Carole encourages you to look beyond the Lockdown and think like an investor, not a pensioner – starting with a rummage around in the murky details of your retirement savings
I’m going to ask you to use your imaginations here. You need to set aside the new world order and pretend it would be normal to book a holiday. A huge, great, extravagant, memory-making bumper of a trip taking in everything from glacier skiing to safari camping. Oh, and I forgot to say, you are well into your seventies and are a pensioner.
We don’t think of pensioners as ‘well-off’
Hard to imagine, isn’t it? Not just the ‘leaving the front door to go further than the local supermarket’ bit, but also the idea that a pensioner could fund such luxury. We simply don’t think of pensioners as people who are well-off. In fact, the very notion of a pension comes with connotations of making do, eking out, scrimping, saving and turning off the extra bar on the electric heater.
‘Old age’ gives pensioners a bad name
Strictly speaking, a pensioner is someone who receives a fixed amount (other than wages or salary) paid at regular intervals. But to make distinct the sort of pensioner who is receiving payments because they are retired, we have become used to prefixing the word ‘pensioner’ with the words ‘old age’. And that, I think, has given pensioners a bad name.
I might be wrong, but I don’t think people tend to describe themselves as ‘pensioners’ with pride – and this is reflected in the stereotypical image they have amongst the rest of the population. As a child, I used to receive postal orders on my birthday from distant relatives. Even at the age of 8 I knew not to approach the post office to pay these bits of paper into my savings account on ‘pension day’ – not unless, that is, I wanted to be stuck behind hordes of old folk who were out for their equivalent of a night’s clubbing.
Are investors sexier than pensioners?
Investors, on the other hand, sound a bit sexier. Being a regular investor, or living off your investments, gives a certain cachet of sophistication. Implicit in these labels is the notion that you have ‘spare’ money to put away, and that you know just where to put it. Added to that, you are someone who can – and does – take risks, putting you in the bungee-jumping category rather than the post-office-queue category.
Or are they the same thing?
But take a minute to think about what is wrong with this next statement:
I don’t invest, I just pay into my pension
These days, if you have a pension that you are either paying into or drawing out from, the chances are that you are an investor. If you are a public sector worker or are lucky enough to belong to a pension scheme that guarantees you a certain level of pension linked to your salary for the rest of your life, then this doesn’t apply in quite the same way. But for everyone with a personal or workplace pension, your income in retirement is directly linked to the investments being made with the money you contribute while you are working. True, you might not be doing the actual investing yourself, but I reckon this still makes you an investor.
A hangover from the old days of pension provision
Why do we draw these distinct lines in our minds between pensions and investing? I think one reason is a hangover from the days when most employers provided pension benefits like the public sector and other final salary ones that I mentioned above. With one of these, you, the pensioner, would get your regular payments for as long as you lived regardless of how well the investments in the company pot were doing. Although few of us have these arrangements, we still tend to think of a pension purely as a payment, rather than the result of an investment.
Tightly-wrapped and out-of-sight money
Another reason for the disconnect might be that, apart from a fleeting mention on the payslip and an unfathomable annual statement, we don’t have much of a relationship with our pension. For most of our working lives there is no possibility of getting our hands on this tightly-wrapped-and-out-of-sight money. We don’t feel that we actively ‘save’ or ‘invest’ in our pension because the decisions are taken for us. It’s as though by calling it a pension, which has a very specific definition, we push it away to the back of our minds where we can happily forget about it because it doesn’t really feature in our day-to-day lives.
Should we call it something else?
Of course, that is exactly what we are meant to be doing – putting money away for our futures and forgetting about it until we need it. This is a good way of ensuring that we don’t accidentally spend it. But the problem with it is that we are not engaging. I wonder whether, instead of calling these special pots of monthly contributions ‘pensions’ – with all the ‘old age’ references that stick to the very word – we should refer to them as our ‘long-term investments’ or even ‘retirement savings’. Wouldn’t this impart some notion of an active approach – a feeling of more control?
