E17: Should you save into a pension or an ISA? With Claer Barrett, Damien Fahy, Peter Komolafe and Becky O’Connor
The following’s a transcript of our monthly podcast, The Pension Confident Podcast. Listen to episode 17 here, watch on YouTube, or scroll on to read the conversation.
PHILIPPA: Hello and welcome to The Pension Confident Podcast. This is a very special recording because this time, we’re not in a sound studio as usual. Instead, we’re here at White City Place in London. And for the very first time, we’re joined by a live studio audience.
Applause
PHILIPPA: Today we’re talking about the battle between two financial titans. Pensions vs. ISAs. Which one’s the best home for your savings? When we thought about making this episode, the first thing we did was ask our listeners what they thought was the right answer to that question. Before I reveal the results from that poll, let’s welcome our expert panel. First up, please give a warm welcome to the Financial Times Consumer Editor, Author and Host of the Money Clinic podcast; Claer Barrett.
CLAER: Thank you.
PHILIPPA: Next to her, we’ve the Founder of the excellent Money to the Masses website and podcast; Damien Fahy.
DAMIEN: Hello.
PHILIPPA: At number three, we’re very pleased to welcome back an old friend of the podcast. Financial Expert, Author and Host of The Conversation of Money podcast; Peter Komolafe.
PETER: Thank you.
PHILIPPA: And last but very definitely not least, a face and a voice you’ll know from her expert commentary on TV and radio. PensionBee’s own Director (VP) of Public Affairs, Becky O’Connor.
BECKY: Hello.
PHILIPPA: Welcome everyone.
Before we start, a reminder for everyone listening here and at home. Anything discussed on the podcast today should not be regarded as financial advice and when investing your capital is at risk.
HOW PENSIONS AND ISAS WORK
PHILIPPA: Let’s kick off by finding out what most people are doing with their hard earned cash right now. When we asked our listeners that question, 80% of them told us they were saving for their retirement. So Claer, is that about what you’d expect in your experience?
CLAER: Yes and no. It’s much higher than I’d expect in some ways. We know from other statistics that lots of people are finding pension saving to be a luxury at the moment, with the cost of living crisis raging. Putting money aside for years and years, when we’re approaching retirement just seems like a lifetime away and lots of people just need every penny they can get in their pay packets right now. Even if opting out means they’re effectively taking a pay cut because pensions are a part of pay, as I’m sure we’ll get on to tonight.
But what I’m not surprised about, in a way, is the fact that that number’s so high because the best thing that’s happened to pensions in the last 10 years, of course, is Auto-Enrolment. You mightn’t have heard of Auto-Enrolment before, but it’s something that happens when you start a job. When I started my first job, I was given a choice - do you want to be in the pension scheme or not? And I said, ‘well no, because you’re gonna take money off me, and I’m 25 and I’m never gonna get old’. And the thought of pensions and retirement just didn’t really compute. If you’d said to me, ‘would you like some extra money every month just for turning up at work every day?’ It would’ve been a different story. But, Auto-Enrolment has made that decision for around 10 million people in the UK already. So, we can start saving into a pension without thinking about it, without even really knowing what a pension is.
PHILIPPA: Yeah, as you say, starting early, if you can save towards your pension, it maxes out your chances of living well when you’re older. But it can be hard to work out how much you need, can’t it? I’ve been through this myself - trying to work out years ahead, how much do you think you need to spend every year? We asked our listeners what they thought about that. Almost a third thought that they’d need £50,000 a year to live on. Now, that’s a lot isn’t it? Becky, is that what you’d expect? It seemed high to me. It’s a big number, isn’t it?
BECKY: So the Pensions and Lifetime Savings Association (PLSA) is a trade group and they tried to nail exactly what they thought people would need in retirement for different living standards. So they broke it down into minimum, moderate and then comfortable. And needing £50,000 is actually more than the PLSA says you’d need. If you’re a single person hoping for a comfortable retirement, they put that figure at £37,000. If you’re a couple and you want a comfortable retirement, which is the highest living standard, that would be £54,000 roughly. But that would be between you, so around £27,000 each, including the full State Pension, if you were both eligible. If you include the State Pension, that brings down the amount that you’d need as an individual to something more like £17,000 per year.
