Welcome back everyone to the deep dive.
You know, today we are going to tackle most important investment of your life.
Like did you know that here in the UK, pensions actually hold more wealth than property?
Wow.
I know, right?
That just blew my mind.
Absolutely.
I mean, we always hear about property being the big investment, but pensions, they're
quietly building this massive wealth in the background.
Exactly.
It's a hidden financial powerhouse that we need to understand better.
It is.
So let's get right into it.
First things first, can you break down the different types of pensions we have here in
the UK?
I think most people are familiar with like defined contribution pensions, where how much
you get depends on how well your investments do.
Right.
But what about those defined benefit pensions?
Are those still a thing?
Yeah.
So defined benefit schemes like the NHS pension, you're right, they're less common now.
But basically they offer a guaranteed income based on your salary and how long you've worked.
So it's like a set amount predictable, which a lot of people find appealing.
Right.
But like you said, most of us nowadays are in those defined contribution schemes.
And that means we're the ones responsible for making the investment decisions, you know,
choosing where that money goes, which also means we're the ones who determine how big
that pot of money is going to be when we retire.
Oh, that makes sense.
So basically with defined contribution pensions, it's more on us to like be proactive and make
those choices.
We can't just set it and forget it.
We need to, even if it seems a bit scary at first, engage with those pensions.
Yeah.
No, I get that.
It's definitely easier to just like, you know, put it in the back of your mind and be like,
oh, I'll deal with that later.
But this makes it sound like later is now.
Yeah.
I mean, think about it.
This is your future financial security we're talking about.
That's true.
Okay.
So let's talk about those employer contributions and tax relief because that's the free money
part everyone gets excited about.
It's amazing how those contributions from your employer plus the tax relief can really
boost your pension.
If you put in 80 pounds of your own money, it gets topped up to 160 pounds.
Like that's insane.
It is.
And you know, it shows you right from the start how pensions, they amplify your savings.
It's like 100% return instantly just because you're contributing.
Yeah.
It's like magic money.
And the thing is, it gets even more interesting when you consider how that interacts with
compounding over time.
Oh, compounding.
Yeah.
That's like the secret sauce for long-term growth.
It's elutely.
But okay, this is where it gets a little scary.
I was shocked to learn that only one in four people actually know what their pension is
invested in.
Oh, wow.
Yeah, that is a bit concerning.
It is.
I mean, we're talking about a lot of money here.
You see, with those default funds, they are designed to be quite general, a kind of one-size-fits-all
approach.
That might not actually be the best fit for you for your personal risk tolerance or your
investment goals.
The takeaway here is, don't just settle for the default.
You really got to understand where your pension is invested and see if there might be better
options out there for you.
Exactly.
So it's like step one is knowing where your money is going and if it's working as hard
as it could be for you.
And this is especially important, you know, for higher earners because they can benefit
even more from being strategic with their pension contributions.
Okay, so let's talk about the higher earners.
What makes pensions so asintegious for them?
What's the deal there?
Well, it really comes down to the way tax relief works with pension contributions.
So higher and additional rate taxpayers can claim back even more tax relief.
Okay.
Meaning a bigger portion of their contributions, it's basically subsidized by the government.
Hmm, that's interesting.
So the more you earn, the more the government helps you save for retirement.
In a way, yes.
And Toby even mentions the sweet spot between 100,000 pounds and 125,000 pounds in income
where it becomes really advantageous.
Oh, I have thought about that.
Yeah, there are some really unique tax considerations in that income range.
Interesting.
So it's definitely something worth investigating further if you fall into that category.
Right, because it's not just saving, it's also about smart tax planning.
Exactly.
Okay, now what about people who are self-employed or run their own businesses?
Do they get the same pension benefits as employees?
They absolutely do.
They might not have employer contributions in the same way, but there are still great
options available, like the self-invested personal pension, the SIPP.
Contributing to a SIPP directly from your business can actually reduce your corporation
tax bill.
Oh, wow.
So it's a win-win.
You're boosting your retirement savings and potentially lowering your taxes at the same
time.
That's a brilliant tip.
We've got our defined contribution, our defined benefit, and our SIPP.
Any other types we should be aware of?
Well, maybe not types, but we do need to talk about something else.
Lost pensions.
Oh, yeah.
I almost forgot about that.
Billions of pounds just sitting unclaimed.
It's crazy.
Right.
You know, it happens more often than you'd think.
People move, change jobs, and they just forget about old pension schemes from years ago.
Yeah, it's easy to lose track.
But the good news is there's a simple solution.
The government has a free pension tracing service.
You can use it to reconnect with any pensions you might have lost track of over the years.
Okay, so if anyone out there has ever had a job where they contribute to a pension and
they're not sure where those funds ended up, go check out this free service.
Absolutely.
