rate}
Preserve	State Street Global Advisors	^{_personal_allowance_rate}	^{_personal_allowance_rate}
Tailored (Vintage 2025-2027)	BlackRock	-1%	51%
Tailored (Vintage 2019-2021)	BlackRock	1%	36%
4Plus	State Street Global Advisors	-4%	13%

Early last year we introduced two new pension plans specially designed for those nearing retirement, offering our over 50 customers more options to safeguard their savings ahead of drawdown. The 4Plus Plan targets an annualised return of 4% over a 5-year period, which is consistent with commonly recommended annual drawdown rates of around 4%.

When compared to global markets, the 4Plus Plan has protected our customers from steep falls in their pensions, delivering a gross return of (-4%) over the period. The plan is actively managed by State Street Global Advisors who began reducing its investment in more exposed assets, such as company shares, when markets began to fall in February. This quick action helped to safeguard savers from the full impact of volatility, and State Street Global Advisors will continue to keep a close eye on markets and react accordingly in the coming months.

Savers in the Preserve Plan continued to be well-insulated from market volatility, as the principal aim of the plan is to reduce risk, and shelter savings from the impact of short-term market fluctuations for customers intending to make substantial withdrawals in the near future. By making short-term investments into creditworthy companies and safer assets such as fixed income, the Preserve Plan remained stable over 2020, resulting in neither gains nor losses for investors.

Those customers over 50 who are in our default plan, Tailored, also saw a reduced level of losses, when compared to global markets. That’s because the plan automatically derisks investments as an investor ages, moving their savings to safer assets and taking a more conservative approach to investing as they near retirement. For those expecting to retire within the next few years, the Tailored Plan (Vintage 2019 - 2021) has reported a small gain for the year.

For our customers who are already in retirement and are perhaps thinking about withdrawing all of their pension as a result of the downturn, we hope that you will take comfort in the range of plans we have on offer, and balance your short-term desire to safeguard your savings with risks of not keeping your savings invested in the longer-term. With that in mind, you may want to consider only drawing down what you need and keeping a close eye on the markets.

Over the coming months we will continue to keep you regularly updated on what’s happening with your savings and if you have questions about your plan’s performance, or anything else, you’re welcome to get in touch with your BeeKeeper.

An important note of caution: It’s always impossible to forecast what will happen from quarter to quarter, and past performance should never be used to predict future performance. However, it is reasonable to prepare ourselves for further falls as coronavirus has continued to have an impact on the global economy. When markets fall, it’s tempting to consider withdrawing your money to protect it or moving it to lower risk investments, however, there’s a risk that investments could be sold at a loss and you may miss out on any increases in value in the future when markets recover.

On the contrary, when markets are not doing well, there are more opportunities for investors. If you make regular contributions to your pension, you may wish to increase your contributions as you’ll be able to invest at lower prices than before the market downturn.

Is a recession the best time to start a pension?

Freelance financial journalist, Laura Miller, looks at why a recession is exactly the right time to start paying into your pension, even though it may not seem like it.

How much pension do I need to retire at 55?

If you're contemplating cashing in on your pension we'll help you figure out if you can afford to retire at 55.

You don’t have to wait until the State Pension age to retire (currently ^{_state_pension_age}). You can access most workplace or personal pensions from the age of 55.

If you’re thinking about cashing in on your pension, we’ll help you figure out if you can afford to retire at 55. If you’re a little way off, we’ll help you understand how to help your pension grow.

Bear in mind that retiring as early as 55 is an ambitious strategy that can become very expensive if you start saving later in life.

How much money do you need to retire at 55?

The amount you need to retire early will depend on:

How much you intend to spend in retirement
How long you expect to live for
Whether you’ve paid off your mortgage and other debts
Whether you retire single or can partly rely on a partner’s income

Calculating how much retirement income you’ll need

There are a few quick ways to get a rough idea of how much you might need, but none are 10^{_personal_allowance_rate} accurate.

1. Multiply your expected annual outgoings by the number of years you hope to be retired

If you expect to spend £25,000 per year and live until 85, you might need a pension of around £490,000 to support you through those 30 years of retirement.

2. Multiply your final salary by 7^{_personal_allowance_rate}

So if you retired on £40,000 per year, you’d need around £28,000 per year to live on in retirement (around £550,000 if you live until 85).

The idea behind this is that you’re likely to have paid off your mortgage and other expenses, so your outgoings will be lower.

3. Consider what others are spending

According to consumer group Which? a couple needs a joint household income of £26,000 a year (a ^{_adjusted_income} pension pot each) to cover living expenses. This rises to £41,000 (a £410,000 pension pot each) if you include luxuries like exotic holidays and a new car every five years.

*Pension pot sizes were estimated using this calculator, assuming funds were drawn down over 30 years from the age of 55 and the pension continued to grow 3% annually. We’re not including the State Pension which you’ll receive in your late 60s.

How your mortgage and other debts affects your pension

You don’t need to have paid off your debts before claiming your pension. But you may find that a significant portion of your monthly pension income could be eaten up paying off any outstanding debts, leaving a smaller amount to cover your remaining expenses.

Mortgages are the biggest loan most people take out, averaging £230,800 in December 2019 according to UK Finance. Fortunately, many lenders have extended their remortgage products to people up to 80. So it may be possible to remortgage to a more competitive deal with lower monthly payments, relieving the burden on your pension.

If you have other debts, such as credit cards or car finance, you may want to consider consolidating them into a single repayment plan to lower your monthly outgoings.

If you’re particularly worried about how you might cope with debt in retirement, you could contact a free service like Citizens Advice, National Debtline, or StepChange.

How your marital status affects your pension

Your pension isn’t affected by whether you have a partner or not. However, your household income and outgoings can be drastically impacted.

If you have a partner who’s also retired, their pension income will boost the total household income you both have at your disposal. This can be particularly helpful if you still have outstanding debts like a mortgage to pay.