PHILIPPA: Yeah, and you talked a bit about pension pots there. What’s the typical size of a pension pot? It varies geographically, doesn’t it?
BECKY: It does vary geographically. The PensionBee data that we have from customers puts Northern Ireland at the lowest average and the Southeast and London as the highest average pension pots. Of course it varies by age. So if you’re 20 something, you won’t necessarily have very much in your pension, but if you’re approaching retirement age, then you’d hope to have some more. And so the average across all ages is actually just over £30,000. But if you look at the 55 to 64 age group, which is when you’re really starting to think about retiring, £107,000 is the average. And going back to those income standards in retirement, that would get you just over the minimum.
PHILIPPA: Yes. We all know saving’s smart, but should you put that cash into a pension or an ISA? We’ve got poll data on this too. 30% of the people we polled had only a pension, 2.5% had only an ISA, and over 67% had both a pension and an ISA. So Becky, a lot of people had both. As you said, Auto-Enrolment was the real game changer. How much of a difference did that make on the numbers?
BECKY: Oh massive. So it’s more than doubled, which is amazing.
PHILIPPA: But do people opt out?
BECKY: They generally don’t, which is good and is exactly what Auto-Enrolment was designed to do.
CLAER: And if they do opt out, they get opted back in after three years.
BECKY: Yeah, exactly.
PHILIPPA: I think we all understand the basics of pensions, don’t we? But should we talk a bit more about ISAs Claer? Because there’s various kinds. Should we stick to the main ones for the purpose of this? What are they? How do they work?
CLAER: Yeah, so you get a £20,000 ISA allowance per year that you can pay into a range of different ISAs. I’m sure we’ve probably all got, or have had at some point, a Cash ISA? I’m getting nods. But around half of people in the UK have never heard of the second most popular type of ISA, which is a Stocks and Shares ISA. So with these, you can invest in companies that are listed on the stock market or funds that consist of lots of different companies that are invested on the stock market. I was always put off opening a Stocks and Shares ISA as a young worker because I didn’t know where I could get one, and I also didn’t know how I’d make the decision of what investments to put in it. But nowadays it’s much, much easier with the different investment platforms that you can open ISAs on. There’s even apps where you can open a Stocks and Shares ISA which have made it much more user-friendly for people to find, maybe select a risk weighting that they’re comfortable with, even answer a questionnaire about the sort of investing they’d like to do, and get going.
The other ISA that you’ve maybe heard of is the Lifetime ISA. We’ve got quite a youthful audience here at White City tonight so, if you’re under 40 years old, then you can open a Lifetime ISA as part of your ISA allowance. You can pay in a maximum of £4,000 a year to a Lifetime ISA and you get a 25% government bonus on top. So if you paid in the maximum £4,000, you’d get a free £1,000, which attracts a lot of people. You can use that then to either put towards your first home, so long as it’s worth less than £450,000, which has caught a lot of people out. Or, you can access it after the age of 60 and use it a bit like a pension.
PHILIPPA: Have you got one?
CLAER: I do. I turned 40 just six days after Lifetime ISAs launched. And the great thing for a ‘moderately old person’, like me, is that once you’ve got it open, you can keep paying into it until you’re 50. So I do try and put £333 a month into it, as a direct debit. And importantly, because I know that money’s gonna be locked up until I’m 60, and I’m 45 now, I know that I can live without it. Because if you want to crack open your Lifetime ISA and get the money out - you can, unlike a pension. But you’ll lose that bonus and you’ll also lose some of the money that you put in as a penalty. So you have to be absolutely sure that you can live without it.
PHILIPPA: What about the rest of you? Have you got ISAs?
DAMIEN: I didn’t qualify for a Lifetime ISA. On Claer’s point though, I know people who turned 40 and then put £1 into a Lifetime ISA, because you can open some with as little as £1.
PHILIPPA: Just to get your toe in the door?