Paying more into your pension is investing
When I first thought about running workshops for women, I wanted us to explore the reasons why it still seems to be that ‘women save, men invest’. I hadn’t necessarily imagined that I would be firing up an appetite to invest – thinking more that I would have to work away at years of conditioning against taking risks. In reality, a number of attendees have been inspired to find out more and have come back with the questions ‘How can I invest?’ and ‘Where do I start?’
There are as many answers to these questions as there are people asking them, as everyone’s circumstances are different and everyone has different goals. But, for many people, the answer could well be: Pay more into your workplace pension – that, too, is investing.
The challenge: Get down and dirty with your pension investments
This might disappoint some people who fantasise about quick-fire trading, or hedging strategies. But it shouldn’t. If you have one of the increasingly-normal pensions of today – ie one that invests your contributions into a pot with your name on it for you to use in retirement – there’s a good chance that you have the option to get down and dirty with your pension investment choices. And while you may feel that the current climate is not one in which to be making big changes, you can at least use it as an opportunity to increase your understanding.
So, assuming you haven’t already completed the Couch-to-5K/baked your own bread for the next month/made a tik-tok video today, here is your challenge. If you have a work or personal pension and you hanker after being more savvy about investing, start by getting to grips with what you already have! As and when the time is right for you, there are some pros and cons of using your pension for some extra investing in the ‘A bit more understanding’ section at the end.
[Just quickly, before you start, I want to highlight something that you might find in your pension details. If, when you started your pension, you ticked the ‘default investment option’ – in other words, if you had no idea about the sort of investments you wanted to have in your pension and went with what was on offer – there’s a good chance you are in something called a ‘Lifestyle’ strategy. If you are, please take a moment to read the companion piece to this blog post ‘Time to change your Lifestyle?‘ The ups and downs in investment markets at the moment might make this sort of investment strategy less attractive depending on how far away from retirement you are.]
- Pull out the latest correspondence that you have about your pension – this should tell you how to log on to your pension account
- Find out the latest value of your pension and, if you can, compare it with values from previous years’ statements. Bearing in mind that the value of all investments have fallen from their highs at the start of the year, are you surprised by the value or is it about what you would expect?
- Check what retirement age is specified – does this still agree with your idea of when you will retire? Find out how easy it would be to change this age
- Find out if you are in a Lifestyling strategy. If you are, please read the post ‘Time to change your Lifestyle?’
- Look at what underlying investments make up the fund(s) that your pension is invested in. You might be able to find a pie chart labelled ‘Asset allocation’. If nothing else, this will give you a feel for how well spread out your money is across many different types of investment.
- Make a note of what you find out and what areas you would like to understand it a bit better. If there are words or phrases that you don’t know what they mean, try to find out – the money advice service website is a government-backed site that gives some great explanations (www.moneyadviceservice.org.uk).
- Don’t be scared! It is a minefield and you don’t have to understand everything fully – just enough to give you the feeling that you do have choices in this, if you want them.
Investing is the key to your retirement years
Let’s be clear, getting down and dirty with your own pension investments is not going to make you rich. But it might start you on a road towards viewing investing as the key to how you fare in your retirement years. I’m guessing most of us, for choice, would prefer not to be queuing for our state pension on a weekly basis before deciding whether or not we can afford to turn that electric bar back on.
21 April 2020
All opinions offered are those of Carole Haswell and should not be construed as financial advice
A bit more understanding
Pros of using the workplace pension for some extra investing
- If you are a UK tax-payer you can pay up to 100% of your earnings into a pension (up to a maximum of £40,000 a year) and get tax relief at the highest rate of tax that you pay. This means that if you are a basic rate tax-payer (20%), you pay £80 out of your taxed income to get a £100 payment into your pension (HMRC pay the £20 in). And if you are a higher rate tax payer (40%), you can claim an additional £20 back through your tax code so that you are only £60 worse off for a £100 contribution into your pension.
- While the money stays in your pension account it will grow free of tax (this is also true of a stocks and shares ISA).
- Your employer might match your additional contributions up to a certain level – it’s worth finding out as this is effectively ‘free’ money.
Cons of using the workplace pension for some extra investing
- You can’t get the money out until you are 55.
- You will be allowed to withdraw 25% of your pension fund tax-free, but will pay income tax on the remainder (by comparison, any withdrawals from a stocks and shares ISA will be tax free).