In addition, living costs tend to be more affordable per person when shared. For example, the cost of heating your home probably won’t be too different whether you’re living alone or with a partner. So sharing that cost with a partner cuts your personal outgoings in half. The same applies to council tax, utilities, and grocery bills.

How your life expectancy affects your pension

You’ll start to receive the state pension from the state retirement age until the day you die. However, workplace pensions work differently.

If you take money from your workplace pension pot on a regular basis, you’ll be able to do so for as long as there’s money in your pot. For example, if you take ^{_money_purchase_annual_allowance} a year from a ^{_high_income_child_benefit} pension pot, the pot will last ten years.

If you use your pension pot to buy an annuity when you retire, the annuity will guarantee an annual income for the rest of your life.

None of us know how long we’ll live for, which is why it’s important to start saving as early as possible so as to retire with a healthy pension pot.

Will my retirement income needs change over time?

Your lifestyle at 55 is going to be quite different to when you’re 85, which will impact your income needs.

For example, you’ll probably want to spend more money on leisure activities like holidays and dining out when you’re newly retired. But when you’re older, you might want to allocate more of your pension income to healthcare and supporting your family.

How will inflation affect my pension?

Inflation is the rate that the cost of goods and services increase over time. It affects everything from the cost of your weekly food shop to the price of property.

Inflation in the UK averaged 2.8% between 2000 and 2019, meaning that goods costing £10 in 2000 cost on average almost £17 in 2019. It’s almost inevitable that your costs will be higher by the time you retire, and even higher in your later retirement.

Pensions do tend to grow over the long-term (the government state pension is linked to keep up with inflation too, under the triple lock). But you’ll need to make sure you don’t take out more than your pension grows each year to avoid reducing the number of years it will support you.

When do I need to start saving to retire at 55?

Generally speaking, the earlier you can start saving the better. This is due to what’s known as compound interest.

Compound interestis the amount of interest you receive on your initial investment, and the amount of interest that grows on that, year on year.

For example, let’s imagine you have ^{_high_income_child_benefit} in your pension:

It grows by 4% over the next year to £104,000 (a £4,000 increase)
It grows by 4% again over the next year to £108,160 (a £4,160 increase)
It grows by 4% again over the next year to £112,486 (a £4,326 increase)

See how you earn a little more each year, even though it grew by the same percentage? And that’s before we’ve even added further payments into your pension! That’s compound interest at work.

In the real world, the percentage of interest would change every year and it could even see negative growth. But it’s not unreasonable to think it might grow by 4% on average.

Calculating when to start saving

We’ve used our pension calculator to find out how much you’d need to save by the time you’re 55 to earn ^{_isa_allowance} a year in retirement.

We’ve assumed your employer will contribute £100 per month and that you’ll retire at 55. We haven’t included the State Pension, which you might be eligible to claim when you reach State Pension age.

Your starting age	Your monthly contribution
20	£^{_pension_age_from_2028}0
25	£850
30	£1,100
35	£1,500

As you can see, not only is retiring at 55 ambitious from any age, but it becomes very expensive the later you leave it.

Can I afford to retire at 55?

If you really want to retire at 55, you’ll need to start planning long before you decide to dip into your pension fund.

You’ll want to think about:

What your fixed costs are likely to be (eg. council tax and utilities)
If you’ll have any remaining debts to pay off (eg. mortgage)
How much you’d like to spend on other living expenses (eg. groceries and clothing)
How much you’d like to spend on luxuries (eg. holidays)
If you’ll receive income from other sources (eg. savings or property)

Our online pension calculator will help you figure things out and can estimate how much you’ll need to save between now and age 55 to ensure you don’t run out of money.

If you’re unsure how much money you have in old workplace pensions, and can’t remember the details, the government’s Pension Tracing Service is a free database you can check. Alternatively PensionBee can help you locate old pensions and consolidate them into one simple plan.

What is a good pension pot?

While the jury’s out on exactly how much you’ll need, a good pension pot is a retirement fund that enables you to live comfortably when you stop working. And even though there’s no one-size-fits-all approach to pension saving, a general rule of thumb is the more you can save now, the better off you’ll be later.

Each year you can save up to 10^{_personal_allowance_rate} of your earnings into your pension or a £40,000 allowance, depending on which is higher. This amount includes your pension contributions, those made by your employer and any tax relief you get from the government.

There’s also a lifetime pension allowance set at ^{_lump_sum_death_benefits_allowance} for 2020/21, which caps how much you can pay into your pension before exceeding the tax threshold.

Can inheritance be used to top up my pension?

Any windfall you receive can be put towards your pension, including inheritance money. You can choose to top up your pension with regular payments or an additional lump sum.

The usual rules apply for most people:

You can put in up to £40,000 per year or 10^{_personal_allowance_rate} of your income, whichever comes first
The government will boost your contribution by ^{_corporation_tax} or more
Your employer will still pay in at least 3% of your salary each year

Depending on your circumstances - such as being self-employed or a high earner - these rules might be slightly different for you.

Could you take a step closer to early retirement?

Hopefully this article has helped you understand what it takes to plan for an early retirement.

Now estimate how much you’ll need to save to reach your goals using our easy-to-use pension calculator.

If you’d like to take the next step on your journey towards retiring at 55, PensionBee can help you:

Track down and combine all your old pensions into one
Pick a plan from a range of established partners, including State Street Global Advisors, BlackRock, HSBC, and Legal & General
Benefit from one simple annual fee
Manage your pension performance and make contributions in one place with our simple but powerful app

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

What does it mean to invest responsibly?

There are different ways that consumers can invest responsibly but it can be difficult to cut through all the jargon. Here are our definitions of the different approaches to responsible investing.

Starting self-employment? Tax tips for an easy life

Find out how you can ease the tax burden when you are running your own business and need to pay your own income tax and National Insurance.

