The Podcast of the Lotus Eaters

00:00:00.000 Hello, and welcome to Brokernomics. Now, lovely viewers that you are and you leave

00:00:05.880 comments below and all that sort of thing, and every sort of time I read the comments,

00:00:09.180 and some of you are great, some of you hate me, which I find an absurd concept,

00:00:14.760 not liking me, but some of you don't. And some of you ask questions, and one of the

00:00:19.320 questions that comes up a lot is about pensions. And I'd love to tell you all

00:00:24.360 about pensions. The problem is I don't know anything about them, because I've

00:00:27.320 never had one. I never put a single penny in a pension in my life, because I don't

00:00:31.220 trust them. But nevertheless, I am behooved to respond to the audience and address

00:00:37.200 your pension questions. So I thought, well, who do I know who can talk about that?

00:00:42.820 And that's when I found Charlie Rogers. Charlie. Hello. You are a Brokernomics 1.00

00:00:48.920 viewer, so we know you're a sensible chap. I am. But you've also spent many, many years

00:00:52.760 in the pensions world, I understand. Yeah, that's right. Good. Yeah. Well, in which case,

00:00:58.880 you are the man to answer our questions. So what's your sort of journey through the pensions?

00:01:05.360 What have you been doing in that? Cool. So before I jumped into pensions,

00:01:10.100 I wanted to be a roller coaster designer. So I went to Swansea University to do a civil

00:01:14.900 engineering degree. I mean, there was a video game for that. Well, yeah. And it's a lot more fun,

00:01:19.820 funnily enough, than the degree I attempted. But yeah, coming out of civil engineering,

00:01:25.940 I was looking for work. My old man's a financial advisor. So he thought, come and do some maths

00:01:31.320 for me. So I ended up being a what's known as a paraplanner.

00:01:34.820 Do you need maths for roller coaster design? You can wing it, can't you?

00:01:39.100 Well, to do all the structural calculations and the force.

00:01:42.440 Health and safety nonsense. Well, it was the health and safety nonsense that

00:01:45.440 turned me off. And I was just like, environmental science. No, I don't need to do this.

00:01:48.940 Right. But you turned your maths powers to something good, did you? Well, it was a lot

00:01:53.480 drier, even than the soil mechanics modules that I had to do. So yeah, so I got started

00:01:59.860 in financial services, working for a financial advice company. Pensions were our speciality,

00:02:08.360 doing DB transfers and stuff like that. So the high level stuff. Obviously, working with family

00:02:16.060 is quite tough. So eventually, left working for my father and I joined the dark side and

00:02:21.360 worked for some providers for a little while. Most recently, a big yellow one that I'm sure

00:02:26.980 a lot of people will recognise if they...

00:02:28.980 Not one of the big names. Oh yeah, one of the big names.

00:02:31.240 Well, they do do a lot of business. They do do a lot of business.

00:02:34.600 And I was part of the business-to-business sales side. So in the financial advisor to corporation,

00:02:44.600 I was the glue that held that relationship together for a long time.

00:02:49.840 Okay, so let's start with the basics. What's the general pitch of having a pension? Because

00:02:54.320 I've never been sold on it myself. But why would one want to have a pension?

00:02:58.600 So the purpose of a pension, and we can talk sort of general level at this point, sort of

00:03:04.580 not separating out the different types of pension. The point of a pension is it is a replacement

00:03:10.040 for your income once you've retired. So you're no longer working, you don't have anyone else

00:03:15.480 giving you money in some way. Pension is there so that you can actually afford to put the

00:03:19.780 lights on, you can put food in your fridge, feed the cat, whatever. Some people are lucky

00:03:27.400 enough to achieve a level of financial success where they've got assets around them that can

00:03:33.640 generate an income. Perhaps they have been a successful businessman and they've got a

00:03:40.360 company that they can sell and that will just put a large amount of money in their bank account. 0.63

00:03:44.680 And then they can just draw that down over time. Perhaps they bought assets like property

00:03:49.400 and they're letting them out as landlords. Or perhaps they can over time sell those properties

00:03:55.000 and again generate those lumps of cash. For most people that's not really the case.

