Often, young people are synonymous with not starting to save early enough for retirement or lacking an understanding in their pension. In this episode Roy is joined by 24 year old Jack Watkinson who has recently graduated from University and is about to embark on his first graduate role. As a young saver, Jack is starting the process of saving into a pension and thinking about retirement.
Roy and Jack discuss:
For further information you can contact or visit your pension provider's website, the Money Advice Service or Citizens Advice. A financial adviser will also be able to provide specific guidance on your own pension arrangements – please contact MHA Carpenter Box Financial Advisers for advice on pensions or retirement planning.
Often, young people are synonymous with not starting to save early enough for retirement or lacking an understanding in their pension. In this episode Roy is joined by 24 year old Jack Watkinson who has recently graduated from University and is about to embark on his first graduate role. As a young saver, Jack is starting the process of saving into a pension and thinking about retirement.
Roy and Jack discuss:
For further information you can contact or visit your pension provider's website, the Money Advice Service or Citizens Advice. A financial adviser will also be able to provide specific guidance on your own pension arrangements – please contact MHA Carpenter Box Financial Advisers for advice on pensions or retirement planning.
So welcome to the Retirement Gym. This is the podcast series thst aims to help you make good retirement decisions in the lead up to retirement and how to spend your money in retirement. My name is Roy Thompson, I head up MHA Carpenter Box Financial Advisers, and on today's show, I've got a gentleman with me, Jack Watkinson. Jack has just finished at the University of East Anglia where he did American studies with a year abroad, which sounds very exciting to me. And I thought we'd have jack on as a young saver starting the process of saving into a pension and thinking about retirement, perhaps synonymous younger savers with not saving enough or not starting early enough in terms of pension savings. So I thought we'd find out a little bit about why that might be, and I asked Jack to bring in one of his own pension statements so we can talk through that, help him understand it and in doing so, maybe how you as listeners, with your own pension statements. So hi Jack, thanks very much for coming on the Retirement Gym today.
Jack Watkinson :Hello, thank you for having me.
Roy Thompson :No problems at all. So the idea maybe 20 minutes or so, for us to talk through where you're at. I've asked you to bring a,long which I think you said you've done, a statement regarding your own pension, I thought it might be quite interesting just to have a look at your statement, to perhaps be able to highlight some specific things that would be important to you on there. But before we get to that Jack, perhaps you could tell us a little bit about what you know about pensions at the moment where you're at and perhaps your experience up to now regarding sort of retirement and the conversations you may have had in school, family those sorts of things.
Jack Watkinson :Alright so I'm by no means an expert. What I do know is that I was auto-enrolled into a Scottish Widows pension in my previous job
Roy Thompson :OK that's the statement you've bought along with you?
Jack Watkinson :That's the statement I brought along today, which we can have a look through in a bit, but I know it was 10% of my salary each month. And that's just built a little pot sort of in my name that's been pushed aside, which I don't really think about that much. Generally, because I don't know much about it. As you mentioned, going back to my education, you know, we were never taught this sort of stuff in school, it was just, you know, after going to Uni for four years, and then starting my first job, it was a case of just getting an email and opening it not really knowing what's happening, but
Roy Thompson :Okay. So you mentioned they're not something that came up in education. And if I think back to my own education it certainly wasn't on the agenda there. What do you feel about that? Do you think it would have been useful? I mean, not just pensions, but I guess finances in general, what are your thoughts about, perhaps how we consider that for people going through sort of education?
Jack Watkinson :I think it would definitely be 100% beneficial, definitely in sort of secondary school to have it as sort of a mandatory; lesson money management, financial advice, even just basic things like taxes and stuff people don't really know what they're doing. People sort of get to Uni, it's the norm to, you know, be in your overdraft and not really worry about consequences long term of how you're spending your money or dealing with your money. So I think 100% it would be great for young people to have more financial advice.
Roy Thompson :Yeah, if I didn't actually go to University, but if I had, I can imagine that I would have enjoyed myself quite a bit and perhaps not worried about the money side of things.
Jack Watkinson :That's exactly what happened to me.
Roy Thompson :And if we think about the word pensions, you know, in my mind they're always synonymous with sort of being old, you know, perhaps a bit dull, how would prior to your notion of auto-enrollment that you said, you know, if anyone was starting to talk about pensions, how would you have felt about that?
Jack Watkinson :I probably would have started to nod off, or just not be interested at all, because I was, you know, not that I was not interested because I was, well I'm 24 now, I still think of myself as very young. But especially when I was at Uni, starting my gap year before Uni, I was saving up for things short term. So that just felt like a million miles away. And something that I wouldn't have to deal with for a long time.