DAMIEN: Just to get your toe in the door and then you can decide how you’re going to start using it. So yes I do have ISAs. Actually going back to your stats, I was one of the 2%. I was the person who was only saving into ISAs for years, that was me. And part of that was down to flexibility because I had a young family and there was always that element that I might need to get the money out. And then I started running Money To The Masses. So effectively becoming self-employed meant then that I missed out on Auto-Enrolment. So ISAs, at one point, were a good way for me to start investing. But they also gave me the flexibility I needed, with a young family and if you wanted to buy a house and all those things.
PHILIPPA: Yeah, you feel a bit more agile don’t you? Peter, what about you?
PETER: I do have ISAs.
PHILIPPA: What sort of age did you get them?
PETER: About seven years ago. I don’t qualify for a Lifetime ISA unfortunately.
CLAER: I feel so young!
PETER: ISAs are great because, you know we’re talking about pensions here, and how ISAs and pensions kind of converge, and interact with each other. One of the great things about ISAs and why people often get attracted to them is because you get the flexibility that comes with it. You can access the money as and when you want to, right? But, when you think about using an ISA to generate an income, it’s also tax-free. So you’ve got that added benefit as well, unlike pensions where you’ve gotta pay income tax on it.
PHILIPPA: So Becky, I’m gonna put you on the spot now cause everyone else has said they do have ISAs.
BECKY: Yeah I do have ISAs. My investments are like a wild flower garden. I’ve got bits of money saved everywhere. There’s a bit in a Lifetime ISA, a bit in a Stocks and Shares ISA, some in Junior ISAs for my kids. They’re not all doing well and I’m not contributing to all of them, all the time either, they’re all there - but they’re not pension substitutes. Although with the Lifetime ISA, I do quite like the idea of getting this bit of cash at 60. With a pension you can access it at 55, although that’s going up to 57 from 2028. I just quite like the idea of having this little extra bit saved, because my boys will be a certain age by then, where they might be getting married or buying a house, or something. So that’ll be quite nice.
PHILIPPA: See, this is making me wonder when you all actually started saving? Because as Claer said, you don’t think about it when you’re young. I certainly didn’t save any money until I was about 30, and it wasn’t much then. When did you actually start thinking ‘I need to put some cash away’?
CLAER: I was 29 when I started a pension and that was when I joined the Financial Times Group.
PHILIPPA: So that was a workplace pension?
CLAER: That was my workplace pension. I could’ve been in previous workplace pensions, but my biggest priority when I was younger was saving enough to get a deposit together for a flat. And I managed to buy my first property, very luckily, at the age of about 27 because in those days, you could get a 98% mortgage.
PHILIPPA: And what about the rest of you?
PETER: I didn’t start saving into a pension until I was in my 30s and funnily enough, I’ve been working in financial services for 15 years.
PHILIPPA: So, you knew better?
PETER: I used to work for one of the big banks and back then they had a defined benefit pension, which is one of those ones that gives you guaranteed income for life. I didn’t know it at the time, they didn’t explain it to me. They gave me two options - we can pay in or we can give you the money. So me, being in my 20s, I took the money and it was beer money on the weekends. I found out probably about seven years ago that it was a defined benefit pension and I still kick myself now.
BECKY: You haven’t worked out how much you missed out on though, just to kick yourself?
PETER: I couldn’t face the calculation! Because I was with them for a very long time. So I hate to think how much I missed out on.
BECKY: I can match that, well not quite! But when I joined my old workplace scheme, which was at The Times, it was a hybrid - so it was a part defined benefit and part defined contribution pension. I chose the cautious fund and I was very young. I was 25 and I shouldn’t have chosen that because it grew by about 1% a year during the time that I was there.
PHILIPPA: But, presumably you had no idea what you were doing?
BECKY: No, I didn’t. I mean, luckily somebody did tell me to join the scheme because it was before Auto-Enrolment. So thank you to that person. But I didn’t get information about which type of investment was right for my age.
MAKING THE MOST OF YOUR PENSIONS AND ISAS
PHILIPPA: Yeah, I mean going back to ISAs and home ownership, Becky, when we were talking about this podcast a couple of days ago, you raised this point didn’t you - about the Lifetime ISA being closest to a pension. If you’ve already got a home and you already have a pension, is there any point in having a Lifetime ISA?
