Deep Dive #11 Your big pensions questions answered

Tom (0:09)

Hello, and welcome to the latest episode of the AJ Bell Money & Markets Deep Dive podcast. I'm delighted to say I'm joined today by AJ Bell's Head of Public Policy, Rachel Vahey, and our Head of Technical, Charlene Young, to talk all about pensions. Hello, both. Hope you're doing okay.

Rachel Vahey (0:26)

Hello, Tom. Yeah, I'm very well. Hope you are too.

Tom (0:29)

Yeah, good. Thank you.

Charlene Young (0:31)

Hi, guys. I'm doing all right. I'm a little bit croaky, so apologies to anyone listening.

Yeah, we'll get through it.

Tom (0:40)

100 percent. Yeah, absolutely. Now, this is a special edition of The Pods, and we're going to be asking all your nagging questions about pensions, and we couldn't have two better people on hand to help with that. We've got plenty to get through, so I won't hang about. Let's kick off with a fairly fundamental question. So this question comes in from Lauren, and she says, I've got so many demands on my money at the moment. Retirement feels a long way off. So presumably Lauren is still potentially decades away from needing to use a pension. Is it really worth paying into a pension now?

Charlene, do you want to take that one?

Charlene Young (1:20)

Yes, I will. So thanks, Lauren. I think the simple answer is that it really is worth it. But that's not to say I'm not hearing you when you say you've got competing demands on your cash.

I do completely appreciate that. So why am I saying it's really worth it? I suppose if you're employed, in most cases you'll already be saving into a pension thanks to auto-enrollment. One thing to kind of pick out here, as well as the money going in, so you might be thinking, oh, is it worth me like kind of topping up my pension savings, for example? If you've got a long time to retire, and it sounds like you do from the question, that can really kind of work in your favor because it gives your investments in that pension more time to hopefully grow. And the beauty of a pension is it's a tax-free repper, so those investments in there can grow free of income tax, capital gains tax, for example. And we talk about something called compound growth quite a lot in our articles and on podcasts, but that really does account for a huge part of the end value of your pension pot, for example, when you reach retirement. So if you can really harness the power of that growth, even if at the moment you might not be able to pay in anymore, that can be really powerful. And I think it was the Pensions Commission, I'm not sure Rachel will correct me if I'm wrong, but they mentioned that investment growth, this compound growth can actually account for around 60% of the final value of the pot by retirement. So yes, that's kind of, you know, even if paying in more or topping up right now or isn't quite an option for you, hopefully that kind of gives you a bit of an indication of how powerful the wrapper is for the investments. And I did mention auto enrollment before. And under that, your employer must pay in at least 3% of something called qualifying earnings. Now, many employers actually do more than this. They'll go above and beyond.

So, you know, it's well worth kind of first point checking what they're paying in. And you might be surprised, they might be paying in more. If you stop saving, which I really, really would urge you not to, if you can at all avoid it, you wouldn't get that employer contribution back as pay in another way. So it could be lost. So it's another kind of really valuable part of saving into a pension if you are employed. And, you know, I think we would hear this quite a bit. And this question is, is it worth it? We've been seeing it pop up following last year's budget, for example, and changes to something called salary sacrifice. I think, you know, changes and whether it's rumours or real changes or tinkering like this doesn't really help that message. But I think what I'd say is that pensions do and will still come with really, really valuable kind of tax incentives, something called tax relief or a bonus top up if you'd rather think about it like that, on what you pay in personally. The changes to salary sacrifice will have a bit of an impact for people, but the real burden of that will actually fall on employers. It's not to say it won't affect some people, but in the grand scheme of things, compared to the income tax relief you get on what you pay in, that is still going to remain really, really valuable. Those incentives are there because the government wants people to save into their pension and have some provision for retirement.