Is a Pension Right for You? David Henderson on Lost Pensions and Default Funds

This transcript is auto-generated and lightly edited for readability, it may contain errors.

[0:18] SPEAKER_01:

If you are employed and your employer offers you a contribution, uh 3% typically, or more, they might offer more, so it’s always worth knowing that. Then pension is a very good option because it’s free money. The alternatives, there’s there’s lifetime ISAs. And if you’re just trying to get on the property ladder, then that might be a good option. But to do something is the main thing. Lots of self-employed people don’t believe in pensions because they’re putting their money into their business and they don’t having the money locked away isn’t right for them. But if they’re putting their money somewhere that is going to fund for their retirement, maybe it’s not, maybe it doesn’t need to be a pension, maybe it could be a property. But it’s making sure you do something is the really important thing, I think.

[0:54] SPEAKER_02:

Yeah, it’s great advice. It’s great advice. I think we struggle with the like the whole our company sets it up for us and it’s done. They send me a letter in the post. I open it, I might read the first page, and then it gets, you know, put in the the paper drawer as such, and I I think about it maybe once I’ve left. Um but there’s a process that people should go through when that letter comes in, especially if you are sort of younger, um, because often companies will put you into schemes, and due to the fact that they do have some of their older workforce in there, that default pension as such might not be the best one for you.

[1:40] SPEAKER_01:

Yeah, so true. So when companies set up a scheme for employers, they’ll work with the provider and they’ll come up for default fund. And 90% of people are put into these default funds. So I think it’s 500 billion in default funds in the UK. 90% of people will go into these funds, and a lot of people won’t check them between that point at age 20, 25, whenever, to 67. Um, and then it can be a bit of a shock. And as you said, they’re there to sort of suit everyone. So they’re there for Jeff, who’s 25, and Jill, who’s 60. And they’re trying to just make sure that they’re they’re not too risky. It’s not going to blow back on the employer if things go wrong. Some of them are overly cautious in the first five years because they don’t want the people who have signed up for it, they don’t want it to blow up in the first five years. And then they opt out and say, hey, this pension’s no good for me. So it’s really important that you look at how it’s invested. Is it right for you, your own attitude to risk? I mean, if you’re younger, then definitely you can take more risk. There’s a study that came out recently, I think they looked at um default funds across the major providers, 26, 29 different providers, the default funds, the main providers. I think 90% of them had under underperformed the benchmark, which is huge. 90%. 90%. And it’s because you’re not looking at the balance of how much is invested in equities. So some of them are overly risk averse. And as we said, if you’re young, if you’re in your 20s and 30s, you can afford to take a lot more risk. So have a look at the default fund. They’ll put it into they’ll put it, put you into that typically when you start. You have the option to change that. If you don’t know how to do it, phone up your phone up the scheme, speak to your employer. Your employer will typically have a team that can help you. If it’s a small employer, find out who the pension’s with, call them up, say, what are my options? I’m in the default fund now. Can you send me through a list of options and just do a little bit of research? And there’s loads of different tools online where you can find and compare and contrast performance. So just have a look, play around. It’s actually quite easy to do, but it’s just the first, the first step, getting the information and finding out what the options are.

[3:40] SPEAKER_02:

So someone listening to this right now can do that. And is it quite a quick process?

[3:45] SPEAKER_01:

It should be a quite a quick process it should be a quick process, yeah. Um you you can do it online if you’ve got an app or a desktop, you can do it online. You probably do it over the phone, you can do it paper-based, and it should just be a case of instructing them and you know, it’s it’s done that day. So easy to do.

[4:01] SPEAKER_02:

I think a lot of people get scared because they see the words, you know, equities and bonds and 20% this, 30% this. And that’s where they like, you know, would rather just bury their head in the sand and like not but actually, you know, you can probably pick up and everything you need to know about that in a couple of hours.

[4:19] SPEAKER_01:

Yeah, definitely, definitely. There’s so much information out there online. Um, comparison tools, comparison sites, giving you tips on, you know, what your risk profile might be. So play around and see what see what’s suitable for you. I mean, having 80% equities might be good for for you, but the person sign next to you, they may not feel might not feel comfortable with that. So just understand what risk means in terms of your your investment journey, but find out the information first and make a decision. It is easy to do.