BECKY: Yeah, I think it’s something people come up against as a bit of a dilemma. For the reason that I previously gave, it might be quite nice to have a pot that’s coming your way at 60. Obviously with the Lifetime ISA, you have the bonus and with pensions, you have the tax relief. However much you get in tax relief depends on whether you’re a basic, high rate or additional rate taxpayer. So, it depends on your taxpayer status, for one thing, as to which works out better.
There’s an annual allowance on pension contributions. And there’s another kind of loophole, which means you can use a previous year’s allowances on your pension as well, which is worth knowing about, if for some reason you’ve quite a bit of cash coming your way.
CLAER: If you come into an inheritance?
BECKY: Exactly. And that can be quite handy at that point. With a Lifetime ISA, as Claer said, the limit in a year’s £4,000. So it’s a slightly lower limit. I’d personally like to hedge my bets, which is why I’ve got a wild flower garden.
DAMIEN: Can I just add two things to that? Obviously if you’re in a relationship, each of you can have a Lifetime ISA, so you’re getting double bubble. So, why wouldn’t you do it? And the other thing is your point about carry forward on pension contributions. I don’t know if anyone here runs a business, but the one thing I would say is, you have to have the pension open from the three year period. Even if you’re not gonna be able to contribute much into it, you’d need to open a pension and put something in it, so that it’s there. Because you have to have had that pension in place so the rules can be used. So even if you’re thinking about some point in the future, have a look at the rules and you may have to think about opening a pension if you haven’t already got one.
PHILIPPA: Peter, a few weeks ago I saw a blog of yours about common mistakes that people make when it comes to ISAs? Do you want to run us through those?
PETER: One of the key things that people often make a mistake on is not understanding what type of ISA they want to go for. I think it’s really important to understand how they work. Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs. Particularly when it comes to things like Stocks and Shares ISAs, you can’t get away from the immutable fact that you’re going to have some investment risk with it and you shouldn’t underestimate that. It’s a great vehicle in terms of potential growth, but the downside to that is also very, very real. And, you’ll probably be able to speak to this as well, Damien - a lot of the time people will think, with a Stocks and Shares ISA, that it’s going to grow - and you can have a Stocks and Shares Lifetime ISA as well. I see a lot of people looking to get on a property ladder with a Stocks and Shares Lifetime ISA, that want to buy a house in three years time. And I think the risk is too high. Do you want to potentially lose your deposit on the stock market? I think that’s really important to understand - what type of advice you’re actually using.
The second one’s that £20,000 to a lot of people, they think, ‘I’m never gonna have that much money so I won’t even bother’. And I often say to people, don’t think about £20,000. Yes, that’s the limit that you’ve got, but if you’re able to contribute £1,000, £2,000, £5,000 into it, that’s what you should aim for.
CLAER: I’ve only ever done it once - been able to save £20,000 in a year.
PHILIPPA: It’s a lot of money.
BECKY: I’ve never done it.
PETER: I’ve only been able to do it last year.
PHILIPPA: Because psychologically, there’s this idea that’s what you need to put in. But as you say, you don’t. It’s like you said Damien, you put your toe in the water with these things and it’s always worth doing isn’t it? It doesn’t really matter how much it is.
PETER: It’s amazing when you go back over what you’ve saved. You think it’s small amounts of money. It’s £1,000, £2,000, £3,000 here and there, but you extrapolate that over five to 10 years and it’s a lot of money.
PHILIPPA: Getting back to the pension vs. ISAs thing. When we polled our listeners, a big majority told us they had both. Is that the best idea?
CLAER: I think it’s a very worthy aspiration. Instagram has been a massive influence on how we learn and educate ourselves about personal finance, and YouTube as well. We’ve got lots of excellent influencers here in the audience tonight. But one of the mistakes that people make after looking at people talking about investing and ISAs on Instagram is that they overlook the benefits of their company pension especially. Because we don’t have people from the company pensions team or HR on Instagram saying, ‘hello everyone, let me tell you a little bit about this company pension thing’. And Perhaps we should.
