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My eldest stepson started his first “proper” job this month, and as part of his induction day was given a pack of indecipherable bumph about the company pension scheme (note: more time was spent on the health and safety briefing outlining the dangers of using a glass staircase in reception than the necessity to save for retirement). He had a week to decide whether he wanted to sign up or not.
Fortunately, his stepmum knows a thing or two about this sort of dilemma, so we FaceTimed. The principal fact that had stuck in his mind was a negative one: “Saying yes to the pension means I will have to give up a percentage of my pay.” Most millennials, with the looming prospect of student loan repayments, could easily say no to the company pension for this reason. So I tried to do a better job than his employer had by explaining why pensions rock.
A pension, I said, is a bit like a supermarket “meal deal” that you might buy for your lunch. There are three components. There’s the money you put in (the sandwich) which gets topped up with money your employer puts in (the drink) and money from tax relief (the crisps or carrot sticks). So you might have to pay for the sandwich now, but you’re effectively getting the other two elements thrown in.
Now for the price. When my stepson got his job, we had used the excellent website thesalarycalculator.co.uk to work out his monthly net pay so he could determine what kind of flatshare he could afford. He was horrified about how much would be lost to tax and national insurance. (Welcome to the club, son.)
The thought of paying 6 per cent of his gross salary into a pension he would not be able to tap into for about four decades seemed a bad deal. The calculator can show the impact of pension deductions (and student loan repayments) on his monthly take-home pay. However, it can’t show you what else is added on. For this, try the pension contributions calculator from the Money Advice Service. It adds up the value of the three “ingredients” — your contribution, your employers’ contribution and the tax relief.
You are lucky, I said, that your employer is prepared to match your 6 per cent contribution. And looking at the totals, he could see instantly that for little more than the cost of buying a supermarket meal deal every day, he would be getting quite a lot of his dough back. One thing to bear in mind with the carrot sticks (the tax relief) is that you will eventually have to pay some tax when you start drawing your pension, I said. But the magic “houmous” on the carrot stick is that your pension savings can grow tax free until then.
Once they’ve cracked how much their total contributions are worth, younger workers are better placed to judge if next year’s Lifetime Isa for the under-40s is for them. This account will give you a government bonus of 25 per cent on a maximum annual contribution of £4,000 (so £1,000 of free money). However, you can only gain access to this money — and the bonus — when you buy your first home, or turn 60. Otherwise, heavy penalties apply.
For those planning on using the Lisa as a pension, a company scheme (assuming you have access to one) will almost certainly be better.
Not everyone will get a matched contribution of 6 per cent. Some being offered Auto Enrolment pensions will get the equivalent of the supermarket “basics” range: you pay in 1 per cent, which your employer matches with an equally paltry 1 per cent. But it’s a start, and the level of minimum contributions will slowly rise.
His next question was what happens to the pension if he left the company.
Young people today can expect to have 12-15 separate employers in their lifetime, creating the administrative burden of multiple pension pots. As I know from personal experience, trying to consolidate them is a total pain. I have deciphered enough of the jargon to see that my new pension provider has a more favourable fee structure than my old one. But moving my money over has required several trees’ worth of forms, delays and enforced listening to Vivaldi as I wait on hold to chase things up.
There are lots of clever people who cannot understand the complexity of the UK pensions system — Andy Haldane, chief economist at the Bank of England, for one. So it’s encouraging to see the government is trying to do something about it. Plans for the Pensions Dashboard were revealed this week, which will enable savers to see their pensions from 11 of the biggest personal and workplace pension providers in one place by 2019.
This is undoubtedly a good idea. But already, providers are bleating that they cannot possibly be expected to provide all of the data needed for us to clearly compare the type of funds and amounts we are being charged. Judging by my own experiences, the government is right to demand better. Those paying into a company pension have no way of choosing the provider — we have to accept the choice our employer has made for us. If we want to compare and switch at a later date, this process should be as uncomplicated as possible.
Pension providers would do well to remember that it is our money we are paying them to look after. If they can show us they’re doing a great job, we will be more likely to consolidate our pots with them.