00:04:02.120 You are more likely to need some sort of savings vehicle to either just take money from or to leave

00:04:10.920 until you need that money at another point. Pensions are taxed in an interesting way in that you don't

00:04:20.760 pay tax on the money that's going into a pension. In fact, you get tax relief at the income level.

00:04:27.880 While it's growing in the growth stage of the pension, that's also tax-free. So any stock market

00:04:36.280 investments you make are free from things like CGT, IHT, stamp duty. All of that, it's disregarded.

00:04:43.800 If it's pension-wrapped, tax-free. So you can move from one asset to another without triggering a taxable event.

00:04:50.920 That's right. As long as it's within pension assets.

00:04:53.960 Yes, which is a narrowly defined list. It is.

00:04:57.320 Maybe we come back to that then.

00:05:00.920 Then at the other end, you pay general income tax as you take the money out.

00:05:04.920 So this is the thing that bothered me about it because I thought to myself, well,

00:05:11.880 I'm quite good at making investments and they're likely to go up. So would I rather pay the tax

00:05:17.480 on the income now and put it in? And then if I can, let's say I can 10x the value of the portfolio,

00:05:23.720 I would rather pay tax now rather than 10x that tax in the future when taxes are probably going

00:05:29.880 to be higher anyway. So that was one of the key things that stopped me from putting into it.

00:05:34.040 But it is quite efficient for people who are earning a lot, don't really understand investment,

00:05:39.560 and just want to shovel as much money in. Because I had a similar start in my financial

00:05:45.560 career. I started with financial advice as well. And what you often see happening is people who are

00:05:51.480 earning a lot towards the end of their career, so their 50s and early 60s, just shoveling as much

00:05:56.520 money as they possibly can in, getting huge tax relief, and then maybe just a couple of years later

00:06:02.520 then starting to pull that back out again. And it makes a lot more sense for those sort of people,

00:06:06.280 I thought.

00:06:08.920 Yes, it does work that way, in that

00:06:15.240 tax relief is typically done at your marginal rate. So most people are basic rate taxpayers.

00:06:21.160 This means that if you put £10 into a pension, you get 20% tax relief. And the maths is funny on this,

00:06:27.400 because the way it sounds is you think 20% on £10, well that's an extra £2. It's not,

00:06:35.080 it's £2.50. Because the 20% is the value of the total amount that's going in.

00:06:41.640 Yeah, oh right, yes.

00:06:42.760 So if you think you're making 80% of the contribution and the tax man is giving you

00:06:47.240 your income tax back. So that makes the 100%.

00:06:51.400 Yes, and that was the thing. I was in financial advice in the early 2000s, and that was at the

00:06:59.400 stage where a reasonably high earning individual could expect to be paying higher rate tax while

00:07:04.440 they were working. And as soon as they retired, they then dropped down to basic rate, which meant

00:07:09.640 you could put money in and get the 40% relief, which as you've just explained is more than £4 on £10,

00:07:14.520 it would be £5 on £10, and then immediately start paying tax at the lower rate. So for them it did

00:07:22.200 make a lot of sense. That's right. And to clarify, what we're talking about at this particular part

00:07:27.880 is private pensions or personal pensions. So let's ask you something funny.

00:07:32.440 Yeah, so here's the divider. It's the private pension and the state pension.

00:07:35.400 Instead of doing a private pension, you just relied on the state pension.

00:07:39.240 Okay, so here's my big bugaboo. This is why we originally got talking.

00:07:43.320 Yes. So the state pension. The state pension originated from...

00:07:51.960 It started out in the early 1900s in Britain as a way of looking after the very old and very poor.

00:07:58.200 It was originally a means-tested benefit to give to the very old, and in them days, 70 was very old.

00:08:07.320 70 was about the sort of life expectancy of a normal person.

00:08:10.760 Well, my understanding is that in the early days is that old people were much better behaved back 1.00

00:08:14.840 then because they could be relied upon to die within a few years of taking their pension.

00:08:18.840 So it didn't really cost the government that much money to offer a pension.

00:08:23.720 That's right. So it was a couple of shillings a week. It was only available to men, and you had to be at least 70.

00:08:31.400 You had to have lived in the UK for, I think it was 20 years.

00:08:36.680 You had to, and there was a behavioural element to it.

00:08:39.400 Oh, was it?