So, I always say to people, before you start thinking about Stocks and Shares ISAs and Lifetime ISAs, you need to ask one question to your employer which is, what’s the match on staff contributions to the pension scheme? Because that, in my book, is what I call the ‘free money’. So if you pay in, say 5% of your salary, it seems like a wrench but they might match it with 10%. They might pay in the bare minimum and only do Auto-Enrolment. But the only way you’ll find out is either by asking, or when you turn up on the first day, they’ll give you the booklet about the pension scheme and you’ll normally have a choice about things like how much money you want to put in. And often when you’re starting a new job you’ll say, ‘oh well the minimum’s 3% so I’ll tick that’. But people don’t realise that if they were to tick a slightly higher percentage, there could be a lot more money on the table from the employer as well.
PHILIPPA: If you find that you cannot keep up your contributions to your pension or your ISAs, what should you focus on? Presumably your pension?
BECKY: If you’ve got stacks of debt that you’re struggling to pay off, then pay off the debt. And then it so depends on circumstances but you do want some short-term savings as well. That buffer’s really important, particularly if life’s very marginal.
PHILIPPA: Yeah. What do the rest of you think about that?
DAMIEN: So whatever you’re putting away, whether it’s into a pension or other savings, it’s not an on/off thing. You can dial down and dial back up. And I’ve used that analogy before - it shouldn’t be like a light switch, not on/off, but like a dimmer switch. So you can turn it down when you need to, but then turn it back up at a later point. If you turn it off, it becomes much more difficult to turn it back on. It’s a mental thing.
I’m gonna give you insight into my own life. I’ve been living like it’s been December 2023 and beyond for about the last year and a bit because I could see what was coming in terms of mortgage rates. And I could see what was gonna happen in terms of lots of things with the economy, which I’ve talked about on my podcast. So I’ve been putting money away in the short term to balance out the fact that my mortgage has now gone through the roof. I was one of those people whose fixed rate mortgage just happened to be coming up at this point and that’s just bad luck. So I’ve put money away at the expense of my pension because it’s no good having a pension if I haven’t got a roof over my head. So you have to be flexible. What ended up happening is, the money I set aside was more than I needed. So I can now take some of that money and put that into investments and other things. So it’s again, about having a plan, it’s not about turning on and off. That’s my view and that’s how I dealt with it.
PETER: I would agree. And there are some really good points in there because everyone has different circumstances. I always say this, what’s gonna help you sleep better at night? If, like Damien said, you’re at this point, where actually, the roof over your head’s the priority, then you have to make a tough decision. And it may be that the right decision at the time is to turn it off and stop contributing to your workplace pension. But you have to be mindful that you’ve got to turn it back on again at some point. Because you’re right, it’s psychological. Once it’s turned off, people get accustomed to the money that’s now available. And you just forget. And it’s very, very easy to do that.
PHILIPPA: Okay, let’s move on to some specific scenarios and look at our pension vs.ISA question from the point of view of different sorts of people. Personally, as I said, I’m self-employed, 4.2 million people in the UK are also self-employed. So panel, what do you think’s the best way for someone who’s self employed? We’ve touched on this a bit, but specifically, if you’re self-employed and are interacting with these products, what do you need to think about?
CLAER: If I can go first, I think the hardest thing for people who’re self-employed is feeling confident enough to lock money up, where you can’t get to it. That’s one of the reasons that pension saving among the self-employed is so low. But also, if you think about how your earnings can fluctuate when you’re self-employed. The luxury of having a salary where you’re getting the same amount of money hitting your bank account every month, where you don’t have to phone up your employer repeatedly to say ‘hello, can you pay me?’ - which is the life of the self-employed. Late payments are an absolutely massive problem for small businesses and for self-employed people. You may not get paid for something for months, so if you don’t have short-term savings pots to raid, then you’re gonna be in trouble.