This article was last updated on 12/06/2023

When you start your own business, suddenly you’re responsible for paying your own income tax and National Insurance Contributions (NICs). You no longer have a boss to whip it out of your salary under Pay-As-You-Earn (PAYE).

With the deadline for tax returns and tax bills fast approaching at the end of January, buckle up for some tax tips to make life easier!

Starting small

As a sole trader, you can earn up to ^{_basic_rate_personal_savings_allowance} a year from your business without paying a penny in tax or having to tell the taxman about it. This is known as the ‘trading allowance’.

However, you might still choose to register as self-employed to qualify for Tax-Free Childcare, or volunteer to pay £3-a-week Class 2 NICs to benefit from Maternity Allowance and a State Pension.

Registering as self-employed

Raking in more than ^{_basic_rate_personal_savings_allowance} a year? Now you do have to inform HMRC and file a tax return. Remember that’s ^{_basic_rate_personal_savings_allowance} during a tax year, so between April 6 one year and April 5 the next.

If so, you’ll need to register for Self-Assessment by 5 October in the following tax year.

Even if you have to do a tax return, you might still escape income tax if your profits are less than the tax-free ‘Personal Allowance’. For most people, the Personal Allowance is £12,570 for the 2023/24 tax year.

If you’ve used the Self-Assessment online service before, you’ll have a Government Gateway user ID number, which was probably sent to you by post when you first signed up. You need to dig this out and use it to sign in to your HMRC online account, along with your password.

If you’re filing online for the first time, you need to have your unique taxpayer reference (UTR), which can be found on letters from HMRC. You’ll then need to create a Government Gateway account, and your activation code will be sent in the post.

Simplest structure

The easiest way to become self-employed is as a ‘sole trader’, where you are the sole owner of your business. You face less faff, less paperwork and more privacy than setting up a limited company, although you also have less protection if your business gets into debt.

If your business grows, becoming a limited company could mean you pay lower taxes and stand a better chance of borrowing - but being a sole trader makes life simpler at the start.

Claiming for more than your (low) costs

When self-employed, you can cut your tax bill by claiming some of the costs for running your business, as you only pay tax on what’s left after costs are taken off.

As a sole trader, you can choose to deduct the ^{_basic_rate_personal_savings_allowance} trading allowance from your earnings, instead of claiming your actual costs. This could be a winner if your expenses are super low.

Hang on to those receipts

Once you face bigger bills for running your business - totting up the likes of stationery and phone bills, train tickets and stock, any staff costs, insurance, accountancy fees, advertising and website costs - you’ll be better off keeping receipts and records.

Remember, if you’re a basic rate taxpayer, every £1 in expenses cuts 20p off your income tax bill.

Work or pleasure?

Sadly, only certain expenses can be claimed against tax. HMRC has a handy helpsheet (HS222) with a table of the most common allowable expenses.

The key point is that trading expenses only count if they are ‘wholly and exclusively’ for the purpose running your business and you can’t claim anything used for personal, as opposed to business, reasons.

So for example if you use your mobile 7^{_personal_allowance_rate} for business and 3^{_personal_allowance_rate} for personal calls, you can only claim 7^{_personal_allowance_rate} of your phone bill. Note you can’t just pluck a figure out of the air but need to be able to back it up. You could for example look at two or three months’ of bills, work out what percentage are for work, and apply that to bills for the rest of the year.

Easy option if you work from home

If you work from home, thankfully there’s an easier option than splitting out bills for Council Tax, gas, electricity, mortgage interest or rent and home insurance, depending on how much of the house you use and when.

Instead, you can claim simplified expenses:

£10 a month when you work 25-50 hours a month from home
£18 a month for 51-100 hours
£26 a month for 101 hours or more

Even better, you’re still allowed to claim the work part of your home phone and broadband bills on top.

There are even special simplified expenses if you live in your business premises, for example when running a bed & breakfast.

Simple way to claim for car costs

You can also claim simplified expenses if you use your own car to do a bit of driving for your business.

Rather than divvying up all your actual costs for running a car, keep track of the mileage for work, then whack in a claim for 45p a mile for the first 10,000 miles and 25p a mile after that.

Cash accounting for an easy life

If you’re a sole trader or partnership with a turnover less than £150,000 a year, you don’t have to grapple with traditional accounting on an ‘accruals basis’. Instead, you can take the easy option and do your accounts on a cash basis instead.

With cash accounting, you only count income when you’ve actually been paid, and expenses when you’ve actually spent the money. This means you won’t end up paying tax on work where you’ve invoiced but haven’t been paid.

With cash accounting, you also don’t have to worry about capital allowances, and spreading the cost of items that last for longer than a year, like a work phone, printer or computer.

Instead, you just bung in the cost when you spend the money. The main exception is if you buy a car for your business, you should instead claim for it as a capital allowance.

However, cash basis may not be right for your business if you have high stock levels, losses that you want to offset against other businesses or face financing charges above ^{_higher_rate_personal_savings_allowance} a year. If you want to borrow money, banks may insist on seeing traditional accounts too.

Looking on the bright side, if you use an accountant, you can claim their cost as an allowable expense.

Watch out for a bigger tax bill with payments on account!

The good news is that when you start as self-employed, you don’t have to pay tax straight away.

Instead, any income tax is only due at the end of January after the tax year when you started earning. So for example you might have raked in mega bucks way back on 6 April 2018 - but won’t have to fork out for the tax bill until 31 January 2020, nearly 22 months later!

The bad news is that once your tax bill tops ^{_basic_rate_personal_savings_allowance}, the government starts wanting money in advance. As in, half the expected tax at the end of January, and the other half at the end of July. Your projected tax bill will be based on your earnings in the previous tax year (although you can always tell HMRC if you expect to earn less).

So suddenly, for example, on top of the 2018/19 tax bill due by the end of January 2020, you will also need to pay half the tax expected for 2019/20.

