129- Million Pound Pension Tick-Box Mistakes

We've all been there... You tick a certain option on a pension form because you don't really understand it and surely it can't make that big an impact, can it? ...

Fear not, in this episode Benjamin shares the £M pension tick-box mistakes so you can avoid them and go into these seemingly unimportant tick box opportunities with your eyes open. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:10

Good morning, good afternoon, good evening, money nerds, whenever you're listening to this, and welcome to Heads Up on Money. In this week's episode, I'm gonna try and keep it a bit shorter than a couple of the previous ones. We're focusing on the million pounds tick-box mistakes that you're making with your financial planning. Have I drawn in your attention there with that million pounds? I'm not exaggerating here that some of the decisions you're making, the simple tick-box exercises that you take with your financial planning, that you just tick unbeknownst to the long-term financial impacts of those, could in reality be a million pound mistake. And I'm going to try and rattle through a few of those in this week's episode of the podcast. But before I do, as always, if you're enjoying the podcast and you haven't already, please can you let me know? Please can you like and subscribe to Heads Up on Money and share it with all of your lovely family and friends so we can get financial education out there to more people. And as always, a just a little heartfelt thank you for me is a lot of you reach out to me with some questions and some suggestions for future episodes of the podcast. And that really gives me so much confidence that you're actually enjoying this drivel. And of course, if it matters to you, it probably matters to a lot of the money nerds out there. So there is no such thing as a silly question when it comes to your money. So, money nerds, please reach out to me. My contact details are in the show notes within every episode. I love to hear from you, and you've got any questions or anything you want me to cover in future episodes of the podcast this year, do reach out. But let's get into this one. We're gonna try and keep it short. As I said, we're talking about the million pound tick box mistakes. When it comes to the interrelation between your life and your financial plan, there will be a few critical moments, a few critical junctures in the road where the decision you take and the box you tick can have a massively differing impact on your long-term financial future. And sadly, when often we're presented with these things, it's a time of financial worry, financial anxiety, financial distress. So we typically just tick a simple option, we tick what we think we know, and we don't really know about how the damaging effects this might have longer term with our financial futures. So the first one is when you are enrolled in a new employer workplace pension scheme, it's probable that you will be enrolled into the default fund. You may be invested in what's called a lifestyling mix within the pension fund. Please listen back. I've got a previous episode on lifestyling and the perils of lifestyling and why everybody should avoid this at all costs. But you've just joined a new employer. There's tons of paperwork you're probably going to need to submit. You just met some new colleagues, you're not very sure if you like Sheila from accounts or not. And you probably are not really thinking about your pension or any of the pension paperwork that your employer is shoving under your nose or telling you to log in and join your workplace pension scheme. Here's the reference number, here's a one-time passcode, blah blah blah. So you don't really think about which fund you're going to invest in. So you tick a box, you say, let's go for the medium risk fund, because that probably describes me. I don't really like gambling, I don't go to casinos, but I wouldn't say I'm risk averse, so medium sounds good. That's a perfect description of me. Tick that box. Then you file that away, and then 20-30 years later you log into your pension and you think, Hold on, this is all I've got? Well that tick box by allocating to perhaps the not optimal asset class within your pension, that's going to cost you that could be a million pound tick box mistake. So don't make it money nerds. I said this in the opening episode of this year's podcast, in that this is one of the simple things you can do, the easy things that doesn't even involve leaving your armchair, sort out the fund you're invested in within your workplace pension, and don't make the mistake of this costly tick box exercise. Number two, similarly in pensions, is opting out of the pension altogether. Perhaps you're getting near annual allowance concerns within your pension, or maybe you heard something from Steve down the pub who mentioned that the government are going to do away with your pension lump sum, or they're going to restrict the ability to contribute to pensions going forward. So you think, you know what, there's so much tampering going on, pensions just aren't for me. I'm going to opt out of my workplace pension. Now this can be an extremely costly tick box mistake, particularly because if you opt out of the pension, it's typical that the employer pension contributions you would have got will also no longer exist. You will have effectively opted out of the pension, you won't be eligible for even auto enrollment anymore. So you're missing out not only on your own contributions, but free money from your employer in the form of employer pension contributions, which is extremely costly over the long time period. You may have gone into this being slightly more inverted, commas, informed, because you're aware you're possibly going to breach annual allowances, you're going to have some tax charges. Well, often, and you do need financial advice on this because it's getting into the realm of pretty bespoke complex scenarios here. But I've seen cases more often than not that even when you model in an annual allowance tax charge, the benefits you're getting from the compounding effect of pension contributions and the fact that you're investing and your employer's investing, it's free money that you're leaving on the table. Even when you factor in a tax charge, the net positive benefit is still good for you. So, yes, there's a tax charge depleting the pot or depleting the growth in the pot, but even still, that's better than just washing your hands of it completely, ticking that box and saying, you know what, I'm opting out of my pension. And you also do need to take care, because