So what I advise friends who’re self-employed to try and do, is to separate money when it comes in. So, say you’re paid £1,000 for a job, then you’d probably wanna put at least 20-25% of that money away for the tax bill that’s eventually gonna arise. That trips up a lot of people. But then maybe put another 10%, as Damien was saying, into an accessible place where you can reach it. Maybe an ISA, maybe premium bonds? You could win a tax-free prize while it’s sitting in there. But then if you can live without it for a year, then it’ll give you more confidence that you could actually lock it up into a pension, or invest it for the long term using a Stocks and Shares ISA. I think the biggest irony for a lot of self-employed people and business owners is, that by law, you’ve got to set up a pension for your staff and Auto-Enrol them, but often you don’t have enough money to set one up for yourself.
DAMIEN: Yeah and I’m nodding Claer, because you’re describing the world that I inhabit. So when I talk about my scenario, it’s because I’m technically a business owner. My staff are Auto-Enrolled and they all get the match on pension contributions. But then for me, as somebody who runs a business, you’re focused on the business and your staff, and you sometimes then have to take a step back and go, ‘well there’s something beyond this, I’ve got a family, I’ve got a future and I don’t wanna do this forever’. And so, there’s a point where you have to start doing exactly what Claer suggested and you have to start trying to put more money away each month.
PHILIPPA: I’m thinking about other specific scenarios. I’m thinking about age, have we got anyone in the audience who’s nearing retirement? No one looks old enough for this, surely? With less time to maximise gains, pensions or ISAs, what should it be?
CLAER: I think that everybody needs to take a longer term view of how long their money’s gonna be invested for, regardless of the tax wrapper that it’s in. Whether that’s a pension or an ISA. What’s becoming the norm nowadays is that you don’t take all of your money out of the stock market at the point at which you retire. You leave it invested and you manage those investments and hope that you can generate enough income to live off those investments for longer and not exhaust them. Whereas, if it was just cash and you were taking £20,000 of cash every year and inflation was eating it away, eventually it’s gonna run out and it’ll run out much quicker. We need the skills to manage investments in our retirement, and this is yet another thing that we don’t get taught how to do. It’s actually much more difficult than just finding the cash to accumulate into pensions over time. I even doubt my own ability to be able to manage investments when I’m in my 60s and my 70s, and I’m somebody who’s quite interested in investments and the stock market. But it’s just another thing that we’re gonna have to do. It’s another fact of life.
Whereas I think for generations passed, it’s been the idea of pipe and slippers. There’s a fixed endpoint to work and then you cash in your pension, you buy an annuity, you get that guaranteed income for life and you don’t have to worry about all of this stuff anymore. You’ve got that certainty baked into your retirement. And that certainty, unfortunately, is what the new system of pensions has made us relinquish. But I don’t think that a lot of people have woken up to that yet.
DAMIEN: And I don’t think there’s anything wrong with running your money for your working life and then deciding you don’t want that stress, because there’s a stress that’s associated with it. Also, when you make decisions yourself with your own money, there’s no fall back. So you might want somebody to come in and have an alternative view, and give you advice. Just because you made one decision at retirement, it may get to a point where you might actually decide you want to have an annuity. Decisions can change throughout your retirement and therefore getting financial advice is one of the things that I think people will do more regularly through their retirement as they live for longer. So I think it’s a valid point.
PETER: You need to have a plan and the plan should look something like - understanding when you get to that retirement date, what do you actually need in terms of money? Are you in that middle phase where you need £X amount of money? What does your State Pension bring in? Then also having a look at, if you’ve got a pension and an ISA, how they act differently when it comes to the tax that you have to pay. From a financial planning point of view, you might decide, well actually let’s take money from the ISA first because it’s tax-free. You can kind of manage your tax payment to the government in that way and leave the pension until much, much later on. When does your State Pension actually kick in? There are so many variables to consider at that point.
BECKY: I would just say though, that financial advice comes at a cost and it’s one that a lot of people can’t actually manage even with the pension pot size that they might have when approaching retirement. So there’s something called Pension Wise, which is a free government guidance service, which is actually really good. It’s not full-on, very detailed financial advice that you’d expect from an Independent Financial Advisor, but it does go into some detail and it’s personalised.
