S1E12: How to sort your pension & retire well | Financial Advisor Lisa Conway-Hughes (Miss Lolly)
Most people don’t realise how much money they need to retire the way they want, nor how to build that pot. Hell, our Producer Will had opted out of his workplace pension before this podcast. To figure out what to do, we’re speaking to the wonderful Lisa Conway-Hughes, also known as Miss Lolly, a financial advisor and author.
What you should remember from this episode
If you don’t forecast what’s going to happen in your life in the next 5 years, it can distract you from the long term because big financial commitments, like buying a house, car, university fees etc. can get in the way of saving towards your retirement/long term future.
Once people retire, some struggle to shift from saving mode to spending mode. Try to get the balance right - having fun but sustainably.
One of the first things Lisa does is optimise her clients pensions based on their tax bracket. The more tax you pay, the more tax efficient it is to pay into your pension because pensions are tax free at the point of entry - the money goes straight into your pension from your gross pay, not your taxed pay. So if you pay 40% tax, you’re basically saving 40% on whatever income you’re paying into your pension.
You don’t pay tax on pensions at the point of entry, but they are taxable when you take them out. The amount that’s taxable can vary but for most people 75% of their pension is taxable (so you can take out 25% tax free).
ISAs are the inverse. You pay tax on the money you put in, because what you put into ISAs comes from your already taxed income - but they are tax free to withdraw.
A good retirement involves you leveraging many pots - your pension, ISA, cash, bonds etc.
You basically want to use different pots with different tax wrappers:
Imagine you want an income of £60k/year in retirement.
This would make you a higher rate tax payer (because your income is £50,271 to £125,140) so you’d pay 40% in tax.
But you could avoid that by taking £50k from your pension, and then £10k from your ISA (£60k total).
This is because your ISA is tax free, so your taxable income would only be the £50k from your pension, which means you’d only pay 20% tax - not the 40% if you’d taken all £60k from your pension.
To manage your money in retirement, Lisa suggests imagining you have a cake which is all of your money. You can take a slice each year. If you take too big a slice, the cake won’t last. But too small and you won’t have the quality of life you want.
You can take a lump sum tax free from your pension, which is 25% of the total, at 55, soon to be 57.
There is a way to get a monthly tax free amount (or quarterly, or annually) related to the 25% but this really is an area (as are pensions generally) where it’s worth getting independent financial advice.
As you reach retirement, you should start to consider your appetite for risk and time horizons, perhaps easing off the risk with your investments. Or, you could decide to take a more nuanced approach, e.g. the money you’re planning to spend in your 80s and 90s you can be riskier with (as you have more time to ride the volatility) whereas the money you’re planning to spend in your 60s and 70s you’re going to be more risk averse with.
Lisa looks at what her clients are going to spend in the next year, and on a five-year time horizon, like when they’ll need to replace their car.
Lisa advises her clients to have three years of cash buffer in retirement:
One year for emergencies
One year for spending in the year they’re in
And another year in case the markets drop so they’re not forced to draw money in a down year (which could really affect their pot of cash) just to live
She takes a waterfall approach - moving around money from pensions, ISAs, general investment accounts, bonds etc. She’s broadly moving money from higher risk to medium risk and into cash.
The government is always moving the boundaries of tax allowances which is another reason to keep reviewing your retirement plan regularly (and having multiple types of pot like a pension, ISA etc.)
Lisa pretends the state pension (£10k/year) isn’t coming - if she gets it, it’ll be a ‘nice to have’. To get the full state pension you need to have paid 35 years of National Insurance. You can check where you’re at by searching for a BR19 on Google.
For higher earners, this could be the golden time for pensions so if that’s you, consider getting it while it’s good (tax free at the point of entry).
A defined benefit is like an NHS worker or teacher’s pension. It’s generally dependent on your average salary when you leave and how long you’ve worked - but it means you get a defined amount for life. They cost a lot to run so we don’t have many now in the UK.
Nowadays most people have a defined contribution - we know what we put in - e.g. an employee might put in 5% of their salary and their employer puts in 3% (that’s standard). But we don’t know the outcome (it’s not a defined benefit) - the outcome depends on how much you put in of course but also how you manage that pot. It’s an investment.
This is why, if you have a defined contribution pension, you are already investing because that money is being invested for you through your workplace pension provider.
Salary sacrifice is something else. Let’s imagine you have a salary of £80k. You can sacrifice £30k, which gets put straight into a pension tax free, meaning your taxable salary is £50k - so you won’t pay 40% income tax- you’ll pay 20% as a basic rate taxpayer.