00:08:40.040 Yeah. So unfortunately, what we're seeing with some of these rioters, some of the older people getting arrested,

00:08:47.160 back in the day, they'd have had their state pension taken off them.

00:08:49.560 Right.

00:08:50.520 Which is a worrying concept if Starmer wants to go back down that rule and impose that.

00:08:56.520 Well, he doesn't want to, whether he can get away with it, but yeah, he wants to.

00:09:00.200 When we come on to talk about the funding of the state pension and what they could do, it's, yeah, maybe that's right.

00:09:04.920 How much is the state pension?

00:09:06.120 So right now it's £221.70 a week.

00:09:12.360 Right.

00:09:12.760 And here's where everything goes crazy, because we've got to think about things in a weekly basis.

00:09:17.320 Yeah.

00:09:18.440 So about £900 a month, roughly, something like that.

00:09:22.040 Yeah. It works out to be just over £11,000 a year.

00:09:25.880 Okay. Well, you better have, at a minimum, paid off your mortgage by then.

00:09:32.280 Yeah.

00:09:32.760 Because maybe you could just about scrape by, but that's...

00:09:36.440 It's not a lot.

00:09:37.800 Yeah.

00:09:38.280 And realistically, it's never been a lot.

00:09:44.600 The interesting thing that Cameron and Osborne did about a decade ago was they introduced

00:09:53.560 sort of a ratcheting effect to the state pension, something called the triple lock.

00:09:58.520 The triple lock is the state pension will always increase by the rate of CPI, by the average earnings

00:10:11.480 in the country, and 3%. And it'll be the higher one of these. Not the minimum, the higher one.

00:10:17.880 Presumably, it's been CPI throughout most of that period.

00:10:21.480 Yeah. Yeah. Yeah. Because CPI has been running at, what, like, eight, nine percent for...

00:10:25.160 Right.

00:10:25.560 Okay.

00:10:26.280 Well, the official figures, isn't it?

00:10:28.040 Yes.

00:10:30.280 So what we saw was when they introduced that, state pension was £121 a week.

00:10:36.440 Right.

00:10:37.800 They immediately bumped it up to about £146 a week.

00:10:41.160 Okay.

00:10:41.880 And since then, it's climbed to £222...

00:10:45.560 Is this reviewed annually, is it?

00:10:47.080 Yeah, it's reviewed annually.

00:10:48.440 Okay. So it's gone up quite a bit in the last couple of years, hasn't it?

00:10:50.600 Yeah. Yeah, definitely. And because of the nature of compound interest,

00:10:54.280 it's got the potential to keep skyrocketing and sort of keep going up.

00:10:58.600 But if you live in a modest home, and you paid your mortgage,

00:11:03.080 and you've got a car, and you're not looking to replace it, and you're not looking to go on holiday,

00:11:06.760 if there's a couple of you, and you said it works out about £12,000 a year, was it? Something like that?

00:11:11.960 About £11,000 a year.

00:11:13.000 £11,000.

00:11:13.560 So if you're a couple, you can see somebody scraping by on £22,000 as a couple, but...

00:11:20.600 It's a meagre existence.

00:11:23.080 Right. And thus, private pensions, which is basically what you did.

00:11:28.520 Yes. Yeah, that's the ballpark where I've been playing for the past 10 years.

00:11:34.520 It makes a lot of sense, both from a planning perspective, you know, thinking that, right,

00:11:43.080 you know, the point of a pension is not to spend it now, but to force yourself to leave it until

00:11:49.080 you really need it, which is why pensions, they are different to things like ISAs, where ISAs,

00:11:58.440 you may have sort of a term with your ISA provider, where you can't access the money for maybe a year,

00:12:04.360 excuse me, a year. Pensions, you are not allowed to access private pensions.

00:12:11.160 At the moment, the year is, you've got to be 58 years or older.

00:12:16.200 And from then, you can, you can sort of do with your money from what you like.

