Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Welcome to Meren Talks
Speaker 1: Your Money, the personal finance edition of Merin Talks Money.
Speaker 1: In these bonus podcasts, we talk about the best strategies
Speaker 1: for making the most of your money. I'm merensum Set
Speaker 1: Web and with Me senior reporter and Money to Soiled
Speaker 1: author John Stappeck Hi, John hil So. Budget is over.
Speaker 1: Things are a little more clear now. Of course, are
Speaker 1: not any more clear at all, but some things are
Speaker 1: a little more clear. That means we can now answer
Speaker 1: some of the personal finance questions with a little bit
Speaker 1: more clarity. We're not always going to be saying depending
Speaker 1: on the budget, depending on the budget, depending on the budget.
Speaker 1: We're now going to say depending on the next budget,
Speaker 1: depending on the next budget, depending on the next budget.
Speaker 1: Because we know this isn't this isn't over looking at
Speaker 1: you know, there's incredibly high level of span, incredibly high
Speaker 1: level of TAXI GDP, very low growth, etc. Know that
Speaker 1: she's going to be needing more, she's going to be back.
Speaker 1: We don't know what she's going to be wanting next time.
Speaker 1: But it's not over, so we're always going to caveat
Speaker 1: everything with there are more budgets to come and we
Speaker 1: have no idea what's going to happen in them, so
Speaker 1: everything that we say must be taken with that in mind.
Speaker 1: Is that fair?
Speaker 2: Oh, that's fairly fair, especially when it comes to today's topic.
Speaker 1: Yeah, and it would be fair regardless of who was
Speaker 1: in government, if I'm honest.
Speaker 2: Yeah.
Speaker 1: Right, So this week we want to talk about something
Speaker 1: incredibly important and something that really really agitates me and John,
Speaker 1: and you'll probably have heard us saying over and over
Speaker 1: and over on the podcast and writing over and over
Speaker 1: that we do anything, almost anything bar selling our children,
Speaker 1: but pretty much anything else to have a defined benefit
Speaker 1: pension instead of the defined contribution pensions that we do have.
Speaker 1: So Withstafa, who's been listening to us going on about
Speaker 1: this for a while, have finally asked the right question,
Speaker 1: He says, I have heard you regularly wish you had
Speaker 1: a defined benefit pension. I do have one, but since
Speaker 1: the first of April, I have transferred for defined contribution pension.
Speaker 1: Am I being a fool?
Speaker 2: Well?
Speaker 1: I have to say my first thought when I saw
Speaker 1: that was first of April. Please God let it be
Speaker 1: a joke. But I think I think it probably isn't.
Speaker 1: Let's start off with defining what this actually has done.
Speaker 1: What's a difine benefit pension. What's this thing you want
Speaker 1: so very bad but not enough to go work in
Speaker 1: the public sector quite badly, but not that badly.
Speaker 2: Yeah, well there is that. So defined benefit pension means
Speaker 2: that when you retire, you get an amount of manual
Speaker 2: income that is proportionate to your salary over your lifetime.
Speaker 2: So at the moment, most faint benefit pensions, they used
Speaker 2: to be final salary now their career average. But all
Speaker 2: that means is that over the length of your career,
Speaker 2: it's the average your salary over that time, and you
Speaker 2: get paid a certain amount of it once you retire.
Speaker 2: And the important thing is that that's guaranteed and it
Speaker 2: goes up with inflation. So you don't have to worry
Speaker 2: about doing anything other than doing your job, and you
Speaker 2: never have to worry about investing money for your retirement
Speaker 2: over and above perhaps anything that you want to do
Speaker 2: in the side. So it's just a very straightforward way
Speaker 2: from an employee's point of view of saving for the future.
Speaker 1: All the investment risk here, or all the risk of
Speaker 1: having enough money to pay out the pension lies with
Speaker 1: the employer. And when I say it lies with the employer,
Speaker 1: I mean it occasionally lies with what you might think
Speaker 1: of as an employer, because there aren't very many of
Speaker 1: these schemes left around in the private sector, right, So
Speaker 1: in the old days, pretty much everyone who had a
Speaker 1: pension had to define benefit pension gradually because they are
Speaker 1: very expensive. Will come on to that they've gradually disappeared.
Speaker 1: There are now well hundred a million people in the
Speaker 1: private sector with defined benefit pensions that are still accruing
Speaker 1: all other defined benefit pensions. Many many millions of them
Speaker 1: are in the public sector. So eighty two percent of
Speaker 1: those who work in the public sector have a defined
Speaker 1: benefit pension on the go. So when I say the
Speaker 1: risk of these pensions rests with the employer, what I
Speaker 1: really mean is the risk rests with the public sector,
Speaker 1: by which I really mean the risk of their pensions
Speaker 1: rests with you, the taxpayer, lucky. So that's how it works.