in some public sector schemes, when you opt out of the pension, that may mean differing valuable added benefits that accompany the pension scheme. For instance, benefits that are paid to your loved ones, death and service benefits. You really need to get into the minutiae here and recognize that it's not as easy as just saying, you know what, screw this, I don't trust pensions, I don't trust the Labour government. I am opting out. Tick that box. Are you aware exactly what you're opting out of? Go into this with your eyes open because as I've said, these could be costly, costly mistakes when amplified over time. A potentially costly tick box mistake for the divine benefit pension holders out there is when you come to take your retirement benefits, you'll be offered the option of do you wish to take a certain lump sum with a certain pension, or do you wish to take a higher lump sum but a reduced long-term pension? And there are no right or wrong answers here, folks, but I really just want to educate you around not having that carrot in front of you of a greater amount now, not swaying you. So what I mean by that is if it says you can get 30 grand as a lump sum and a pension of nine grand a year, or we can give you 45 grand as a lump sum and a reduced pension of 8,200 pounds a year, you probably think, you know, hey, hey, I could get a more in my bank account now? That's incredible. And you don't really appreciate the long-term value of having a secure guaranteed income for the rest of your life and what that might mean for retirement benefits for your loved ones, etc. So, no right or wrong answer. It's not to say you should never take the option of a greater lump sum entitlement, but just be mindful not to be swayed by immediate reward and immediate gratification. And that tick box of getting a few extra grand in your bank account now could have implications for the long-term financial plan in the future. So go into this with your eyes open. When you're talking about greater sums than the ones I've mentioned, it could potentially amount to several figures difference longer term in your financial plan. So just pause before you tick that box, take a step back, speak to your financial advisor if you have one, or if not, reevaluate and consider what do you value more? Is it immediate gratification, an immediate lump sum now, or long-term security in your income for the future? The last one I will say is there's an option probably when you join your workplace pension scheme again, is do you want to join the lifestyling? Do you want to be in a lifestyling approach? And it says things that sound pretty nice in practice. They say lifestyling will move you out of higher risk assets into lower risk assets as you get closer to retirement. It often locks in the value of your wealth and avoids volatility and the value when it comes to the point of retiring and using your retirement benefits. And you think, you know what, that sounds perfect. Why would I be a mug and do anything otherwise? Tick, I'll join the lifestyling. Well, I really encourage you not to do that. I mean, I can't give you financial advice one-to-one, but be aware of what lifestyling is. It's moving you from higher growth potential assets into lower growth potential assets. It's an outdated concept that relies on the premise of once upon a time, when you retire, you use your pension pot to buy an annuity. So naturally you don't want to have too much volatility and the value at the point of when you retire. But nowadays, with retirement benefits being flexible in nature and drawing down wealth throughout the course of your retirement, the course of the rest of your life, you'll be dipping in and out of that probably at different rates over the course of your life. You're still going to want to have a decent level of growth potential within your funds. You do not want to be moving the dial of growth potential way down to low growth potential, which is what lifestyling does. It can leave masses of returns on the table because it's very defensive in how it does it. For instance, even the 10 years before retirement, or what they think is your retirement date, because they've just got a notional retirement date based upon what you've ticked. They don't really know when in reality you're going to retire. They don't know your financial plan. So suddenly they're moving you from equities into bonds, which are typically considered more defensive. But query what is meant by defensive. Safe is not necessarily what safe means literally. So really, really go into lifestyling with your eyes open. If there's a tick box which says, Do you want to join the lifestyling fund or do you want to be part of lifestyling within your workplace pension? I really encourage you to second guess that. Do your research. Again, I've got an episode on this topic in greater depth, but don't just tick that box because over long periods of time it can make massive differences. What if, for instance, you're planning to retire or they think you're planning to retire at 65? Over the course from your age of 50 to 65, there's been a great rally in markets, equity compounding has done its thing. So you wonder why on earth, when I'm reading in the newspaper and the Sunday Times that equity markets are stronger than they've ever been, why is my pension done so badly? The reason is lifestyling, this dangerous practice has already gone on within your pension where you're moving from higher growth potential to lower growth potential, and that often, more often than not, is not the recipe for success. So be aware of that. That is a potentially million pound tick box mistake that you could make with your pension. Don't do it, money nerds. Those are the key pension tick box million pound mistakes that you could have been making before you started listening to this episode, but you're not going to now. You don't need to thank me now, money nerds, you can thank me in 30 years' time. Yes, my cat Dusty, he agrees with that one. Okay, Money Nerds, I'm gonna wrap this one up for your benefit and also for the benefit of my cat Dusty, because he has just walked into the room demanding it is feeding time at the zoo in advance of tomorrow morning's podcast episode release. But I hope you've enjoyed this one. If you have, let me know. And if not, I will try and keep next week's one a bit more interesting. Have a great weekend. In the meantime, money nerds, stay safe out there. I'll see you next week for personal finance Friday. It rolls around oh so quickly, too quickly, some might say. Anyway, off to feed dusty. Have a great weekend. See you next time. Bye for now.