00:12:23.720 Different to ISAs, of course, because ISAs you can, usually you can sort of dip in and out. So,

00:12:27.880 I think what you were talking about earlier about sort of making lots of gains in your sort of

00:12:33.880 investments and being able to take that money earlier. ISAs work the opposite way around to

00:12:38.840 pensions in that you don't get any tax relief on the way in, but you also get, you don't get taxed

00:12:43.960 on the way out. So, but the inside that the growth part is also tax free. So if you, if you can grow your

00:12:50.360 ISA to a million, then you can take income from it and it will be tax free, which is, which is a

00:12:56.440 wonderful thing. Of course. But you've got the problem of, you need to be a much, you need to be

00:13:02.280 much savvier on your selection of investments. And most people are not. Sure. If you're going to go for

00:13:08.200 the default options, you're probably better off going down the pension route. And the other thing with

00:13:13.640 the ISA, of course, is you've always got that temptation that you can access it. Exactly. And for some

00:13:18.120 people that's just going to be too much. It's like, oh, okay, I'm going to take it out. I'm going to do

00:13:21.720 this and then I'll put it back and you never do and stuff like that. So one of the other big caveats,

00:13:26.840 if you're looking to plow a load of money into an investment, uh, investment vehicle like this

00:13:32.680 is the limits on it as well. At the moment, the limit, um, for an ISA, the most amount you can put

00:13:38.200 in at any one year is 20,000 pounds. Um, with pensions, they've just up the limit to 60,000 pounds a year.

00:13:45.000 Right. Um, controversially they've, I mean, you need to be earning a lot before that's a problem

00:13:52.200 for you. Sure. Yeah. And when you consider things like the, um, the tax relief that you're getting

00:14:00.040 on your contributions as well, um, somebody who's earning a reasonable amount, 60,000 is a good

00:14:05.720 amount to put into your pension. Um, it's the, the specific limit is a hundred percent of your earned

00:14:12.840 income or 60,000, whichever is lower as well. You need to have taxable earnings.

00:14:19.480 I mean, you can't use up your, your taxable earnings. So you can't, for example, put loads

00:14:23.880 of money into a pension and do say a VCT as well, because your, the tax relief cannot exceed the

00:14:29.720 amount of tax that you would have paid. Otherwise that's not allowed. That's right. And, and VCTs are,

00:14:35.480 of course, you're sort of more of the expert in that. It's, uh, it's not something that I've,

00:14:39.720 I've sold, although I have written a couple of suitability reports about VCTs. So it's, uh,

00:14:44.840 I think they're actually quite good. I should do a Brokonomics on them actually. 0.99

00:14:47.160 You should. They are actually quite good. Yeah. And, uh, EIS and SEIS schemes. Yeah.

00:14:54.120 There's a lot of good things that are high earning viewers will be able to access, but are, uh, a little

00:15:00.760 bit weird and wonderful. And surprisingly, I, the amount of high income people that I speak to,

00:15:05.240 and they complain about tax. And I said, well, you could just do this and this and this and this,

00:15:08.120 and you don't pay any tax and then none of them seem to know anything about it. So, so yeah.

00:15:12.680 Well, the, the point of the taxation system is to be as convoluted and crazy as possible with so many

00:15:18.520 spikes on it that people go, Oh God, I don't even want to touch that. I'll just pay my taxes.

00:15:22.360 Yeah. So, um, I mean, what's your sense of uptake? I mean, presumably most people have a pension.

00:15:30.360 The uptake on it is, um, is a lot higher now that we've had something called law to enrollment.

00:15:35.080 Okay. So, um, in the nineties, we had a drive by the government to get people to,

00:15:41.960 to start buying into private pensions. Cause in the UK, we've had private pensions for,

00:15:46.440 for decades and decades. It's been, it's been a thing for a while. And that was done through,

00:15:50.680 um, usually it's done through your workplace. Um, there were things like the executive pension

00:15:56.920 scheme that were for company executives. Um, they were, uh, sort of just workplace,

00:16:02.520 um, usually final salary schemes. That's something that some of our viewers might, uh,

00:16:08.120 Oh, that's a good one, isn't it? Final. So this is, if I've got this right,

00:16:11.480 this is a thing and you used to, in fact, you still sometimes get them in the public sector.

00:16:16.920 Yep. Where basically the last year of your earnings or the best of your last three years of earnings,

00:16:22.680 they just pay you a salary based on that. And I think it can be up to something like 45% of whatever

00:16:27.560 your last year was. It will depend on the scheme. Um, but normally what they will do with, um,

00:16:34.520 a final salary scheme is they'll take your peak year. Um, and then for every year that you've

00:16:39.160 contributed to the scheme, you will get a 60th paid of it. So, so they will normally do it.