Speaker 1: This pension income. The great thing about it, as Johnson,
Speaker 1: it arrives every single month. You get paid regardless of
Speaker 1: what happens. And this, of course the country goes completely
Speaker 1: bust and other taxpayers can't continue to provide fewer retirement
Speaker 1: This could happen, but it's not looking likely in the
Speaker 1: immediate Do you get that money now in the private sector,
Speaker 1: if you have a private sector dB, you may get
Speaker 1: inflation linkage, well, you will get inflation linkage, but it's
Speaker 1: not guaranteed to be to the actual RPI or the
Speaker 1: actual CPI. You may have a cap which is sometimes
Speaker 1: three percent a year or five percent a year, which
Speaker 1: means that quite a few people in private sector defined
Speaker 1: benefit schemes stout during that period of very high inflation.
Speaker 1: So in periods when inflation was above ten percent, they
Speaker 1: may have found they've only gotten up left with three
Speaker 1: to five percent. But nonetheless that's probably better than those
Speaker 1: words in the private sector managed on our defined contribution pensions.
Speaker 1: So that's a defined benefit pension, and you can see
Speaker 1: how incredibly attractive it is. There's one more thing to
Speaker 1: add to it on its enormous attractions, which is the
Speaker 1: amount that employers tend to contribute. In the NHS, the
Speaker 1: employer the public sector, the taxpayer contributes around twenty four
Speaker 1: percent nearly twenty four percent of a salary into the
Speaker 1: pension scheme for the employee. The employee themselves will will
Speaker 1: put in anything from five point two percent to twelve
Speaker 1: point five percent, depending on where they sit on the
Speaker 1: income scale. In the civil service it's pretty good too,
Speaker 1: you get twenty eight point ninety seven percent. There are
Speaker 1: various different schemes, but that seems to come out around
Speaker 1: there all the time. And the low government it's fourteen
Speaker 1: to eighteen percent. So your employer, the public sector is
Speaker 1: putting just to be clear, it's putting a lot of
Speaker 1: money into these schemes. Now, let's shift from that very
Speaker 1: pleasant sounding thing. Although I will say that, and it
Speaker 1: is fair to say this job before we go any further,
Speaker 1: just because you're in a defined benefits game doesn't mean
Speaker 1: you're going to spend your retirement rolling around in money.
Speaker 1: If you were making twenty five thousand pounds in the
Speaker 1: public sector before your retirement, you're going to be getting
Speaker 1: considerably less than that as your pension. And I would
Speaker 1: also say that there is a saying where because the
Speaker 1: contribution levels from the employee are reasonably high, they can
Speaker 1: be you know, five six seven percent. It is the
Speaker 1: case that a lot of low earners in the public
Speaker 1: sector opt out of their pension, and that's a major problem,
Speaker 1: not medium owners or higher. And as they all stay
Speaker 1: up to tend very sense of a word at the bottom,
Speaker 1: they're going to be people who say, do you know what,
Speaker 1: I'm only earning fifteen thousand pounds, I can't afford to
Speaker 1: put anything into a pension, regardless of the fact that
Speaker 1: my employment might be adding another twenty percent plus just
Speaker 1: too much. I say, that's a problem. Lovely southing nice
Speaker 1: isn't define contribution, define contribution pension.
Speaker 2: Or define contributions the opposite. So really you just have
Speaker 2: to save into sometimes call a pot, but we prefer
Speaker 2: to call a rapper tensions rapper that carries various tax
Speaker 2: advantages but really ignoring them. It's on you to save
Speaker 2: up as much as you think you're going to need
Speaker 2: to fund your retirement when you retire, and when you
Speaker 2: retire you can use that pot in various ways, but
Speaker 2: the point is it's not protected in any way and
Speaker 2: there is no guarantee. All of the risk is on you.
Speaker 2: And I think to get a sense of how much
Speaker 2: more beneficial the defined benefit pensions are for auto enrollment,
Speaker 2: which is define contribution schemes, your employer contribution is as
Speaker 2: little as three percent and your your kind of contribution
Speaker 2: will be five percent from your gross salary, and obviously
Speaker 2: some employers are more generous than that. But the point
Speaker 2: is that even a generous sort of like generous package
Speaker 2: by defined contribution terms would be much lower than the
Speaker 2: civil serve is nearly a third to your wage getting
Speaker 2: paid by your employer on top and it's not going
Speaker 2: into your pension scheme. But that's the point. That's the
Speaker 2: cost to the employer for providing you with that pension.
Speaker 2: So yeah, so the risk is all on you, and
Speaker 2: that's that's for the entire period, including Jurdan retirement.