PHILIPPA: Yeah. If only as a guide to thinking, ‘do I actually need to shout out for advice’?
DAMIEN: Yeah, and actually back to your original question, when you get older does the pension become more attractive? Well in very simple terms, you’re closer to the point you can actually access it and you get tax relief on the way in so, on a very basic level, it does. The numbers suggest it.
PHILIPPA: Thinking about other scenarios and people wanting to leave money, it might be for loved ones, it might be for good causes. What’s the easiest way to do this? Pensions or ISAs? Again, I’m back to that.
CLAER: Well, I think if you went to go and see a wealth manager, they’d all say spend the pension last. But also, at the moment and I say at the moment cause I think it’ll probably be taken away in the future, there are amazing tax benefits if you leave somebody your pension. Now, you can’t leave somebody a pension in your will, you have to fill in what’s called an expression of wish form. Now, I mention this because like any pension that you’ve got anywhere from any company, even old ones - you might have started your first job aged 21 and thought, ‘oh well if I die, I’ll pledge for my pension to go to my lovely boyfriend’. But then, by the time you start your third or your fourth job, you might have split up with him. You know, the relationship could be toast. But if you don’t go back to that pension provider and say, ‘actually I’d like to update my expression of wish form because I’m now married to Peter and I’d like him to get my pension’, then he won’t. So it’s well worth thinking about.
But say for example, I leave you my pension, and you can leave anyone your pension. It doesn’t have to be somebody you’re married to. My pension will go seven ways between my three stepchildren and my four nieces and nephews. If you want the money to go to them, there are massive tax advantages in passing it to them. In some cases, if you die before the age of 75, the money will go to them tax-free or they’ll only have to pay the marginal rate of tax that they pay when they access the pot. Now there are lots of different rules and regulations that surround this, but that’s the main reason that people are shoving loads and loads of money into pensions, if they’re wealthy enough to do so. Because they’re seeing it as something that’s outside of inheritance tax and it’s a really great, tax efficient way of passing money on to the next generation.
PHILIPPA: So, that’s a better idea than setting up Junior ISAs for them?
CLAER: Well it could be, but of course you’re relying on the rules not changing and plenty of people, not just me, have noticed that this is quite a big kicker to the wealthiest. And in a cost of living crisis, in a divided society where the gap between the haves and the have-nots is just getting bigger and bigger by the day - should we be giving these massive advantages in the tax system to people who’ve already had so many advantages and so many privileges in life? I think that, regardless of your political persuasion, you could say that maybe that’s a step too far.
AUDIENCE QUESTIONS
PHILIPPA: We’re coming to the end of our time, I’m sorry to say. I wanna wrap up with some questions from the floor. We’ve got roving mics so if anyone’s got a question, show me a hand. Okay, I think I can see someone in the middle there. Tell us your name and your question.
LAURA: Hi, I’m Laura.
PHILIPPA: Hi Laura.
LAURA: My question is, so I have a Stocks and Shares ISA, can I also have a Lifetime ISA as well, or can you just have one, or can you have two Lifetime ISAs? How does it all work?
PETER: Right, the ISA rules can be very, very confusing sometimes. So if you have a Stocks and Shares ISA, you can have that and you can also have a Lifetime ISA invested in Stocks and Shares as well. That’s completely fine. What you can’t do, is have a Lifetime Stocks and Shares ISA open with X provider and then go open another one with Y provider in the same tax year. So you’ve gotta be sure in terms of who you’re choosing to allocate. You can have a Stocks and Shares ISA, just a normal one, and a Lifetime ISA that’s invested in Stocks and Shares as well. That’s completely fine and within the rules.
PHILIPPA: Have you got one Laura?
LAURA: Yeah I’ve got a Stocks and Shares ISA but not a Lifetime ISA, but now I might be convinced to get one.
PHILIPPA: Any other questions? Hi.
EDYTA: Hello, I’m Edyta. When I talk about finance with people at work, a lot of people would say ‘why would I contribute to a pension?’. But maybe 30 years down the line everything goes mad, crazy and I’d rather use this money now and maybe invest in properties or businesses and things like this. Nobody has a crystal ball so I’m not asking for predictions, but maybe just your take on why we think pensions are important?