[4:44] SPEAKER_02:

Yeah, the way I look at this with people is like, okay, it takes you, let’s say, even if it took you 10 hours, right, to learn.

[4:51] SPEAKER_01:

It won’t take 10 hours, yeah.

[4:52] SPEAKER_02:

It won’t take 10 hours, but like worst case scenario, if you’re a slow learner, it takes you 10 hours, right? And then you but then you get 3% from your dot for default fund and your other fund might, you know, example, right? This is not financial advice, might give you seven or eight percent. Yeah. That uplift over 30 years, if you work that out on a time per hour basis, is mental. Yeah. So just taking that time can be uh like just an enormous difference. And actually, as we said before, it’s a couple of hours. Yeah. So then if you work that out, you know, that could be you know 60, 70, 18 grand an hour or more.

[5:29] SPEAKER_01:

It’s a big difference. And it’s we’re talking about those standards of retirement uh when we first started, and it could be the difference between going up or down one of those. Um so yeah, do it. Find out the information, speak to your employer, speak to the scheme, and see if you can make an informed decision around it.

[5:42] SPEAKER_02:

A lot of um providers will have uh smaller selection, but some will have really big selections. If they do, what’s what do you feel like is the best way of approaching that too?

[5:51] SPEAKER_01:

Yeah, so some some providers might have say if you have a workplace SIPP, for example, you could have thousands of different options there in terms of funds and terms of equities you can choose from. But typically what they’ll do is they’ll create best buy tables. So they’ll say, you know, here’s our top 50, here’s our recommended funds that they think are suitable or you know, they’re guiding you towards. So have a look at that because it can be overwhelming if if you’re in a SIPP, for example, and you’re new to it, there’s a lot of choice there. Um, so yeah, go to go to the scheme, see what they’ve got in terms of best buy tables and take it from there.

[6:22] SPEAKER_02:

Yeah, especially like when it is a SIPP as well, and like someone like Hargreaves or uh you know, even Invest Engine or other platforms like that where it is like, okay, wow, I’ve now look at this list. You have 450 funds I can pick from? Like where do I even start? That guy said to do this one, yeah, but they don’t have that, or it’s called something different, and the names can be really confusing.

[6:43] SPEAKER_01:

So that’s the selling point in the first place. You say, Oh, we’ve got like a thousand different funds you can choose from. Great. It comes to the point of doing it. Where do I start? Yeah. But Hargreaves do a Best Buy, um, AJ Bell, all these different companies do Best Buy. So see what’s on offer. Look how they’ve uh narrowed it down for support. Yeah, absolutely.

[7:00] SPEAKER_02:

Now, one of the big things is that people will have had previous jobs and often not looked after their pension pot when they’ve left it. And they may have multiple providers. I know I consolidated mine and I had six different providers. Well, okay. And so it was quite, you know, I was dotting around like wildfire in my twenties. I was doing two, three years per employer. Yeah. And every single one had a different pension provider, and it was, you know, quite an experience. But that gap between people finding money, it’s like down the sofa, where’s it been? And that lost pensions gap’s enormous, and it’s getting bigger, isn’t it?

[7:41] SPEAKER_01:

Yeah, it’s getting bigger. It’s 31 billion at the moment, and that’s gone up 20, I think it was in 2018, it’s gone up by 16% or something. It’s increasing basically. So this is this is an unintended consequence of auto-enrollment, which we’re talking about. More people get enrolled into a pension, but more people switching jobs. And if you’re not with a large employer, typically, they might not give you the support. So when you leave and you have your exit interview, they might not say, Oh, by the way, don’t forget about your pension. You might just leave, and that’s it. So there’s lots of these pensions dotted around and people changing jobs more, so it’s more of an issue as well. It’s actually easy to track them down. Um, but there is 31 billion out there. I think the average pot size is around about 9,500, slightly more for people over 55. I think it’s about 13,000. And as and that means there’s three point five, sorry, 3.3 pots out there. So to put that in context, 31 billion, that’s the GDP of Papua New Guinea. 3.3 million, that’s the population of Wales. So imagine going to everyone in Wales and saying here’s £9,600 for your retirement. That’s that’s what’s out there, and it’s only going to get bigger as well. The amounts are increasing.