Okay, now for the big question, the one everyone wants to know.
When can you actually access your pension?
When can you finally start enjoying those savings?
So right now you can access it at 55.
Okay.
But heads up, this is going up to 57 in a few years.
So I can't just assume it'll stay at 57 forever.
Exactly.
It can change.
Pension rules, you know, they're subject to change.
Got it.
So stay informed.
Always good advice.
Always.
But you know, once you do hit that magic age, there are some interesting choices you get
to make about how you withdraw the money.
Oh, okay.
Tell me more about those options.
What's the best way to access your pension savings once you're allowed to?
Well, one option is you can take 25% of your pension pot tax-free.
Whoa, tax-free.
Tax-free, which can be great, you know, for covering any immediate expenses or maybe even
just treating yourself a little after all those years of saving.
Yeah, I like the sound of that.
Right.
And then the rest of it, you can withdraw as income, taxed as income when you need it.
Okay.
So it's flexible.
You can customize it to fit your needs.
Exactly.
It's about having flexibility and control over your retirement income.
Now are you ready to see the real power of pensions in action?
I think it's time for a little comparison, don't you?
Oh yeah.
Bring on the grand finale.
Let's see how pensions stack up against a regular investment account.
All right.
Lay it on me.
I'm super curious to see what this comparison looks like.
Imagine you're investing 200 pounds every month consistently for 30 years.
In one corner, we've got a regular investment account, just your typical investment account.
And in the other corner, a pension.
So same amount of money, same timeframe, but we're going to see how they perform differently
because of all those pension perks.
With that regular investment account, assuming you get decent growth, you'd probably end
up with around 334,000 pounds after those 30 years.
334,000 pounds.
Oh, that's pretty good.
It's not bad, right?
But I have a feeling the pension is going to blow that out of the water.
You would be correct.
With those consistent contributions and of course the magic of employer top ups and tax
relief, the pension pot balloons to almost double.
No way.
Oh yeah, we're talking about 668,000 pounds.
Holy moly.
That's insane.
Right.
Just seeing those numbers side by side is crazy.
It really shows you the power of pensions.
It's like a secret weapon for building wealth.
And it makes you realize how important it is to not be passive about it.
Even small tweaks can make a huge difference in the long run.
Absolutely.
So are there any specific things we should be doing to make sure we're optimizing our
pension strategy?
Obviously don't opt out of your workplace pension scheme.
Even if the contributions seem small at first, missing out on those employer top ups is,
well, it's just silly.
It's like turning down free money.
Try to contribute a bit more than the minimum.
Yes, absolutely.
Even small increases over time, they really add up thanks to that compounding effect.
Yeah, compounding is like magic.
It is.
And you know, it's about finding that sweet spot, that balance between what you can comfortably
afford now and what you want your future to look like.
Choosing your investments within your pension is really important, right?
Oh, absolutely.
It's not just a set it and forget it situation.
You have choices.
Think about your risk tolerance, your investment goals.
Even your values can play a role.
And understanding those different investment options, how they could affect your pension
growth, it's crucial.
And those hidden fees too.
Yeah.
Right?
Those can really eat away at your returns.
They can.
That's why it's always worth comparing different providers and fee structures.
Be an informed investor.
Okay.
All great advice.
You can even choose investments that align with your values, like ethical or sustainable
options.
Yeah, that's really cool, right?
It is.
It's like your money can actually make a difference in the world while it's growing.
It's about aligning your financial decisions with what you believe in.
But of course, there's always a but isn't there.
Those pension rules, they can be a little tricky to navigate.
Like what?
What should we be watching out for?
Well, the contribution limits for one, there's this annual allowance, which is currently
60,000 pounds, but that includes the tax relief.
Okay.
So you got to factor that in when you're figuring out how much to contribute.
Got it.
So it's not just about the amount you put in.
It's about the total after that tax relief is added.
Exactly.
And then there's also this carry forward rule.
Carry forward.
Yeah, it's kind of a hidden gem.
If you haven't used your full annual allowance in the past three tax years, you can actually
carry forward that unused allowance.
Oh, really?
So you can basically catch up if you had some lean years.
You got it.
It's a great option if you're now in a position to contribute more.
That's really helpful.
Okay.
So we've covered the basics.
We've talked about contributions, investments, even those pesky rules.
Now let's circle back to those higher earners.
You mentioned they have some unique advantages.
Can you break that down for us?
Sure.
So basically when you're a higher or additional rate taxpayer, you get to claim back even
more tax relief on those contributions.
The more you earn, the more the government helps you out with your pension savings.
In a way, yeah.
It incentivizes higher earners to save for retirement, which makes sense.
Makes sense.
So it's not just about putting money away.
It's also about being strategic and using those tax benefits to your advantage.
Absolutely.