Roy Thompson :Yeah. So and you mentioned about short term things and again, I can have some sympathy because, you know, if you're looking at short term priorities, such as buying a house starting up, perhaps travelling, as you mentioned, they're things that you can enjoy now. Whereas retirement feels like some time away. And it's something you can save for later.
Jack Watkinson :And especially, I was lucky enough to go travelling before I started my career, whereas my parents are thinking of retiring and going travelling then. And they're building up to do that. Whereas that's a kind of different kind unique element of my sort of attitude towards retirement and pension planning potentially.
Roy Thompson :Yeah. And I think it's interesting because actually where we've got not just in this country, but internationally, longevity is increasing. So, theoretically, if you wanted to retire at a traditional retirement age, let's call it 65. What you'd find is your life expectancy would be longer than your parents, theirs would be longer than their parents. And what that actually means is for younger people, they have to save more than their parents did for a successful retirement. So it always seems strange to me that it's not on the agenda in education. And really, I guess the message is for younger people, the earlier they can start saving for retirement, the better it's going to be in the long run for them and we were looking just a short while ago at a chart that showed the benefit of starting saving early so someone who saves from a younger age just for a shorter period of time, when compared to someone who saves at a later age for a longer period of time, actually using some reasonable returns, they ended up with a pretty similar amount of capital at the end of that so, what it shows is the benefits of compounded returns which are really important in building up wealth. So you've, bought along your own statement, so we don't have to talk about the amount in there or you might feel happy to disclose that obviously, you've not worked for very long so we know it's not going to be hundreds of thousands of pounds so to speak, but we wish it was perhaps. But should we have a little look at what you've got? So for the benefit of those listening, I guess what we've got here is a document that sort of highlights as Jack's referenced that his pension is with Scottish Widows. So that's just the name of the insurance provider who provides the contract. And I guess their role is to administer Jack's pension, report to HMRC to ensure that any taxes that are due to Jack or vice versa are paid correctly, and also to ensure that they keep the money safe. So they're the custodian of the money. When we use the word money-safe, that doesn't mean that it can't go down in value, because traditionally, a pension will invest money. What it means is that their objective is to act as the custodian to ensure that it's not embezzled and spent inappropriately. So it says there Jack, workplace pension. What does that mean to you?
Jack Watkinson :Workplace pension means the amount I'm putting into my pension from my job.
Roy Thompson :Yeah, so a workplace pension is just a type of pension. It was introduced around 2011 /2012, when the government introduced auto-enrolment, I guess the important things were that the government put in place, a series of directives really about how a workplace pension could work. There's a maximum level of charge that Scottish Widows can levy for their role as administrator. So the idea of that is that protects you as the consumer, you can't be charged more, you know, an inappropriate amount of money. And they need to make sure that if ever you were to move that pension somewhere else, you're not going to suffer a copious penalty. So and there's a range of other perhaps more technical issues that sit behind a workplace pension, which are aimed at designing protecting you as the end consumer and so it's a good thing. A workplace pension is a good thing. It requires an employer to automatically enrol someone into the pension scheme when they join their workforce. So it's a form of forced saving, you could say
Jack Watkinson :Soft compulsion
Roy Thompson :Soft compultsion yeah, that is the word that 's sometimes used, but principally driving people to try and save more towards their retirement. As a nation, we're under saving for the time. So we've got the current value there. So I don't know if you want to tell us what that figure is?
Jack Watkinson :So it's £897.38. I think that's actually gone up since last month.
Roy Thompson :Yeah, so that wouldn't be unusual. That figure will change on a daily basis. So we can see here we're looking at online statement. And what we can see here is that says fund value as of the 13th of August 2020. So if we were to look middle of next week, that figure would be slightly different again, and that's because your money is invested so can go up and down on a daily basis as I say. So we've got a current value there of just sort of £900. And if we were to retire on that of course, and spread that out over the rest of your life, you can imagine you'd be talking about having a few pence per month to live on. So what we know already is that in order for us to enjoy our retirement, we'll probably going to have to build on that number to a reasonable position. The next thing on there it says Fund Holdings. Under the fund holdings it's got a fund name, units, unit price, current value again. Which of that or what of that information do you feel might be important to you? Because the industry uses a lot of jargon. What of that do you think is important to you?
Jack Watkinson :The value. I'm not hundred percent sure, obviously the value is something to do with stocks and then going up but yeah if you could advise me on that?
