This episode of the Your Recipe for Financial Success podcast was published on 28th January 2021. You can listen again by heading to our Episodes page, or on your favourite podcast player.

In this episode, Becky, Emma and Julie are talking about a staple in any financial cookbook – pensions.

Episode Highlights

Here is everything you need to know about pensions, at a glance:

  • You can have a pension from any age – even an under 16 can have a pension. You can’t access your pension until the age of 55, however, no matter what age you started paying into your pot
  • You can pay in to a pension until you reach the age of 75
  • Money Purchase Pensions = the more you pay in the more you get out at retirement
  • There is no set amount that you have to pay in to your pension pot. There are, however, limits on the maximum amount you can pay in any one year; either £40,000 or your entire earnings if less than £40,000
  • You get 20% tax relief on any payments you make into your pot. So if you make a contribution of £100, £125 actually goes in to your pot
  • When it comes to withdrawing money from your pension pot, you can normally take 25% as a tax free lump sum. The remaining 75% will be taxed at your marginal rate of income tax.

Hopefully we have filled you up with the basics of pensions and you feel more confident to take control of your pension pot. If you would like to get your teeth into even more financial recipes, check out our other podcasts on our episodes page. Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics!

 

Rediscover the conversation

Becky Campion 
Thank you for bringing those cakes into the office yesterday Emma, they were really lovely. I actually had one for my breakfast this morning!

 

Emma Knights 
A nice sweet treat in the morning.

 

Becky Campion 
It was very nice we treat, nice with a cup of coffee!

 

Emma Knights 
Instead of elevensies, you should have had an eightsies, ninesies and tensies.

 

Becky Campion
I thought my jeans were feeling a little bit tight and now I know why. Have you been making anything else this week?

 

Emma Knights 
Actually I’ve been working on a train birthday cake for my nephew this week. I can’t show you what it’s going to look like yet though because it might be an absolute disaster! I will wait and see.

 

Becky Campion
A train wreck by any chance?

 

Emma Knights
Possibly!

 

Julie Hunt 
That was bad. Hopefully the podcast can only get better from here! I think that leads us to move swiftly on Becky, would you like to introduce today’s episode?

 

Becky Campion
Of course Julie, so in today’s episode, now we’ve got the train discussion out of the way, we’re going to be talking about a staple in any financial cookbook, which is pensions. Okay Emma, let’s start off with the real basics, what is a pension in really really simple terms?

 

Emma Knights 
A pension is tax free savings account, which would be used to produce an income when you do actually retire. You can have a pension from any age. I even mean you can pay into a pension for a child, and you can keep paying into pensions until you reach the age of 75, but actually keeping it even more simple today, we’re just going to be talking about Money Purchase Pensions.

 

Becky Campion 
Whoa, I thought you said simple! what’s a Money Purchase Pension?

 

Emma Knights 
So, believe it or not, it’s the simplest of all the different types of pensions. Basically, it can change with the stock market so it will rise and fall, similar to any type of investment.

It’s not based on how long you’ve worked somewhere or the amount that you earn. It’s based on how much you put into it so basically the more you pay in the more you will eventually get out of it.

 

Julie Hunt 
So how much do you have to pay into a pension then?

 

Emma Knights 
There isn’t actually a set amount, the more you can put in the better. So as much as you can afford is always the right answer, but there are limits. You can put a maximum of £40,000 per tax year or 100% of your earnings so if you haven’t earned £40,000, say you have a pension and earn £20,000, you could put £20,000 in.

When paying into your pension you get something called tax relief. The way to think of this is when you go to a supermarket looking for some ingredients and you go down the home baking aisle, looking for flour, it might say ‘20% extra’ on the packaging. Now I don’t know about you but I like it when that happens! So, tax relief is pretty similar to the 20% extra on the flour.

You get tax relief, at basic rate on the money which you pay in. What that means is if you pay in £100, £125 pounds will actually go into your pension. If you are a higher rate taxpayer you could claim more tax relief back when you do your self assessment.

 

Julie Hunt 
Okay, so let me check I have got that. If I’m paying £60 per month into my pension, what we’re really saying is that £75 per month is actually going into it.

 

Emma Knights 
That’s exactly right.

 

Julie Hunt 
I get that. Earlier on you said there was no set amount to go into your pension, but I have to pay a fixed amount into my pension each month. Why is that?

 

Emma Knights
So I’m guessing, and I could be wrong here, that your pension is probably one through work?

 

Julie Hunt 
Yes it is. Yeah.

 

Emma Knights 
So, I would assume that that’s probably part of what is called an Auto-Enrolment Scheme?

 

Julie Hunt 
Yeah, that sounds right.

 

Emma Knights 
An Auto-Enrolment Scheme is still a money purchase pension, but it’s a little bit different.

It is a scheme that’s been set up by the UK government, which is basically to encourage people of working age to pay into a pension. It started because they were very concerned that there was going to be a massive pension deficit in years to come. They’re trying to do something about it now through auto-enrolment schemes.