This can hit hard the first time it happens, when your tax bill shoots up roughly 5^{_personal_allowance_rate} higher than expected. Count your blessings that at least in future years you’ll already have made payments in advance.

Cut your tax bill with pension payments

Self-employment means you have to sort out your own self-employed pension, with no employer to choose it or pay in for you.

High earners get the benefit that saving for retirement can cut their tax bill.

You can stash away up to 10^{_personal_allowance_rate} of earnings in a pension each year, maximum £40,000 a year in 2019/20, and your pension provider will automatically add basic rate tax relief.

But if you’re actually a higher rate or additional rate taxpayer, you can use your Self-Assessment return to claim the difference between basic rate and your income tax rate, and see it taken off your tax bill.

Final checklist before you submit a tax return:

Make sure things match up

When you’re calculating the money your business has made and the expenses you’ve incurred, cross-reference your numbers. Check your bank statement to make sure that the payments you’ve actually received match the invoices you’ve issued, and check that payments going out of your account match the receipts you’ve saved.

Keep the late penalties in mind

If you’re worried about being able to pay your tax bill, don’t delay filing your tax return as a result, as the penalties for late submission are steeper than the penalties for late payment.

If your Self Assessment return is late, you’ll usually have to pay an immediate fine of £100, and then penalties will keep piling up if you still don’t file your return. Bear in mind that you’ll always get a penalty for filing your tax return late, even if you don’t owe any tax.

Remember to pay!

Once you’ve filed your tax return, don’t forget to actually pay your tax bill. Remember that the deadline for paying your tax is the same as the deadline for filing your tax return: 31 January.

Once you’ve submitted your tax return online, your tax calculation will be made and you can then log back into your Self-Assessment account to pay your bill. Remember that payments can take a day or two to clear, depending on the payment method you use, so transfer the money a few days before the deadline to ensure it gets there in time.

A quick, straightforward way of paying is via online bank transfer, but make sure you use your UTR as the payment reference so that the payment is credited to your account.

Faith Archer is a Personal Finance Journalist and Money Blogger at Much More With Less.

The economic case for more sustainable investment

Our CEO, Romi Savova, discusses the demand for sustainable investing and the potential impact on returns.

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E12: Financial jargon - what does it all mean? With Vix Leyton and Jasper Martens

The Pension Confident Podcast

PensionBee Content

09 Dec 2022

minute read

Dec 2022

Inside the BeeHive

Pension Basics

The following’s a transcript of our monthly podcast, The Pension Confident Podcast. Listen to episode 12 here, watch on YouTube, or scroll on to read the conversation.

PHILIPPA: Welcome to the last episode of Series One of the Pension Confident Podcast. But no need to worry, because I’m happy to tell you we’ll be back with a whole new series in January 2023. I’m Philippa Lamb, and to wrap up this year, we’re going to demystify a subject that’s confused all of us at one time or another - financial jargon. Whether it’s stagflation, inflation, Auto-Enrolment, or all those acronyms - what do they mean?

From interest rates and income tax to dividends and bonds, sometimes it feels like the language of personal finance is specifically designed to confuse us. So, today we’re going to push back with jargon busting help from two expert guests.

Vix Leyton‘s right here with me. By day, she’s a Personal Finance Expert and off-duty, she’s a Stand-Up Comedian and Host of the False Economy Podcast. Welcome Vix.

VIX: Thank you so much for having me.

PHILIPPA: Also with us is PensionBee’s very own CMO, Jasper Martens. Great to have you with us.

JASPER: Thank you. And no, I don’t have a podcast like Vix.

VIX: Not yet, but eventually we all will!

Why it’s important to understand financial jargon

PHILIPPA: Before we start, as always, I’m going to remind you that anything discussed on this podcast should not be regarded as financial advice and when investing your capital is at risk.

Now, Vix, financial jargon, I know you’re an expert and I’ve worked in that field myself, but it’s confusing for everyone. You were telling me before we came in, there’s still stuff that trips you up. Is there a particular word?

VIX: It’s a funny one because I’m technically a finance expert, but my job is to be the person that asks the questions so people don’t have to. Because I think everybody’s so embarrassed that they don’t seek advice on these things. So you just kind of style it out and I’m good at that.

But I like the more exciting terms like bull and bear. They sound like sexy fashion brands to me, but I think they’re a lot drier than that.

PHILIPPA: Jasper, have you got a least favourite bit of jargon?

JASPER: In the pensions industry, we’ve got lots of jargon and the one that I’ve brought to the show today is an UFPLS.

PHILIPPA: What’s that?

JASPER: That’s an Uncrystallised Funds Pension Lump Sum, which only applies to a defined contribution scheme. And even after all of these years at PensionBee, I’ve failed to explain that in simple terms to anyone.

PHILIPPA: I’m not sure I want you to do that even now!

VIX: It’s like when someone explains the rules of a card game, I really want to understand and I’m listening, I’m giving you my eye contact, but I can hear the music from Smart in the back of my head.

PHILIPPA: Which brings us to the big problem here! Jargon’s off-putting, and every line of work has its own. The difference with financial jargon is, it’s really in our own interest to understand it.

JASPER: Yes, if you don’t understand your finances then you’ll fail to plan a happy retirement but also to have a good financial outlook. And sometimes you do need to go into the books and learn. Fortunately we’ve got the internet now to help.

Financial jargon in the news lately

PHILIPPA: But personal finance is particularly jargon filled, isn’t it?

JASPER: It is and I think the industry’s made it deliberately complicated. Sometimes I hear things like, ‘Well we’ve got these difficult words and acronyms because otherwise we have to write them out and it takes a long time.’ And I feel that if we keep the population clueless, then people won’t take action. And then those companies can earn money off of you. So, you better start finding out what those words actually mean.