00:16:46.840 Uh, the maximum contribution term will normally be 40 years. So you'll have 40 60th of that final

00:16:52.120 salary. So two thirds. Right. So if you were, if you were earning 60,000 pound a year, they'll pay

00:16:57.240 you a salary of 40,000 a year, 40,000 a year. Which is not bad. I mean, you don't have to go to

00:17:02.520 work anymore. You're still getting two thirds. And there's no investment risk for it. Yes.

00:17:07.080 And you get a big lump sum tax free at the start of it, which is why that they, they're going out

00:17:13.640 of fashion because they're incredibly expensive. And everybody used to do this back in the sort of

00:17:16.440 fifties and sixties. And then at some point in the sort of, you know, seventies and definitely

00:17:22.760 by the eighties, private companies were looking at this and doing a bit of maths and thinking,

00:17:27.800 Oh my God, this is, this is going to ruin us. And I mean, I remember when I started the investment,

00:17:34.040 um, I looked at British airways and I quickly came to the conclusion that this wasn't a business.

00:17:40.360 This was a pension fund that has a sideline in doing flights. Yep.

00:17:43.400 Well, it's Avios is the, is the new one with British airways. It's the, uh, I'm not sure if

00:17:48.760 you've seen the video where somebody that there's a guy, uh, quite clever chap who's explaining how,

00:17:54.120 uh, the airline industry are basically forming their own currency now. So everything they're

00:17:59.480 doing, they're acting like banks. The fact that they do flights is, is an, is a side on it's like

00:18:04.360 banks selling mortgages. Yeah. And any sufficiently complex system just becomes financialized.

00:18:08.680 Yeah. Yeah. So my credit card, my main credit card is with BA. So I,

00:18:12.760 I'm, I'm all hang, you know, I like Avios. It's good.

00:18:16.600 So private companies used to do this final salary thing. Yes. Yeah.

00:18:20.200 Worked out it wasn't viable. Some government schemes still offer them,

00:18:25.000 although even those are graduating away today. It's, it's, it's, it's a product of our

00:18:32.840 health case. And, and, you know, I'm going to touch wood with this, our health care system

00:18:37.640 getting better over time. People living longer. I know. And that's a disputable claim.

00:18:41.800 Well, well, um, in terms of life expectancy, in terms of people expecting to live longer.

00:18:47.080 The buggers just aren't dying anymore. Yeah. Well, also the kinds of places that would offer these

00:18:52.040 sorts of schemes are typically white collar work. So it's the office workers who are not likely to go

00:18:57.400 out and sort of fall off a ladder or whatever. They're the ones who are going to live into their

00:19:01.800 hundreds because they've had a set, not a sedentary lifestyle. If you've got a leaky uranium mine,

00:19:07.240 you might not mind offering a final salary scheme. Yeah, that's pretty good. But if people have been

00:19:11.640 working in air conditioning for 40 years, the last thing you want to do is pay them an open ended thing

00:19:16.920 on their final salary. My wife is a lecturer at a university. Yes. And it's been very interesting

00:19:23.640 sitting in on the meetings that they've been given to explain the lack of funding in the university

00:19:31.480 final salary scheme. It's not a final salary scheme with the university. It's something similar,

00:19:35.560 but it's basically a, it's a similar concept. So, so the, so some of the universities, they still

00:19:41.000 have final salary? Oh yeah. All the universities in the UK. Oh really? Oh, right. Yeah, yeah, yeah.

00:19:44.760 There's, um, there's an element of, um, it's called defined benefit. So the way the university scheme

00:19:51.400 runs is they take your earnings of that year and they, they add that up. So it works out quite well.

00:19:58.360 Um, once you hit 10 year and you're a professor and you're, you know, you're earning nearly six

00:20:03.480 figures or six figures in some people's case. Um, but then that's, uh, offset by all the yearly

00:20:09.320 years where they had just got their PhDs and they're earning, you know, sort of average salaries.

00:20:13.640 So my understanding is the top of the tier, there's the final salary scheme.

00:20:17.560 Then there's the defined benefit, which is the softer version of final salary.