[8:48] SPEAKER_02:

That is wild. 31 billion. So Wales. Like, yeah. I mean, Chris, who who’s in our team as well, he lives in Wales, which we’ll probably tell him to look up his lost pension. He might have nine and a half grand sitting there. But that money, again, is money that can be put to better use. And if you’re listening to this right now and that sounds like you, even if you’ve got one missing, that’s still money that you can go and track down. Now, I’ll tell you a story. My mum worked in next in her, I think it was her first job, did it till she had before just before she had me. Yeah. And was there eight, nine years, and uh left, did life, yeah, and then a couple of months back found 65,000 pounds in a lost pension that was sitting there. So from going for her, you know, bless her, she she’s a lovely person, but she spent every penny that she’s ever ever had in her pocket. She looks great. Yeah, I say that, Mum, if you’re listening to this, hopefully. Um, but um she’s not she wasn’t in a best position to retire. Yeah. And you know, I think that was was becoming ever more apparent, and that money potentially is gonna be life-changing for her. Um but if you’re younger and then you have time to bring it under control to maximize it. What’s the process there?

[10:10] SPEAKER_01:

Yeah, so the process, so the term lost pensions, some people say is not the right word, it’s a misplaced, whatever. You don’t have the information in front of you. So find out that there’s different ways you can do it. So there’s government pension tracing service, you can go onto there and go through that’s those steps and they’ll try and find it for you. Or you can use various apps and services, penny being one, um, and you basically just type in your details, you put who your previous employer was, national insurance number, address, if you’ve previous addressed, name change, because that’s why people lose their pensions or lose track of them. Name changes, yes, changing, uh, address, you know, all these things just add up. Um, so put in your details and see what it brings up. We’ve found pensions, um, uh smallest pension, 0.01p, largest pension, uh about 450k, and the most number of pensions, um, about 16 for one individual. So it is a big from different employers. From different employers, yeah. Wow. And some of these people, like your mum, generally don’t know. Some people, when you speak to them, they’ll say, Well, I kind of knew I had that one there, but that one was a surprise and it was 45k or it’s 30k. And it makes a big difference in your retirement plan. You were talking earlier about how do we get, I mean, might get to that 80 figure, or how do we get ideally get to that bigger figure? But if you’ve got 65k that you didn’t even know about, and when you’re speaking to a lot of these, a lot of people, so I speak to a lot of the penny users to sort of understand the journey so we can improve our service. And a lot of people think that when they leave their employer, the money stays where it was, and they’ll say, I didn’t realise that was mine. I thought my employer kept it. Yeah. So whether it’s 500 pounds, 65,000, or whatever it is, it’s your money. And 15 of them, if you’ve got 15 different pots, it all adds up. And if it’s one pot, it’s it’s your money. So make sure you track it down, make sure you realise what you’re entitled to and find it. And then you don’t need to transfer it. Maybe you just find it and say, actually, I’ve looked at where it is, I’m happy with that. It’s got a low annual management charge, it’s performing well. I called up the company, the engagement was good, I’m happy. And lots of people when they track down the pensions will say it’s not so it’s it’s it’s a buzz finding the money, but the biggest thing is just peace of mind that I know where I am now. I’m not thinking what if, what if. So find it and then make a decision from there. You know your number. You know your number, yeah. Yeah, you know where you are on that PLSA chart or towards it anyway.

[12:26] SPEAKER_02:

Yeah, and that’s a good point. And I think something to say as well is that you know, not everyone knows their pension’s invested. Yeah. And that’s like a big thing. It’s like, well, what? They invest the money. Yeah. Oh, and I love what you said there as well, because we we have come across that a lot in the comments that we get on when we do uh pension videos is that you know, I just thought the money was my employer’s money. And actually, you know, that’s your money, you can bring it under control, and that money’s growing. And that’s why it’s so important to check what plan you’re on to set up for your growth.