PHILIPPA: I’m a cynic about that too. I think there’s a bit of a barrier being put up there. But listening to the news lately, it’s been filled with financial jargon and economic stories. I was thinking we might kick off with some of the terms we’ve been hearing regularly in the news. Some of the real basics, and the first one I have for you is income tax.

JASPER: We all love to pay some tax, don’t we Philippa?! So I think, with income tax, people generally understand what that means. You’re paying tax on the income you earn. And we have tax bands in the UK, so on the first £12,570 that you earn, you don’t pay any income tax at all.

And anything you earn over £12,571 and up to £50,270, you pay ^_basic_rate basic rate income tax. Then, if you earn between £50,271 to £150,000, you pay ^_higher_rate higher rate income tax. If you earn over £151,000, you pay ^{_additional_rate} additional rate income tax.

However, it was announced in the Autumn Statement on 17 November, that the higher and additional tax thresholds are changing in 2023/24. So, from April 2023, if you earn between £50,271 and ^{_lower_earnings_limit},140, you’ll pay ^_higher_rate higher rate income tax in 2023/24. And if you earn over ^{_lower_earnings_limit},140, you’ll pay ^{_additional_rate} additional rate income tax in 2023/24.

So those are the UK tax bands and usually, you won’t really see the tax being taken off. Because what’s given to you in your take-home pay, is different to your income as the tax will, in most cases, already have been taken off. So I think that’s where sometimes the confusion kicks in. But most people will be paying tax within those tax bands.

PHILIPPA: And inflation?

JASPER: Inflation’s basically the price of things you buy in shops increasing in value.

VIX: I knew that one!

JASPER: Oh, you knew that one? Great! Do you know the difference between RPI and CPI?

VIX: Oh, no. I didn’t realise that I had to revise for this podcast. Is that the Retail Price Index?

JASPER: Yeah, so I’m going to pretend I already knew everything about it and I didn’t look it up whatsoever.

PHILIPPA: Yeah, he did. I saw him doing it. RPI?

JASPER: Retail Price Index and Consumer Price Index.

PHILIPPA: What’s the difference?

JASPER: The simplest way to explain it, it’s the way you measure inflation. And with the Retail Price Index, we include things like the cost of living and housing, so your mortgages are included. And usually that one is higher than the Consumer Price Index. And to make things more complicated, for example, the government or a company might use the RPI and another will use the CPI.

PHILIPPA: So you need to know which is which?

JASPER: You need to know. But normally, I’d say, roughly they’re quite similar. One tends to be a bit higher than the other.

VIX: So, I’m speculating here but does which one is used depend on which one is higher? Because I’ve only ever seen RPI on bills, when they’re explaining why my bills are going up.

PHILIPPA: Interesting.

VIX: And again, like you say, it’s this willful ignorance. It looks legit, so I just huff and puff about it and just shrug and move on.

PHILIPPA: Yeah, well what else are you going to do about it?

VIX: Then I shred it and feel sad.

PHILIPPA: Okay, interest rates. I know it sounds basic, but let’s talk about interest rates.

JASPER: Well where do you start? Because it’s such a broad topic. But interest rates, I think for most people, it’s either the money you earn on your savings. So, the bank pays you an interest rate because you’ve given them some money in their bank and therefore they give you a percentage in return.

But interest rates can also cost you. So if you’ve got a mortgage, an interest rate’s the money you pay to borrow money from a bank or another organisation. And interest rates are usually set by a central bank.

PHILIPPA: Central bank being, in this case, Bank of England?

JASPER: Exactly. So for example, recently the interest rate has gone up from 2.^{_corporation_tax} to 3%. And that’s the rate that the banks pay to borrow money off the Bank of England.

PHILIPPA: And that’s what’s called the base rate?

JASPER: The base rate, exactly. And the banks who borrow that money can then lend that money to you, as a consumer. And they’ll probably put a margin on top of that. So what you pay is definitely not the base rate. You’ll usually pay a bit more.

PHILIPPA: So everything hangs off the base rate. So when we hear on the news about the Monetary Policy Committee at the Bank of England changing the base rate, it does matter because it impacts the amount of interest we might get in our savings account or the amount of money we might have to pay for a mortgage.

JASPER: Yes. So the amount of interest you pay when you borrow money to buy a house gets more expensive if the base rate goes up, but you might also get more interest on your savings. Usually, the Bank of England and other central banks will change that base rate to curb inflation. Because if it gets more expensive to borrow money, consumers hold back and don’t spend as much.

PHILIPPA: We spend less?

JASPER: Exactly. And that’s why the bank has that tool. And sometimes it’s nice for us, as we get more savings in our bank account, but in many cases it’s not so nice. And the cost of living really is now the issue here, where that rate has gone up and therefore our mortgage payments are going up.

PHILIPPA: As I said Vix, you work in this industry so I have to say, you’re a part of the problem! But you’ve talked about bull markets, there’s gilts, there’s stagflation, there’s asset management. I mean it’s just bamboozling. Does the industry really design itself in such a way that it’s building that wall between it and us?

VIX: It’s impossible to know, isn’t it? But I think the big issue for me is that this isn’t taught in schools.

PHILIPPA: Oh yes. We’ve talked about that on the podcast before - you’re not taught any of this stuff at school, are you?

VIX: Yeah, I can tell you that I’ve lost my watermelon or my umbrella in French - I’ve never used that. But I wouldn’t be able to give you a concise understanding of how interest and inflation would affect literally every element of my life, in terms of borrowing and saving.

There are so many terms that are confusing. Who’s coming up with these? What’s stagflation? It sounds like when I said yes to going to Becky’s hen in a local pub, and then six weeks later, somehow I’m in a WhatsApp group with somebody called Laura who’s asking for ^{_basic_rate_personal_savings_allowance} for an Airbnb that I don’t remember saying yes to. Oh and also I’ve got to dress up as a unicorn. That’s not what it is, but there are no clues as to what it is?