Speaker 1: I mean, you're not necessarily making the investment choices. Obviously
Speaker 1: a lot of people don't even know they have a
Speaker 1: defined contribution pension at all. It's just a pension. But
Speaker 1: what's happening is that their contribution and employers contribution are
Speaker 1: being paid into a fund of some sort. Normally horribly
Speaker 1: performing in high fever will come onto that another time,
Speaker 1: and that the idea is that grows throughout your working
Speaker 1: life and at the end there's a lumpsum that's enough
Speaker 1: to pay you out a reasonable income. And we've looked
Speaker 1: at this before. It is true that if you work
Speaker 1: on an average income, you get a reasonable uplifting your
Speaker 1: salary every year, and you come out the other end
Speaker 1: having saved the maximum your employer allows them the pension
Speaker 1: added to the state pension, you should be just about okay.
Speaker 1: But you're just about okay without the certainty and inflation
Speaker 1: uplift that you get with a dB. So, although it
Speaker 1: doesn't really matter how you cut it, a dB is
Speaker 1: a better deal for an employee than a DC or.
Speaker 2: On that inflation point. This really is important because even
Speaker 2: if you get an annuity, which most define contribution people
Speaker 2: don't at the moment, you still aren't going to be
Speaker 2: able to buy one that buys you the kind of protection.
Speaker 2: I mean, I was hauping to look at the civil
Speaker 2: service pension before we came on as well, and we're obsessed.
Speaker 2: And during the they can have very inflationary period. So
Speaker 2: they got ten point added to the pension in April
Speaker 2: last year because that was the reference period. So no
Speaker 2: one in the private sector, I mean, if you did
Speaker 2: get ten point one percent would be interested to hear it.
Speaker 2: But I don't think anyone would have unless you get
Speaker 2: some very obscure dB set up from a long time ago.
Speaker 2: So it really is a major and major benefit, and
Speaker 2: that would be extremely expensive to putures in the open market,
Speaker 2: even if it was possible we do.
Speaker 1: So. The one thing that might have made a DC
Speaker 1: more attractive than a dB, and maybe something to do
Speaker 1: with my stuff is shift. We don't, by the way,
Speaker 1: know anything about my stuff as actual situation. Why he
Speaker 1: shifted from pension to pension. We don't know whether that's
Speaker 1: actually about changing jobs. We don't know whether a positive
Speaker 1: decision or not. We have no idea what happened there
Speaker 1: was just all we have is the question that he
Speaker 1: asked us. So no judging here, no judging here. But
Speaker 1: until this latest budget, it was possible to leave your
Speaker 1: defined contribution pension effectively your step to your airs tax free.
Speaker 1: So they did not pay tax on receiving it. They
Speaker 1: and if you were under seventy when you died, they
Speaker 1: paid no tax on it at all.
Speaker 2: Over seventy five, sorry.
Speaker 1: Under seventy five and five over seventy five, he paid
Speaker 1: your personal rate of income tax on withdrawing money from
Speaker 1: the pension. There, I John, yeah, yeah, So that made
Speaker 1: it a very attractive thing to do, and financial advisors
Speaker 1: had begun over the last decade or so to advise
Speaker 1: people to leave their money inside their pension and spend
Speaker 1: all the money that they had outside that pension first,
Speaker 1: because that was the most tax efficient way to leave
Speaker 1: money to their heirs. So that was one reason why
Speaker 1: a lot of people, I mean a lot of people
Speaker 1: transferred from dB to DC, and particularly when interest rates
Speaker 1: were extremely low and so the capital value of defined
Speaker 1: benefit pensions was very high, you could shift that into
Speaker 1: a DC wrapper and think to yourself, this is great,
Speaker 1: My airs are going to be rolling around in cash,
Speaker 1: which of course lots of them, but not anymore.
Speaker 2: Yeah, we talked about this the other week. But the
Speaker 2: thing is, when this first happened, it seemed regious, and
Speaker 2: it did seem like something that was bound to be
Speaker 2: cracked down on eventually. It's unfortunately it's taking a government
Speaker 2: this long to do it, so that it has become
Speaker 2: part of a lot of people's retirement planning and it
Speaker 2: really does change it. I mean, you know, there was
Speaker 2: a point where, like you say, advisors were saying, right,
Speaker 2: you'll put money on your pension, but don't touch your
Speaker 2: pension until last whereas now you're probably going to be
Speaker 2: better to actually take your pension before say your eyes
Speaker 2: are because although your eyes will attract inheritance tax, the
Speaker 2: actual money will then be free of income tax once
Speaker 2: you know you're withdrawing it. If you've passed it on
Speaker 2: to a spouse, it's not a spouser and inherited. Whereas
Speaker 2: the thing with the pension is that not only is
Speaker 2: i HD taken out when they take the income from it,
Speaker 2: that'll get tax too. So you're like, kind of makes
Speaker 2: the sequencing completely different from what a lot of people
Speaker 2: will planned. So that's you know, there's gonna be a
Speaker 2: lot of interest and knock on effects from this, and
Speaker 2: most of them are not going to be, you know,
Speaker 2: ones that people feel very happy about if they had
Speaker 2: been relying on this as a plan in two.