00:20:22.120 Yeah, they're, they're kind of the same. Yeah. Which you only ever get, well actually that's the

00:20:25.720 thing that you still get in government and universities. Yep. And then there's defined

00:20:30.040 contribution, which everybody else has access to, which is the only bit that is known is how much

00:20:35.880 you put in. Yep. And then it has to grow. Okay. So tell us about, tell us about the growing bit.

00:20:40.840 So let's just say I'm paying into my pension and there's now money in my pension. Yep. But I'm not

00:20:47.880 going to retire for another 30 years. What happens to the money? So that money in the defined

00:20:53.320 contribution aspect is basically like a savings account. It's like an ICER. It's like, uh, like a

00:21:00.040 bond. Um, it's invested in however way you want and it just sits there. Who does the investing?

00:21:07.000 Uh, it'll be the company who has sold you the pension. Right. So you can either privately contract

00:21:14.040 a company in, uh, as a customer, uh, by, uh, sort of ringing them up and saying, hello, I'd like to

00:21:20.280 open a sip, please. So that, that's usually the way. Self-invested personal pension. That's right.

00:21:24.920 Self-invested personal pension. And then the self-invested bit means that you can, well literally

00:21:29.800 invest it yourself. So you, you have a range of options and you just pick one and you say, I like

00:21:33.800 that and that and that. Yeah. So the way the, um, I won't get into like the technical details of it,

00:21:39.720 but effectively the way the legislation wraps the investment, it means that you are subject to a,

00:21:48.120 um, a certain set of rules about how you access it, when you access it, what it's taxed at,

00:21:55.080 how you get tax-free money out of it, and what happens when you die, which is an important thing

00:21:59.320 as well. Um, it's... Yes, that's a bit annoying, isn't it? If you spend 40 years saving up in your

00:22:06.280 pension, then you die. So the good thing about pensions is pensions don't form part of your

00:22:12.360 estate. So, um, if you were to die at age 70, like our, uh, like our chap from 1910, who's,

00:22:21.480 who's just got state pension, um, in the modern era, um, if you die before you hit age 75,

00:22:28.680 your pension assets are outside of your estate and they can be passed down to your dependent tax-free.

00:22:34.760 100%. And how, how are they? So let's say, uh, hang on, you say if you died before 65?

00:22:41.000 75. 75. So let's say two 70-year-olds are married. Uh, Mr. Bobbins, he dies. Yep.

00:22:47.240 And he's got this nice big personal pension. Yep. Um, does his wife just get showered of the money,

00:22:52.920 or does she, or does it get added to her pension, or what? So it will, as long as the deed of nomination

00:23:00.600 that he has filled in with the pension provider says, hey, when I die, give my pension to my wife,

00:23:05.800 Mrs. Bobbins. Yeah. It will go over to her. It becomes her, oh, she gets ownership of it,

00:23:11.720 and it gets ring-fenced in a tax-free environment. She is then free to draw that money down tax-free 1.00

00:23:19.080 until, until she dies. Even before she's, okay, so let's make it to 40-year-olds. Yep.

00:23:25.240 And she gets the money. Can she just go on a shopping trip then? Yep. Or she can? 0.99

00:23:29.640 That's called a dependence drawdown. And that can be accessed by any, by the person that it's allowed

00:23:36.280 to. This is dangerous information to put out there, I think. Well, this is why the government

00:23:39.480 doesn't want people to know about it. This is a really good way of estate planning. Or to get

00:23:44.440 bumped off by your wife? Well, there's that. But what I was seeing a lot of when I was administering 0.76

00:23:51.240 pension plans is you'd see grandparents willing it to the grandchildren. So as a form of inheritance,

00:23:58.920 I'm going to spend my money that I've saved, but then if I die, give it to the grandkids.

00:24:04.440 And then they can pay for university, they can use it as a... Because we've got to come on to talk

00:24:09.000 about annuities, because that is different to what happens if you die after an annuity. But are you

00:24:14.040 saying that... Let's say you've got somebody in their mid-70s. Yep. And they want to pass money

00:24:20.440 on to their children, avoiding IHT. Yep. And maybe they've already got a private pension,

00:24:26.920 they're drawing it down. Could they start a new private pension and put loads of money into it,

00:24:32.040 and will it to their children, and then just never have any intention of drawing it down,

00:24:36.840 and then when they die that money gets passed over? So this is where the limit, based on your earned

00:24:43.160 income stops that. So if you've got someone aged 73, are they earning 60 grand a year?