Roy Thompson :So the value is obviously just where you're at at the moment, I guess an important thing or where you should start looking is the fund that you've got. So the fund name, says Pension Portfolio 2. That's just a name for something. What you really need to start looking at is what that means for you. So if we were to click into what that fund is what we can start to see here as we pull up a fact sheet, which has got even more information, which is, I don't know, the first thing that we've got on there is what we call an asset allocation. So again, a piece of jargon. I would say certainly for youngsters or in fact, people of all ages. This is the most important thing to be looking at when you start looking at your pension statement. Because the asset allocation really means where your money is invested and we start to see words like equities, which is stock market / stocks and shares as you would think of it, and we start to see words like fixed interest and corporate bonds. And these are different forms of investment. So stocks and shares tend to be slightly more higher risk. And corporate bonds and fixed interest investments tend to be lower risk. There's variances to the theme, but as a broad statement that would be correct. So what we know is if we start to look at that asset allocation, the more you have in equities or stocks and shares, it could be argued that you're taking more risk. And if we start to look at risk, the more risk that we take, what it means is over the long run, we might hope to get a better return in exchange for the risk that we're taking. Certainly a better return than just simply leaving your money in the bank or the building society. And at the opposite end of the scale, if we look at something that's very low risk, well, our investments are unlikely to fluctuate too much in value, but they certainly won't go up in value by much and an ultimate form of that would be something like a bank account where currently we might get quarter percent interest, but of course, our money can never go down. So very, very, very low risk. So your asset allocation is really important to you. I guess the next thing that we start to look on here, it starts to talk about performance and we've got a bunch of charts and some names again. Anything on there mean anything to you at all?
Jack Watkinson :No, it doesn't look like it's written in English mostly. Obviously, I understand the chart has dropped hugely because of Coronavirus. I can see that, it's sort of steadily going up and then plummeted down around March 2020. But no, this sort of thing I don't think I'd even open, I didn't even know this existed, this whole chart. So what you're coming from there the chart is more informative than perhaps the information that sits underneath. And you're right. The chart that we're looking at here looks at past performance of the investment that you've got in your pension. It shows a sort of a roughly squiggly line going upwards for the previous four or five years and then a sharp drop in recent times, and you're right. It's to do with the Coronavirus. Actually, if we look at this, in March, we can see that there was a fall in value of some 25 to 30% of the value of your money. So if we take your 900 pound, and we rewind back to March, if we'd have had 900 pound in there at that point in time, we might have found in the space of a month or so that had fallen by roughly 30%-35%, somewhere down to about £600 there or thereabouts, which is quite a big difference in value. What we've seen is a steady recovery in that and it's now perhaps down around 10% from from where it was back at the beginning of March. Which is better. Where I talk about the level of risk, and I've just got an example here. This is a low risk investment. So if we were to look at the same chart here, what we can see is between February and March this year, this fund that we're looking fell by about 10% in value so far less than the 30% that your fund fail back in March with the onset of the Coronavirus. So, a lower risk fund when things are going not so well is less likely to fall as much as a higher risk fund. What you then need to look at, if we look at short term performance, that's fair enough. But what we said earlier is over the longer run, a higher risk fund should reward you with a better return. So if we start to look at some of the detail here, what we've got is a statement that says cumulative performance. And we can see that over the last five years, this fund that you're invested in, actually went up by 40%, or just over 40% in value. That's much, much better than what you would get in a bank or building society. And it's your reward for taking that higher level of risk. If we compare and contrast it to the very cautious investment, or the more cautious investment that I've got up here on a separate chart, we can see that over the last five years, that fund has only gone up just over 20%. Half as much as the higher risk one. Now those variances are quite significant. They're not guaranteed. So you know over the next five years, they're not guaranteed to repeat. But what we can see is that the level of risk that you take with your pension investments can have quite a material difference. Does that make sense? Yeah that does make sense. So looks to me to I don't know, as a youngster I'm more inclined to take a higher risk.
Roy Thompson :Well, you might argue that if you're younger, certainly if you're looking at your own retirement, then you might argue if you're accepting of the fact that you're going to have some of these highs and lows along the way, such as we've had from Coronavirus, you might argue that over the longer run, you would be well rewarded. Or you could hope to be well rewarded for taking that higher risk. And we can start to see that by getting those much better investment returns, that's really going to help the money that you've got invested generate a better return over time. So we, we had a look at this, didn't we Jack, prior to you coming on. So if we took your £900 that you've got saved at the moment, and we invested for the next 40 years, and made a regular contribution, such as you're paying in at the moment, a lower risk fund, we evidenced a sort of return that might build up a capital of somewhere around £120,000 by the time that you retire, whereas the higher risk fund, if we applied that moving forward, we might end up with a figure of somewhere around £250,000. So almost, well in fact over double the amount just by looking at the level of risk that you have with your pension fund. As I say, and as the regulator would say, it can't be guaranteed, but what we can see is that the level of risk is single handedly the most important thing that you can look at when you're starting to think about your own investments. You must ask yourself, whether you're happy to accept the highs and lows. But if you are, you can see the benefits that can be driven out. So if we were saving for retirement, any idea on the amount of money that we might need, once we get to retirement, arguably, to have sort of a secure income that you would be happy with.