PHILIPPA: Yeah. And that’s an old one. I’ve no idea where the word stagflation came from. It’s crazy, isn’t it?

Now look, acronyms are my personal least favourite. Jasper, again, I want to start with a common one, and I want to start with FTSE. You hear about the FTSE all the time. We might know it’s something to do with the stock market, but what exactly is the FTSE?

JASPER: Well, the FTSE is the Financial Times Stock Exchange, which is basically an index of companies that are listed on the stock exchange. And so, if we talk about the FTSE 100, we’re talking about the 100 biggest companies on the FTSE, the Financial Times Stock Exchange. That’s basically what it means. It’s just an index of companies that are listed there.

PHILIPPA: Another stock market acronym - IPO.

JASPER: Well I know that one because PensionBee did one in April 2021. It’s an Initial Public Offering. And that’s when your company is going to the market, and before you do so -

PHILIPPA: I’m going to stop you there. Going to the market? Let’s go further back to the basics.

VIX: This little piggy?

PHILIPPA: So you’re a company -

JASPER: Ok, I’m rolling up my sleeves!

PHILIPPA: So, you’re a company and you’ve grown to a certain size and now you’d like some investors to lend you some cash?

JASPER: What you’re trying to do is get people buying your shares, so that you can raise money. When a company goes on the stock market, they’re trying to sell shares. And if your company is good, and it has good unit economics and has a good future, investors will say ‘I want some of those!’ and they’ll buy those shares off you.

PHILIPPA: So the public offering is, you offering your shares for sale?

JASPER: Yeah. To anybody who wants to buy them.

PHILIPPA: Got it. Savings is a big area for acronyms isn’t it? Again, we hear a lot of them but knowing precisely what they are is something else. Here’s a nice one for you. What’s the difference between an ISA and a LISA?

JASPER: Well first of all, can I just say that I feel like I’m doing a test here?

PHILIPPA: That’s exactly what’s happening.

JASPER: I should’ve known!

VIX: We both know the answers. We’re just checking that you do.

PHILIPPA: I’ve got them on a piece of paper here.

JASPER: Well, an ISA is an Individual Savings Account and a LISA is a Lifetime Individual Savings Account.

PHILIPPA: And what are they?

JASPER: So basically, they’re both tax efficient ways to save for later. In the case of a LISA, you can save that towards your first house purchase.

The Lifetime ISA, like all ISAs, is a tax-free savings account. You won’t be taxed on what you put in, and you receive a ^{_corporation_tax} bonus on your savings. You’ll get a £1 bonus for every £4 you put in. You can put up to £4,000 into a LISA every year, so the maximum bonus you can receive each year is ^{_basic_rate_personal_savings_allowance}. In addition to this limit, you can’t pay more than ^{_isa_allowance} per year across all your ISAs.

LISAs are tax-free and the government provides a bonus of ^{_corporation_tax} on the money you put in. So, for every £4,000 you put into your LISA, you receive a ^{_basic_rate_personal_savings_allowance} bonus.

JASPER: And ISAs are just savings, but they’re tax efficient. So, every year you can save around ^{_isa_allowance} into that Individual Savings Account and you wouldn’t pay any tax on that amount.

ISAs are popular ways for people in the UK to save or invest their money tax-free. There are four types of ISA:

Cash ISAs
Stocks and Shares ISAs
Innovative Finance ISAs
Lifetime ISAs (LISAs).

The government puts a limit on how much individuals can save or invest in them in a single tax year. This limit is known as the ‘ISA allowance‘.

This ISA limit is the maximum an individual can save across the range of ISAs. So for example, if you saved ^{_starting_rates_for_savings_income} in one ISA and £3,000 in another in one tax year, you’d have used up £8,000 of your total allowance.

In the 2021/22 tax year, the total allowance stands at ^{_isa_allowance}. This limit resets at the start of each tax year on 6 April 2023. If you don’t make use of your entire allowance before then, you’ll lose any remaining amount.

JASPER: Does that answer the question?

PHILIPPA: Are we happy with that?

VIX: I think so.

Pensions industry jargon

PHILIPPA: So Jasper, the moment you’ve been waiting for, let’s talk about pensions! Because, as we know, the pensions industry is big on confusing acronyms. There are a lot of very confusing terms. Which ones do you think listeners really need to have their heads around?

JASPER: I think, especially at the moment because it’s been in the news a lot, it’s the triple lock on the State Pension.

PHILIPPA: And what’s that?

JASPER: It’s basically indexing your pension. That means that the UK Government is legally binded to make sure that your State Pension rises in line with one of three locks. Lock one is the rate of inflation, which was at 10.1% in September 2022. This is the rate in which the Chancellor confirmed that the State Pension will rise in April 2023. Lock two is the increase in average earnings. And lock three is a fixed amount of 2.5%. The highest of those three is the one in which the State Pension will grow.

PHILIPPA: Okay. Vix is looking confused!

VIX: Does that mean that the State Pension only ever increases and never decreases?

PHILIPPA: That’s a very good point. Can the State Pension go down?

JASPER: No, the minimum it will go up is 2.5%. But if inflation, or average earnings are higher than 2.5%, then the State Pension will increase in line with those instead. The highest one will win.

PHILIPPA: And it really matters right now because we’ve got very high inflation all of a sudden. If you’re dependent on the State Pension, then it’s really significant isn’t it? Because everything you’re spending, you’re getting 1^{_personal_allowance_rate} less for.

VIX: And everything’s costing 1^{_personal_allowance_rate} more.

JASPER: It sounds really great, right? And it’s really beneficial for people who’re taking their State Pension because they’ll get that increase. But what about everybody else in this country that aren’t getting the State Pension because they’re still working and earning? What about them? And that’s what’s often criticised in the media - that pensioners are getting the best deal. So, I would say, the jury’s still out.

PHILIPPA: Jasper, what’s risk?