The minimum contribution that you’ll be paying in is 4% of your earnings, but your employer will also be paying in 3% of your earnings, and you’ll also get an extra 1% of tax relief. So you’ve basically doubled your money before it’s even been invested.

I’ve got some facts here for you today about pensions and I’m interested to see how close you can get to the answers and whether our listeners think the same as you or something different. My first question for you today is what percentage of the UK adult population don’t have a pension?

 

Julie Hunt
That’s a hard one Becky, what do you think?

 

Becky Campion
I’m going to say is pretty much 50/50, I reckon half do and half don’t.

 

Julie Hunt 
I reckon it’s going to be less than that, a few years ago I would have agreed with you before they brought in the auto-enrolment legislation. I reckon about 25%, of the population don’t have one.

 

Emma Knights 
Ok so one of you is a bit high and one a bit low. The answer is actually 35%. That means 35% of people are going to be fully reliant on the state pension which is currently a bit over £9000 pounds per year. I’m not sure about you but do you think £9000 would be enough to live on in retirement?

 

Becky Campion 
Not comfortably no.

 

Julie Hunt 
Not if I want to do all the things that I want to do in retirement definitely not!

 

Emma Knights
Exactly, people normally want to go on holiday and do all sorts of things. I think that’s going to be a very scrimp and save retirement and doing very little to get by.

 

Becky Campion 
I think you might be right there.

 

Emma Knights 
So how about this one. What do you think the average size pension value is in the UK?

 

Becky Campion 
I’m going to be on the optimistic side. I’m going to go for £75,000!

 

Emma Knights 
How about Julie?

 

Julie Hunt 
I think that’s a little bit too optimistic for me. I’m going to go for about £40,000 pounds

 

Emma Knights 
Surprisingly, you are both too high on this one.

 

Becky Campion 
Oh Blimey, that’s not very promising. I was way out then!

 

Emma Knights 
The average size of a pension is £21,441. If you think of an average adult working 40 hours a week on minimum wage, at the moment they would  be earning just over £18,000. So, what we’re saying is just over one years salary has got to last your entire retirement.

 

Becky Campion 
Not good really is it?

 

Emma Knights 
How about this final question I have for you today. What amount of money do over half of the population believe is a comfortable amount to live on for their retirement?

 

Becky Campion 
Well, looking at those figures, I’m hoping it’s going to be quite a low number. I’m not sure really. About £25,000.

 

Julie Hunt 
Yeah, I think I just go slightly higher and say £30,000 a year.

 

Emma Knights 
So this is where I’m going to shock you both. Actually, people think they need £100,000 pounds to retire.

 

Becky Campion 
What, not in a year?!?!

 

Emma Knights 
No its £100,000 to last their entire retirement.

 

Julie Hunt 
Well that’s not going to get you very far. Looking at the figures you were talking about earlier we’re talking just under £20,000 per year. That’s only five years, so really if you’re retiring at 67 or 68, that’s going to be ran out by the time you are 72 years old and then you’ve run out of money.

 

Emma Knights 
Exactly, then you’re going to be relying on that state pension again of about £9000. In reality you actually need a considerable size pension pot to last your entire retirement. So, best to start saving early, and putting in as much as you can possibly afford, and also making sure it’s invested somewhere sensibly as well to be growing ready for your retirement.

 

Julie Hunt 
Then when you do get to retirement, what happens with your money then? How do you go about getting the money out of your pension?

 

Emma Knights 
When it comes to taking money out of your pension, you can actually take 25% of the value tax free. Say you had £100,000 in there, like most of the population think is what you would need, you’d actually get £25,000 of that out completely tax free.

You could take that as a lump sum, or you could take it over a period of time. The rest of your money that you take out will be taxed at your marginal rate of income tax. If you’re a basic rate tax payer, you’ll be paying 20% tax on what you take out.

I should also note at this point that you can’t access your pension until you reach 55. So earlier on, when I said about paying money into a pension for a child, you can definitely do that but they would not be able to access any of it until they reach 55 under current legislation.

 

Julie Hunt 
So when you say marginal rate of tax, what what do you mean by that?

 

Emma Knights 
Sorry, what I mean is they’ll be taxed like income, the same as your wages would be at the moment.

 

Julie Hunt 
So I get 25% free which I can do what I want with it – so a holiday, car, whatever I want? Then I get taxed on the rest of it. So can I take it all as a lump sum in one go or do I have to take it out as an income?

 

Emma Knights
It can be whichever you prefer. You just need to be careful, because if you take out too much in one year you won’t necessarily be paying a basic rate tax of 20%. You could be pushed into the next threshold and the amount of tax you would end up paying could be 40% or 45%, depending on how much you take all at once.

 

Becky Campion 
All right, okay. Well I certainly understand that now. Thank you Emma.

 

Emma Knights 
So today we have only touched on the absolute basics of pensions. There’s plenty more elements that I’m going to share with you but we’ll be covering those in a future episode. We hope you’ve enjoyed following along in todays episode.