And this becomes especially important when you're earning over 50,270 pounds a year.
Remember that sweet spot Toby mentioned, between 100,000 pounds and 125,000 pounds.
That's where things get really interesting from a tax perspective.
He goes into different types of schemes like relief at source and net pay and how they
affect the way that tax relief is applied.
Okay.
That sounds a little complicated.
It can get a bit technical, but the takeaway is if you're in that income bracket, talk
to a financial advisor.
Solid advice.
Now, what about our self-employed listeners?
Any specific tips for them?
We talked about SIPPs, but anything else they should keep in mind.
Well, Toby's a big fan of SIPPs because of the control they offer.
Right.
You can really tailor them to your specific needs and goals.
And we already covered that contributing straight from a business account can be a smart move.
Okay.
Now, last but not least, let's talk about those lost pensions again.
It blows my mind that billions are just sitting there unclaimed.
I know.
It's wild, right?
But it's really easy to see how it happens.
People change jobs, move houses, life gets busy.
Yeah.
But remember, no need to panic.
That government tracing tool can help you track down any lost pensions from your past.
That's like a financial treasure hunt.
It is.
And it's totally free.
No need to hire some fancy service.
Just hop online and start your search.
It's easy peasy.
Okay.
I think we've covered a lot of ground here.
We've talked about different types of pensions, how contribution and tax relief work, choosing
investments, even those tricky rules and limits.
So when can we actually get our hands on this money?
You're right now.
It's 55.
But going up to 57.
In 2028, yep.
And of course, these rules can change.
So always stay up to date.
Got it.
Flexibility is key.
But once you do hit that magic age, there are some cool choices you can make about how
you access that money.
Oh, yeah.
So spill the beans.
What are our options?
Well, you can actually take a 25% lump sum completely tax-free.
Seriously, tax-free.
Totally tax-free.
Great for those immediate expenses or maybe you just want to celebrate all those years
of saving.
I can definitely get behind that.
Now, what about the rest of the money?
What are the options there?
So the rest of it, you can withdraw it as income and it'll be taxed like regular income.
But there are some clever strategies you can use to minimize your tax bills.
So it's worth looking into those when the time comes.
So it's not a one-size-fits-all situation.
You can kind of customize your withdrawal strategy to fit your needs and goals.
Exactly.
And that's what's great about pensions.
You have choices.
You have flexibility.
It's about taking control and making your money work for you, even in retirement.
This has been amazing.
I feel like I've learned so much about pensions today.
It's important to have a good understanding of this stuff because it really can impact
your financial future.
Absolutely.
And I think the key takeaway here is don't be afraid of pensions.
They're not as scary or complicated as they seem.
Yeah.
Once you break it down, it all starts to make sense.
So before we wrap things up, any final words of wisdom for our listeners?
What's the one thing you want them to remember?
Take control of your pension.
Don't ignore it.
Don't put it off.
The more you engage with it, the better equipped you'll be to make those important decisions
that will shape your retirement.
Couldn't have said it better myself.
Take control, empower yourself, and start building the retirement of your dreams.
Wow.
I feel like we've really cracked the code on pensions today.
Yeah.
It's been a pretty deep dive.
Who knew it could be so, dare I say, interesting?
Right.
They get this reputation for being so dull and confusing.
Totally.
But once you understand the main ideas, it's like this whole new world of possibilities
opens up.
And over time, those small changes, they compound.
Compounding, our new favorite word.
So whether it's adding a little extra to your contributions every month or just taking
the time to actually look at your investment choices.
Every little bit counts.
It all gets you closer to that dream retirement.
Absolutely.
It's all about taking control of your financial future and making sure your choices align with
your goals and what you want your life to look like.
And the good news is, it's never too late to start.
I love that.
You know, it's easy to get overwhelmed with all the details, especially if you're just
starting to think about pensions.
For sure.
But remember, even just taking a first step, like educating yourself a little bit, taking
a look at where you're at with your current pension situation.
Right, right.
That's huge.
And there's so much help available, too.
You don't have to figure it all out on your own.
Okay, so as we wrap up this deep dive, what's the one key message you hope our listeners
take away from this?
What's the big takeaway?
Don't be passive with your pension.
Really, that's the most important thing.
Don't ignore it.
Don't put it off.
The sooner you start engaging with it, the better.
Understand it.
Explore your options.
Exactly.
And you'll be so much better prepared to make those decisions that really matter down the
line.
Love it.
Take control, be empowered, and build that awesome retirement you deserve.
This has been such a fascinating deep dive.
I feel so much more knowledgeable about pensions now.
Me too.
It's been great unpacking all of this with you and to everyone listening.
Your pension is a powerful tool.
Don't underestimate it.
Thanks for joining us on the deep dive.
We'll catch you next time for another adventure into the world of knowledge.