00:24:49.800 Yep. Probably not. If they are still earning 60 grand a year, then yeah, no problem.

00:24:55.160 Sorry, but the age 75 is the important one, because the minute they turn 75, it becomes taxable.

00:25:02.200 I see. But let's say you're a high-earning doctor or whatever in your 60s,

00:25:08.120 and you want to think about passing money on to your kids. And let's say you're earning 180 grand

00:25:11.720 a year, you could keep 60 to live on, you could put 60 in a pension for yourself, and you could put 60

00:25:16.120 in another pension, will it to your kids? And then if you don't make it to 75, and you might have a good

00:25:23.080 reason to think you're not going to make it to 75 or something, you might know something.

00:25:26.200 Yeah. Well, you might be going to dignitas at 74. Well, yes. Well, I don't know if parents are that

00:25:32.680 helpful, but you can basically skip IHT for everything you put in.

00:25:39.080 Yeah. Yeah. I never knew that. That is useful.

00:25:43.080 This is a big draw for pensions. Yes.

00:25:45.320 Especially now that one of the only good things the Conservatives actually did in power

00:25:50.200 is they recently took off the lifetime allowance as well. So one of the duffs that Gordon Brown did

00:25:58.520 was they introduced a total limit on the amount that you can put into pensions. And by that,

00:26:04.760 I mean total amount that you could put into pensions before you'll then have a tax charge.

00:26:09.480 Including the growth of the assets themselves?

00:26:11.800 Yes. Yeah.

00:26:13.000 Oh, right. Well, that's awesome.

00:26:13.640 So there was an annual limit, the annual allowance of, I mean, it was 40,000 for a while. I forget what

00:26:19.560 it was when it first started. But then there was also a lifetime allowance of a million pounds.

00:26:24.600 So on the one hand, the government is saying, hey, well done. You've planned for your retirement.

00:26:30.040 You're going to make sure that you're not a burden on anyone else, but don't plan too hard.

00:26:33.960 Don't save too much because then we're going to tax you on it.

00:26:37.160 No, you don't think they'll do that with us?

00:26:38.280 It was the Labour governments, you know, but the Conservatives took 14 years to get rid of it.

00:26:45.080 So, you know, we can't give them too much, can't give them too much credit.

00:26:50.040 We're in a weird limbo at the moment because Labour before the election, we're talking about reversing

00:26:58.200 that and putting it back in. So we'll see what happens. But when it was taken out, the financial

00:27:04.520 services sector jumped for joy because the calculations were a nightmare to deal with it.

00:27:10.600 It made everything harder and it was a disincentive to save for your retirement.

00:27:15.800 It was just a bad idea. So we'll see what happens. But at the moment, touch wood, there's no...

00:27:24.200 Also a million in 2002, whatever, when Gordon Brown was...

00:27:28.120 Oh, yeah. It's very different.

00:27:29.400 Yeah, very different to a million today.

00:27:30.920 Yeah. And it did go up. It went up first to 1.5 million and then they adjusted it down.

00:27:39.320 And then it was going up and sort of followed CPI for a little bit. And yeah, you've got to feel

00:27:45.800 sorry for those financial advisors in the couple of years where it really got crazy. And there was a

00:27:49.800 split year in 15-16 where you had two different limits that you had to calculate.

00:27:56.440 Yeah. Tax is insane in the UK.

00:27:59.640 So you put your money into this thing with the points we raised and then you can either invest

00:28:06.600 it yourself if you find a SIP provider, a self-invested pension provider, or you can...

00:28:12.200 What I think most people do is they just go to one of the big names and they say,

00:28:16.840 why don't you put it in the big name managed fund?

00:28:21.720 So that's if you're going out of your way to be like, right, I've got a bunch of money kicking

00:28:26.520 about my bank account. I need to do something with it. What most working people do is they are, 0.99

00:28:35.000 by default, rolled into their company workplace pension. So this is called auto-enrollment.

00:28:42.040 And this was what Australia did first when they realized that not enough people were saving into

00:28:47.800 private pensions and there was a big state pension burden. So they made plans to turn off their state

00:28:55.080 pension. But first, what they did was they said, right, if you have a company, you have to provide

00:29:00.120 a pension system and your employees have to be default enrolled in.