JASPER: This isn’t being a risk devil or a risk taker.

VIX: Or a skydiver! I’m not going to go on this rollercoaster because the harness looks a bit loose? No! That’s not what risk is.

My mum got divorced about 10 years ago and she didn’t take care of any of the household finances, she ran our home and brought me up and did a brilliant job of it. But I think my mum’s perception of pensions was, it was kind of a benefit that work gave to you and it was a flat rate like a savings pot.

I remember, we went to the bank and sat down with a bank manager because I didn’t understand enough to help her. Even though she was like ‘You work in finance, you can help me make these decisions’, I was like ‘Oh, no thank you!’

They sat her down and they said, ‘Right, we want to understand what your interest in risk is.’ Like, how much of a risk taker are you? My mum was scrambling around, and she sort of fancied the bank manager as well, which didn’t help. So she wanted to seem a bit sexier and a bit riskier, and I could see the cogs turning in my mum’s head. And she was like, ‘Hmm, you know, occasionally I like a scratch card.’

JASPER: Risk is about how you want to invest your money. Other than the State Pension and defined benefit pensions, every other pension in the UK’s actually an investment, whether you like it or not.

It can be cash, it can be bonds, it can be stocks, it can be anything really. But the typical cocktail is a mix between shares and bonds, and then maybe a little bit of cash and property, and all of those come with a risk. Now, if you’re young and you’re growing your pension savings, you might actually want to take a little bit of risk as share prices can go up and down, as we are seeing right now.

PHILIPPA: But you might get potentially better returns?

JASPER: Yes, especially in the long run. And when you get a little bit closer to retirement, you might want to take less risk and therefore, you might be looking at investing in property, bonds or cash.

Now most pension plans that are out there will be a mixed cocktail. So, you might have a very strong cocktail when you’re young and maybe an alcohol-free cocktail as you get nearer to retirement. But most pension providers will start you off with a very ambitious cocktail when you’re younger and all you need to do is contribute. And then what they’ll do over time, is they’ll change the cocktail. So they’ll add more water to it.

PHILIPPA: So you’ll end up with mineral water at the end of it?

JASPER: Exactly. You want less risk when you’re two years away from taking your pension. And that’s what risk is all about.

PHILIPPA: Okay, I’m happy with that. I’ve got more pension related terms for you - what’s an annuity?

JASPER: So, let’s say you’re getting to an age where you want to retire and you’ve saved a pot of money. You can give that to a pension company or a life insurance company and in return they’ll say, ‘Oh thank you Jasper, thank you for your pension. And for that, I’ll give you a fixed amount until you die.’

And an annuity rate, let’s take 5% for example, basically means that you get 5% of your pot every year until you die. Now that’s usually linked to interest rates. So this is where the base rate comes in.

So if interest rates are really low, annuity rates will be low too. And annuity rates have been historically very low. Now, with the interest rates rising from 2.^{_corporation_tax} to 3%, even though it might not sound like a lot, it’s a huge change.

PHILIPPA: What about drawdown? We hear about this all the time - but what’s drawing down your pension?

JASPER: So, with an annuity, you give away your pension pot and in return, you get an income every month. In the case of a drawdown pension keeps your money invested for longer. At the same time, you can take your pension flexibly, withdrawing money whenever you need it. Up to ^{_corporation_tax} of your savings can be taken tax-free, with the remaining 75% subject to income tax. The amount you pay depends on your total income for the year and your tax rate.

VIX: Is that subject to the same income tax rules as your salary?

JASPER: Yes.

PHILIPPA: Like we were talking about earlier.

JASPER: So for example, people who are emptying their pension pots when they’re 55, that’s drawdown. Basically, you draw down your whole pot until it reaches zero. So, let’s say you have ^{_high_income_child_benefit} in your pension and you take that in one go: suddenly, your income in that year is ^{_high_income_child_benefit} and you’re going to have to pay a lot of income tax.

VIX: That’s an expensive boat!

JASPER: But if you take small chunks every year as income and leave the rest invested, it has a chance to grow over time.

You can take up to ^{_corporation_tax} as a tax-free lump sum or take ^{_corporation_tax} of each withdrawal tax-free. Your tax-free amount doesn’t use up any of your personal allowance, but once your withdrawals exceed this threshold you’ll be required to pay income tax. It’s important to consider how much you withdraw from your drawdown pension, and when you do so, to ensure you don’t move into a higher tax bracket.

If you’ve a small pension with a value of ^{_annual_allowance} you can take ^{_corporation_tax} as a tax-free lump sum, leaving £45,000 in drawdown. Once you exceed your personal allowance, each withdrawal will be subject to income tax. However, if this is your sole income you’ll only be charged the basic rate of income tax, as your total pot falls within the lowest tax band.

If you’ve a larger pension with a value of £400,000 you can take ^{_high_income_child_benefit} as a tax-free lump sum. You’ll then have £300,000 to invest via drawdown. The amount you choose to withdraw in any given tax year will determine how much tax you pay and you could easily be required to pay higher rate or additional rate tax if you withdraw too much too soon or have other earnings. If, for example, you choose to withdraw a further ^{_high_income_child_benefit} in a single year you’ll have to pay higher rate tax at ^_higher_rate.

So it might be better if you take small chunks every year as income, and you leave the rest invested so it has the chance to keep growing over time.

PHILIPPA: Pension policy documents, they’re full of jargon, aren’t they? What are the common benefits and acronyms that we might find in pension policies?

JASPER: So you might find things like a Guaranteed Annuity Rate, a Guaranteed Minimum Pension, Protected Tax-Free Cash, Protected Pension Age. Basically these are guarantees that were given to customers in the past.

So just to give you an example: a Guaranteed Annuity Rate. If you were with pension company A and you wanted to buy an annuity, you’d get a really good rate from pension company A, because they didn’t want you to go to pension company B, C, or D. Nowadays, websites like Money Helper actually help you to shop around because there might be better deals out there.