Speaker 1: Yeah, so the thing to do now is to do
Speaker 1: gifts out of income, to take money out of the
Speaker 1: pension and hand it on on the gifts out of
Speaker 1: income exemption actively, isn't it.
Speaker 2: Yeah? Yeah, And yeah, let's say, oh, those kind of elements.
Speaker 2: I'm sure that people who will charge you a lot
Speaker 2: of money to explain to you about doing Yeah.
Speaker 1: Yes. The other group of people who might not be
Speaker 1: particularly impressed by this, of course, is the platforms, because
Speaker 1: nothing an investment platform more. Indeed, a fund manager really
Speaker 1: kind of likes more than sticky money. So the idea
Speaker 1: that people were very gaen to keep as much money
Speaker 1: as possible inside their pension rappers for as long as
Speaker 1: possible was very attractive for financial product providers. So they
Speaker 1: might be markedly irritated by this, but possibly not as
Speaker 1: irritated as people who moved out of dB into DC
Speaker 1: in order to leave their money tax free. So I
Speaker 1: think that's it. Is there anything that we've missed out
Speaker 1: of that?
Speaker 2: I mean, I suppose. The other point to remember is
Speaker 2: that if you want to transfer from a defined benefit
Speaker 2: pension to a defined contribution pension, you will struggle to
Speaker 2: find an advisor who will give you advice on that.
Speaker 2: And the reason for that is because the FCA comes
Speaker 2: down like a ton of bricks or anyone who hasn't,
Speaker 2: you know, completely made sure that it's definitely the right
Speaker 2: thing for the client. So the risk of miss selling
Speaker 2: or being accused of miss selling is extremely high. And
Speaker 2: the reason for that is because for the vast majority
Speaker 2: of people, define benefit pension is a lot better than
Speaker 2: a defined contribution pension. I know you occasionally see people
Speaker 2: trying to make contrarian arguments kind of online about this,
Speaker 2: but you know, it really is one of those things
Speaker 2: where you have to have a very very weird set
Speaker 2: of circumstances for the DC to be better than the dB.
Speaker 2: Certainly as far as I can.
Speaker 1: See, well, there was a point. That point no longer exists,
Speaker 1: but I only mildly disagree with you, junks. I wouldn't
Speaker 1: want it to more than that. But there was a
Speaker 1: point back when interest rates were insanely low, and of
Speaker 1: course to lower the interest rate, the value of the
Speaker 1: assumed the capital sum that pays out your dB. So
Speaker 1: there was a point when interest rates were extremely low
Speaker 1: that pensions that would have provided a very small stream
Speaker 1: of income were suddenly worth a very large sum of capital.
Speaker 1: So there was a moment in the interest rates I
Speaker 1: got when you could argue, and I think I might
Speaker 1: even have argued there was a point when it was
Speaker 1: reasonable to do it, but it was a pretty short window.
Speaker 1: I remember modern Wolf in the Ft he did it,
Speaker 1: and that called a lot of conversation. But of course,
Speaker 1: you know he'd done his maths pretty well, done his
Speaker 1: math pretty well.
Speaker 2: Yeah, I was a great taming call.
Speaker 1: Yeah, yeah, anyway, but now it's rather more complicated with
Speaker 1: rates where they are and possibly staying higher for longer.
Speaker 1: But that's a conversation for a different part of this podcast.
Speaker 1: I think that's kind of it so much tofi there
Speaker 1: you are. I don't think we can answer the question
Speaker 1: was it foolish to move? Because we don't know your circumstances.
Speaker 1: But I think what we would say in general, in general,
Speaker 1: is that John and I would still even after this conversation. Really,
Speaker 1: I really love a dB patchion. Thanks for listening to
Speaker 1: this week's Maren Talk to Your Money. If you like us, show,
Speaker 1: rate to review, and subscribe wherever you listen to podcasts
Speaker 1: also be showed follow me in John on x or
Speaker 1: Twitter at marinsw and John Underscore Steffecht. This episode was
Speaker 1: produced by SOMEERSIDI, production support and sound design by Moses
Speaker 1: and Questions and comments on this show and all our
Speaker 1: shows always welcome, and that's particularly the case, by the way,
Speaker 1: on these personal finance ones, because John and I are
Speaker 1: not IFAs and we are not accountants. So if you
Speaker 1: know something we don't know, do please write in and
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