Jack Watkinson :Not off the top of my head, but I suppose if you wanted, sort of around £40,000 a year, I don't know how much you'd need in a pension pot. But definitely a lot more than £900.
Roy Thompson :Yeah, so if we were retiring today and you wanted £40,000, certainly we'd be talking about and it's important to remember you don't just have to have money in your pension it could be savings. it could be a rental property, it could be a range of different assets, but certainly what you would be looking at is saying that you need somewhere around, as a very broad statement around one and a half million, something of that nature. That then has a very reasonable chance of giving you a level of return that could drive the sort of income that you need. Really importantly, as well, it would have a chance to ensure that as you move through retirement, and inflation affects the level of spending that you need to have so that £40,000 would need to go up through retirement because cost of living goes up, you would find that you would need somewhere around that one and a half million.
Jack Watkinson :Hugely supports the fact that young people need to start saving sooner for their retirement. Without a doubt.
Roy Thompson :Yeah, I would say that if you start thinking of that quantum of figure people would be very concerned.
Jack Watkinson :Yeah which is a figure that no one's ever told me. I don't know if any other younger listeners have been told that, but certainly I was never told of that figure throughout school.
Roy Thompson :And of course younger people these days, you know they may benefit from an inheritance, they may benefit from, you know a career that develops, sort of other pension arrangements that they, you know, they don't have to contribute to. We shouldn't forget things like the state pension. So the state pension I don't know if you have any idea what you might be entitled to?
Jack Watkinson :No, not really.
Roy Thompson :So it's a very broad statement again. Current state pension is around £8,500 a year making the assumption that you work for or have National Insurance credits for 35 years of your working career. I guess the issue for you current state pension age is 67. What's very, very likely to happen is that that state pension age will continue to increase and you may well find you're into your seventies before you get the benefit of the state pension. So, yeah, and this comes back to this notion, I guess a very popular thing you mentioned travelling. And I don't blame you for that sounds like a really good thing to do. But what happens is your career ends up starting later than it might have done 20 or 30 years ago. But what's likely to happen at the other end, your career is likely to continue longer than people who were perhaps working 20 or 30 years ago. So I guess, you know, whistlestop tour, I guess, of your statement that you've got here, and it certainly wouldn't answer everything. But I would be saying to younger listeners, absolutely they should be looking at the level of risk that they should be taking on board with their pension arrangements, they should be looking at starting saving as soon as they can. Certainly the notion of auto-enrolment is a good thing, and they should embrace that when starting with an employer. They should not be afraid of the information they should engage with that. And there's a range of places you can go, so the Money Advice Service, you can go there and get information on pensions. Citizens Advice provide information. Of course a Financial Adviser would be able to provide you very specific guidance regarding your own circumstances. But in this instance, Scottish Widows, we're just on their website here, you can start to see there's a reasonable amount of information that you can look through.
Jack Watkinson :Yeah, already just by just by sitting here in the Retirement Gym, I've learned quite a lot.
Roy Thompson :So I think it's, you know, I certainly wouldn't discount what's available on the internet. So, I think from the purpose of speaking today, from my perspective, really to try and help younger people understand the important bits of information that might come up on their sort of pension statements, what they can do to drive out a little bit of a difference. Jack, hopefully that's been helpful. Before you go, I've got three questions that I've asked all people who have attended the podcasts, so they're nothing to do with pensions really. They're just to give a bit of a flavour into your own insight but favourite day of the week?
Jack Watkinson :Favourite day of the week. Well it's gotta be Friday. Got to be Friday right now. Got the whole weekend ahead of you.
Roy Thompson :So I understand you're waiting to start a new job in September. So is everyday not a Friday?
Jack Watkinson :Well I think it's better to work then have a Friday and feel a little better.
Roy Thompson :Yeah. So there's nothing like the release at the end of the week. But if you're down the pub and you have one piece of advice for your fellow students or fellow youngsters, what would it be?
Jack Watkinson :It would be I think, about how much you're spending on your pints and think about long term. And it's that it's better to make a friend out of an enemy than it is to make an enemy out of a friend. I literally just thought if it right now.
Roy Thompson :I tell you, so your funeral song. I've retired you and killed you off.
Jack Watkinson :Alright my funeral song. Probably Nessun Dorma by Luciano Pavarotti, the Italia 90 version.
Roy Thompson :I think you're winding me up. I thought you were gonna say something like Eminem. Jack, thanks very much for coming on appreciate that.
Jack Watkinson :No worries, cheers Roy.
Roy Thompson :So thanks for listening to today's podcast. If you'd like any of the resources or charts that we spoke about, they can be found at www.carpenterboxfa.com/retirementgym. If you would like to talk about your own retirement savings, we can be contacted on 01903 534587. Thanks very much. Transcribed by https://otter.ai