But remember, if you salary sacrifice and want a mortgage, the mortgage will usually be based on your taxable income which is the reduced amount (£50k).
A lot of big corporates are using pension funds that are underperforming.
Your pension is probably going to be the biggest asset of your life. You know what your mortgage rate is but can you say how big your pension is, and how it’s invested?
You always need to check fees before moving pensions.
You always need to check if there are any guarantees you’ll lose before moving a pension. For example, if your pension is from before the early 2000s it’s worth checking the percentage that’s tax free - you may have more than the usual 25%.
Lisa finds women in particular can be overly cautious, but being too cautious can be risky.
She says when you’re young you should take the most amount of risk you’re comfortable with because you have the most time to ride out short term dips. A small percentage difference in performance over many years can make a lot of difference.
If you’re self-employed, e.g. a sole trader, you can use your pension to control the tax you pay, in much the same way as the examples above of staying below £50k/year in taxable income. What you pay into your pension doesn’t get taxed so you can put in an amount each year that keeps you in the tax bracket you want.
Only 16% of self employed people pay into their pension!
For self-employed people, the mind game Lisa plays is asking them the minimum they know they can afford to pay in every month, come rain or shine. Then every quarter she nudges them to pay in the difference between what they have paid in compared to what they agree their future self needs them to put in each year (pro rated to a quarterly amount).
Lisa almost wants to scare herself into paying the maximum she can into her pension. She says pension planning should feel a bit scary because you want a good pension.
What you should do after this episode
Take control of your pension. Find out how much you have, with what providers - and what your money is invested in. Honestly just knowing where you’re at can be really empowering.
Log in/call your pension provider (you might need to contact your past employers first to get your pension provider details) and get the information you want like:
The fund(s) your money is in. See how the funds describe themselves.
Go to Trustnet, search for your fund(s) and it’ll bring up a fact sheet.
You want to see how your money is performing v average.
You probably also want to see what it’s invested in. Maybe you care about ethical investments. Maybe you want all your money in stocks. It’s up to you but knowledge is power.
Beware of the labels you’ll see when looking at things in pensions like ‘adventurous’, or ‘balanced’. Balanced sounds sensible but taking too little risk at a young age can really impact your long term future. You really need to dig into what your pension is invested in and if it’s what you want.
For instance, as Damo is in his mid 30s, his pension plan is 100% stocks. His rationale is that over the long term the stock market has always beaten less risky investments like bonds and he can afford to take a long term view because of his age.
To figure out how big your retirement pot should be, consider using the ‘rule of 25’. Take what you think you’ll want to live on per year and times it by 25. So if you want to live off £40k/year, you’ll need £1 million (£40k x 25 = £1 million). The rationale is that 4% is a reasonable annual return on your money. So if you have £1 million, you can take out £40k a year to live off without eroding your pot.
To figure out what you want to live off per year, look at what you’re spending now, but do a proper analysis of what you’re spending. It can’t be a guess. Download your bank statements and make sure you take everything into account.
You can exclude things you don’t think you’ll still be paying for in retirement, like a mortgage, but remember you’re going to be living a 7-day weekend so you should probably factor in more spending.
The other thing to consider is inflation - that’s why you need to update your calculations every year. If you need £40k/year now that could easily rise to £44k next year. To give you some idea, the value of money has roughly halved in the last 30 years. So if that trend continues, and you think you’d want £40k/year today you might need £80k/year in 30 years to live to the same standard.
If you’re a parent, or think you might be, factor in that the ‘bank of mum and dad’ is staying open for longer than before.
You can check out the PLSA’s guidance on living standards here, e.g. what a moderate lifestyle costs.
If you’re a spender, and are trying to set yourself up better for retirement - set boundaries. When you get paid, consider sending money off first for sensible things like your ISA, pension etc. then the rest that’s left over is guilt-free spending. Basically, put systems in place to manage the ways you’re bad with money.
If you have a defined contribution workplace pension it’s worth seeing how much more your company is willing to pay in. Some companies will match what you put in up to certain limits, so you might put in 6% and they’ll put in 6%. Not only is that tax free, that 6% is ‘free cash’ paid for by your company.
Often a couple of percentage points reduction in your monthly take home pay won’t make a meaningful difference to your living standards but over a lifetime it can be huge for your pension pot - particularly if invested well.
Figure out how much you should be saving a month. Lisa suggests using a pension calculator - but halving your age is a nice rule of thumb. Lisa is 42 so on that basis she should be saving 21%. That might sound like a lot, but remember there are structures to help you get there, e.g. through the defined contribution and employer matching.
We just want to say again, pensions are an area where financial advisors can be really worthwhile.