00:29:04.520 So you can opt out?

00:29:06.040 You can opt out. Generally, it's a bad idea because the way it works is the government mandates that the

00:29:13.480 company has to put money in on your behalf as well as you. And the way it's done through payroll,

00:29:19.480 usually it's more tax efficient for the employee to do it as a salary sacrifice.

00:29:24.600 Yes.

00:29:25.000 So you save on the national insurance contributions, you save a bit of tax.

00:29:28.840 Because if you're earning 50 grand and you put 10 grand in your pension,

00:29:32.280 you're taxed as if you're earning 40 grand, which is probably in a lower tax bracket.

00:29:37.880 Not anymore, because 50 is...

00:29:39.320 Oh, okay.

00:29:39.960 Well, whatever the math...

00:29:41.080 Let's say 70,000.

00:29:41.960 Yes.

00:29:42.520 Well, let's say 55,000.

00:29:44.360 Right.

00:29:45.000 Yeah. Okay. So you'd have...

00:29:46.840 If you were to just put it in from your bank account, you'd have 5,000 that was eligible for

00:29:52.040 40% tax relief and 5,000 that was eligible.

00:29:54.760 So that was what I was offered to do that. And I still didn't take it personally because

00:30:00.120 that would have meant I would have had to have picked from the list of their investments,

00:30:03.240 which were managed funds. And I just know I can manage money better than they can.

00:30:06.840 So I was willing to give up all the tax advantages and the extra 5% or whatever it was

00:30:11.720 to manage it myself, because I knew that would be more. But I take your point. For most people,

00:30:18.120 take the 5%, take the whatever percent it is that your employer offers, take the tax

00:30:23.160 advantages, take the salary sacrifice to move yourself into a lower tax band and, you know...

00:30:29.560 And just build something.

00:30:31.160 Yes.

00:30:31.640 There's nothing stopping you from doing a transfer out of that pot into your own SIP.

00:30:35.560 Yes, yes, that's true.

00:30:36.680 So that is something that you could do. You could take, I don't know, 5 years of something

00:30:42.040 moderately cautious so that you're just building up a small growing bit. And then once you've got,

00:30:47.960 I don't know, 30,000 saved, open a SIP with it and manage that yourself more aggressively.

00:30:52.920 Yes.

00:30:53.320 But stay employed and then just every 5 years, move a lump over.

00:30:56.760 And that's a clever way of doing it.

00:30:58.200 And of the big names, you know, the Avivas and the LNGs and whoever else,

00:31:01.240 you know, they are big names in fund management because they're managing large pots of money.

00:31:07.000 Large corporate pension schemes, usually.

00:31:08.840 Yes.

00:31:09.160 So they...

00:31:10.360 They're like our UK mini Black Rocks, really. 0.75

00:31:12.920 I mean, they're just managing all this money.

00:31:14.840 Yeah, kind of.

00:31:15.960 Very cautious and normal about it.

00:31:20.280 Boring returns.

00:31:21.160 Yeah. I mean, there's obviously, there's two sections of the business then.

00:31:24.760 So there's the people who administrate the pension schemes.

00:31:30.040 They will sort of do the day-to-day admin of like making sure,

00:31:33.080 oh, Mrs. Meggins has just put £20 into her thing. 0.59

00:31:35.880 Let's give her £5 government tax relief to top it up. 1.00

00:31:40.520 There we go. That's filed away.

00:31:41.720 And then you've got the other half, which is the asset management side, which is,

00:31:45.080 okay, here's Mrs. Meggins's £15,000 that she's saved so far and she's moderately cautious.

00:31:50.840 So let's put it in 60% equities and 25% corporate bonds.

00:31:55.000 Yeah. Disastrous idea, that.

00:31:56.520 Yeah. Well, that's a very different conversation than what we're doing today.

00:32:01.480 But yeah. Yeah. So that's how it'll go.

00:32:04.920 So you've got all these different types of pensions and we covered that.

00:32:07.800 When you get to the end of it, um, you've stopped working.

00:32:13.080 What happens then?

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PREVIEW： Brokenomics ｜ Pensions

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