PHILIPPA: Yeah, that sort of anxiety about the future - it’s a good point.
DAMIEN: Can I answer that one on the basis of the uncertainty of the future? So if somebody’s saying why would I not just go and take that money and start a business? The thing is - when you’re contributing to a pension, or Stocks and Shares ISA, you’re investing. So why would you try and create the next Facebook when you can invest in the one that already exists? And all the other mega companies out there that are on the stock market. So if you think about investing, what you’re really doing is taking a stake in a lot of these companies as you’re buying shares. So, people think that their money’s dead when they put it into these vehicles. But it’s not, it’s growing. So when you’re investing, you’re sharing part of the success of lots of companies.
PETER: I’ll add to that and I’ll also share some of my own experience because I thought exactly like this. There’s probably one fact that I’ve come to realise now that I’m 43 and that is that the wrinkles creep up on you just like that. One minute they’re there and you just don’t know how they got there. But when I was in my twenties, I thought I could conquer the world. I thought I was gonna be a massive rap star with loads of money and Lamborghinis and Ferraris.
PHILIPPA: There’s still time!
PETER: I’m 43, I’ve given up on that - my mate’s still going though! But the thing is right, we all think like that when we’re much, much younger and that’s youthful exuberance, right? But you can do the two things at the same time. Contributing to your pension doesn’t mean that it’s going to stop you from pursuing what you want to pursue. You can do both.
PHILIPPA: Are you convinced at all?
EDYTA: Yeah, I am. I think it’s just more from the perspective of - if it’s not there anymore then you cannot really access it.
PHILIPPA: But it sounds quite tempting, doesn’t it? Spend some, save some?
EDYTA: Yeah, I do both.
CLAER: Can I try and convince you a little bit more? I’d say like with both pensions and ISAs, you’re getting the most bang for your bucks. I’ve tried to explain pensions before to a group of school children, like a supermarket meal deal. So, you’re putting in the sandwich but then you’re getting the free money, which is the contribution from your employer, and that’s the drink. And then, because you’re not paying tax on any of that money and it can grow tax-free, that’s the packet of crisps that the government’s throwing in. So if you just take your sandwich - you don’t get the government top up, you don’t get the employer top up. You’ve then got less to try and invest in the other things you’ve talked about. Property being one of them. Well, you know the problem with property is that the government’s gonna come along and take quite a few bloody bites out of the sandwich in the form of things like capital gains tax and tax on rental income. So I like to put in the full sandwich, drink and crisps into my pension, and think, ‘okay, this is the most bang I can get for my buck. And that’s before we start thinking about investment growth.
BECKY: I think if your whole approach is patient and ‘I’m in this for the long haul, and slow and steady wins the race’, then that should give you a bit of comfort that you’re doing the right thing for yourself and you’re not missing out on anything more exciting. Because it probably doesn’t really exist. Pensions are the most exciting thing you can invest in!
PHILIPPA: I’m saying nothing! I think we’re gonna wrap this up now. Really useful questions, really useful answers, thank you panel. I know our studio audience would like to thank you too. So let’s have a round of applause please.
Applause
PHILIPPA: Now, if you’d like to hear more from our guests, Damien’s podcast, Money to the Masses is out every Sunday and you can find it, of course, on all major podcast platforms. Claer’s brand new book, What They Don’t Tell You About Money and Peter’s brand new book, The Money Basics are both out now!
Now for everyone listening here or indeed at home, please remember, as I said earlier, anything discussed on the podcast should not be regarded as financial advice. And when investing, your capital is at risk.
Next time on the podcast: you’ve spent all those years saving up towards a happy retirement, you’re ready to retire, but how do you access all that hard earned cash? We’ve touched on this today. We’ll discuss the best time to access your pension, and the best ways to take it along with all the ins and outs of pension withdrawal. So join us for that one. In the meantime, please do rate review and share this episode and keep up to date with everything going on at PensionBee.com/podcast. Thank you.
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.
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 |