PHILIPPA: Like we do with utilities?

JASPER: Exactly.

How and where can we learn about finance?

PHILIPPA: It’s all about better education around money and finance, isn’t it? And it always seems to me that basic finance skills, and I know you feel the same way about this Vix, is something that we should be teaching kids in school?

VIX: It absolutely is, because just in this session I’ve understood more than I’ve ever known. It can be scary, you’ll read the first couple of paragraphs of something and if you don’t engage with it straight away, I’ll just move on.

PHILIPPA: It’s bewildering isn’t it?

VIX: I sit down and I try but it’s confusing and I think people are embarrassed to ask questions. I was with my mum in that session, and she’s not a stupid woman, she’s a very intelligent woman, but she’s just had no exposure to this whatsoever so she didn’t know what to ask. And her view was that she just wanted somebody to tell her what to do and they weren’t able to do that.

That’s the one thing that a pensions advisor cannot do, you have to opt in. But she didn’t have the financial skills to opt in. And that dragged on for much longer than that session, because we came away from it and it manifested on the route home. She hadn’t really taken in what was said enough. So it took us a long time to get there.

PHILIPPA: I’m hoping there might be people who’re listening to this, who might not know anything about pensions actually, because we do talk about the basics. And we’re not frightened to talk about the basics because, as you say, no one really wants to admit they don’t know what drawdown is. And with the situation that we’re all in, economically, this stuff matters more than ever.

JASPER: Yes and I think as an industry, we’ve got to do much better than what we’re doing right now. At PensionBee, we want to make pensions simple so you can look forward to a happy retirement. That’s our mission statement. But every week there will be moments where it’s almost like someone presses a button and we’ll realise something is too jargony. So every piece of content we produce has a proper tone of voice check because we have to avoid these things creeping in.

PHILIPPA: Are you surprised just how low the level of understanding is in the finance industry? Because I always feel that, even in myself, as well as in others, who’ve worked in this field. There’s always stuff that, if you’re really honest, you just don’t properly understand?

JASPER: Yeah. Half of the time people don’t know that a pension’s actually invested, or that it costs you money.

PHILIPPA: And there’s no shame in not knowing that, is there?

JASPER: There’s no shame. I didn’t know that a pension costs you money when I joined PensionBee in 2015. I thought my company was paying for it but no, I was paying for it.

VIX: I found out today!

PHILIPPA: Have you got a favourite way of educating yourself more about this? We’ve got this podcast, there are other podcasts. But have you got any favourites, Vix?

VIX: I’m approaching 40 years old and I’m a Peter Pan. In my mind, this is something to worry about later. I’m astonished that there are 21 year olds walking around now that didn’t exist when I was a teenager. But I think we all want to believe that we’re still young enough that we could change the game. So I think it’s brilliant that all these resources exist, but particularly now, with the cost of living crisis, where people are trying to work out how they can budget until the end of the month, budgeting for even 10 or 15 years feels like a problem for another day.

So I think the press and financial experts need to do more to highlight the difference between tackling it now versus leaving it a few years - five years, 10 years, 15 years - because there’s a penalty for that. I’m already paying a penalty for that now I’m approaching middle-age. That hurts to say out loud!

PHILIPPA: If we’re talking to young Vix, Jasper, where would you send her? Is there a book, are there some websites you can go to, to look up financial terms?

JASPER: There are a couple of handy websites I would check out. Money To The Masses explains finance in a really easy way. And secondly, Boring Money is a really good website too.

VIX: I mean they’re really under-selling this!

JASPER: They’re looking at how to turn something boring into something actually really exciting and hopeful. So that’s what they do. They’ve also launched a really good community hub especially aimed at women and their savings, because they tend to be behind in terms of their pension savings, for example. So I think that’s really good. And of course, Money Helper‘s also definitely a really good one to go to.

PHILIPPA: That’s all really helpful. I’m gonna wrap it up there. Thank you both very much.

VIX: Yeah, it’s been a brilliant educational day for me, so thank you.

JASPER: Yeah, thank you both!

PHILIPPA: That’s it for this episode and Series One. A final reminder that everything you’ve heard on this podcast should not be regarded as financial advice and wherever you invest your capital is at risk. We’ll be back with you in January 2023 with Series Two and we’ll be kicking off with financial personalities - what’s yours and can you harness it to help you reach your savings goals?

If you’ve got a moment, we’d love it if you could rate and review us on your podcast app, or you can share your feedback and suggestions for future episodes by emailing podcast@pension.com. Thanks for being with us this year. Have a great Christmas break and join us again in January.

Catch up on episode 11 and listen, watch on YouTube or read the transcript.

Risk warning

‍

Period	Market Event	FTSE World TR GBP (%)	4Plus Plan (%)
4Plus Plan’s inception – 6 Sept 2013	QE Tapering, China Interbank Crisis and its aftermath	-5.44	-2.41
3 Oct 2014 – 15 May 2015	Oil price drop, Eurozone deflation fears & Greek election outcome	-5.87	-1.77
7 Jan 2016 – 14 Mar 2016	China’s currency policy turmoil, collapse in oil prices and weak US activity	-7.26	-1.54
15 June 2016 – 30 June 2016	BREXIT referendum	-2.05	-1.07

Period	Market Event	FTSE World TR GBP (%)	4Plus Plan (%)
4Plus Plan’s inception – 6 Sept 2013	QE Tapering, China Interbank Crisis and its aftermath	-5.44	-2.41
3 Oct 2014 – 15 May 2015	Oil price drop, Eurozone deflation fears & Greek election outcome	-5.87	-1.77
7 Jan 2016 – 14 Mar 2016	China’s currency policy turmoil, collapse in oil prices and weak US activity	-7.26	-1.54
15 June 2016 – 30 June 2016	BREXIT referendum	-2.05	-1.07

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