How Safe Is Your Pension?

Transcript

Speaker 1  0:01  

The purpose of wealth talk is to educate, inform, and hopefully entertain you on the subject of building your wealth. Wealth builders recommends you should always take independent financial tax or legal advice before making any decisions around your finances.

Christian Rodwell  0:19  

Welcome to Episode 218 of wealth talk. My name is Christian Rodwell, the membership director for wealth builders joined today by our founder, Mr. Kevin Whelan. Hello, Kevin.

Unknown Speaker  0:28  

Hi, Greg. Good to be with you again.

Christian Rodwell  0:30  

Yeah, wonderful, sunny day today. And we've got an interesting topic to discuss today, which is how safe is your pension. And it was off the back of an article that we read just a week ago, it was pretty shocking. And I think anyone listening today is probably going to get a sharp reminder that they need to take a little bit more attention to things.

Speaker 3  0:51  

That's one of these perennial problems and existential problem that I think the UK population just simply do not understand how pensions work, you know, I don't know if you know, this abyss. But the very first pension in the world, in the entire history of the world, was an English country. And it was in the 1590s. Right, and that was called the Chatham chest. Now, the Chatham chest was a, literally a chest full of money to pay for the benefits for disabled seamen. The reason I know that it's not that I'm a geek on pensions is for people who don't know my story. My father originally went into national service. And it was down in Kent. And I was born in Chatham. So even though I'm majority and I was raised there, so the Chatham chest, and it's something that that stuck with me, because economic history was part of my degree. And I love to all that history. And the real first proper pension came in the late 1600s, which was for the Royal Naval officers, you know, the posh people wearing the braid, and the medals. And once you've put in 15 years of service, you've got 100% of your income paid for by the government, the exchequer, and you see that the public sector always look after their own, you know, they're still the only pensions pretty much left, where you get some relationship to your salary. It's two thirds now. So it's not as much as then, you know, we'll talk about that because I think people think pensions and the word pension kind of comes from a regular payment. People think pensions mean, I've got a pension, I'm gonna get a regular payment. Well, you're not. There are just different types of pension. And we're talking today, one about state pensions, right state pensions, you know, when state pension came into the UK, state pension 99, they came in five shillings Chris. File, five shillings was what was paid in a state pension in 1909. So we've got a big, big history with pensions in the UK, yet, we still have the most uninformed group of retirees. For reasons I cannot fathom. There's so much information available out there. But so many people put their trust, misguided, in my view, into the hands of third parties. And I talk about this when I wrote the first book on the Seven Pillars of Wealth, and that the vast majority of people in the UK over concentrated their future security. And this guy here, how old was he? 65. Right. Okay, so a transition point, okay. So big, big, big transition, moving from work into not work. So transition in life, that he needs to be able to, I needed to be able to predict, to get some kind of certainty over what his future income will be. So that he and his family could live a life based on not too much compromised or too much worry. Now he's going to have sleepless nights, is not going to have enough money coming in to pay bills, as far as we understand. We'll probably not therefore be able to leave a legacy. And we'll probably run out of money before it runs out live. And this is what's happening in the UK right now. Yeah, people are

Christian Rodwell  4:32  

running. Yeah. So it's a shocker of a story. And before we get into the details of that, Kevin, let me just tell our listeners to stick around because we're going to share at the end of the podcast, how we can help you and a really good opportunity for us to review your pensions and give you some some real help. Before we do that, as well just pinpoint some events we've got coming up this month as well. Kevin, so we've been on the road and we enjoyed our trip to Manchester last month. We have got another event coming up next week. 1415 Nov back in London, central London, just near Tottenham Court Road station where we're going to be doing a combination of a cashflow night, but also just an informal drinks and networking as well. And so if you're interested in that, or if you're in Birmingham on the 29th of November, then come along and meet Kevin and myself and some of the other wealth builders team and wealth builders members, again, for a networking evening there and a drink on us. And details of both of those events can be found at wealth builders.co.uk, forward slash events. So grab a ticket. And if your wealth builders member,

Unknown Speaker  5:32  

we're offering a bit there, because you wanted to get that in early this

Christian Rodwell  5:35  

morning to let people know, shall I just give some details around this story cabin, which was published in the in the Daily Mail just a week ago or so. And as we said, it was 65 year old gentleman whose pension had plummeted 30% In one year, which was more than 75,000 pound decrease. And his pot, which was around 250,000 pounds, just 18 months ago, has now dropped to 160,000. And so he's worked hard all of his life one year away from retirement, and now his plans are in jeopardy. So how safe is your pension? Kevin?

Speaker 3  6:07  

Well, the real answer is not very, unless you know what you're doing. The real challenge is understanding pensions. Now world world of pensions is a bit grey, a bit dreary, a bit drab, and then therefore people often will dismiss pension. So number one thing, I've got a pension, so I'm going to get a payment, not the case, when I described the different types of pension, or, or I'm with a big insurance company, or I'm with, I'm with Vanguard, I must be safe. No, because in that article, Vanguard lost a fortune in that fund. Or, you know, I'm with the retirement Protection Fund, which is the name of a particular insurance company fund called the retirement protection, which lost 30%. So it didn't protect the pension fund at all. So in other words, there are challenges with understanding what different types of pension there are, or what risks are really happening. And then how to deal with those risks. How to diversify, to make sure that you can create certainty in a world that we know is fundamentally uncertain. This is the real essential element of wealth, Chris, that by diversifying, or having multiple streams of recurring income, multiple streams on one stream, then you can create certainty when there isn't. Right. And that's the whole point about that. It's why I wrote the book is really why I get passionate about this. Because while I can tell a story, I can try and educate people on this, this gentleman's life is going to be devastated. And we've seen this before. You know, we saw this in 2008, when the credit crunch came, and 30 40% was wiped off people's pensions in a heartbeat. And this happening again, and it's gonna happen again. And because we know it's always going to happen, and it's going to happen in your lifetime. And it's gonna happen to our children's lifetimes, they're going to live to 100. We need to understand how pensions work, from the risks that we get. Now, I talked a minute ago, Chris, about the old Royal Navy pensions, and everything with those pensions was all safe. Yeah, it was all guaranteed to be paid, you just had to claim it. After 15 years of service, in that case of the naval officers. Currently, you got to stay pinching, okay, which pays it 66 and 67. And gotta go later, and later and later. So you got to know what that is. That's a proportion of your pension. And just be aware of that and get yourself a state pension forecast. And you've got a sense of that. You can't rely on that. Because it's not going to make anybody wealthy. It's not McQuaid certainty. But it will give a small foundation. We've talked many times about finding lost pensions. We're not going to go there today. But you should always look and see where those pensions are. Because the big lesson today is not how much have you got this happens at work? If you've got a pension from like a big employer, you've got to know whether it's the method of conversion, right, this is the point Chris. So let's let's deal with simpler sticks. Do you remember I told a story a while ago about my Scandinavian roadtrip. I do indeed. Now I different challenges on my Scandinavian roadtrip. But if you think about a holiday to a country you've never been before, and you go there and you're going to spend the rest of your life there. That's retirement land. Right? You're going from work land to retirement land. When you get there, you've got a bag of money, but you've got to know the conversion rate. If you don't know the Convert version rate, you don't know how long your money's gonna last. And my experience in Sweden was I was in a cafe in Sweden, and I gave them some coins to remember, I'll try and get rid of the cons. But guess what I did. I gave them Danish currency instead of Swedish currency because I wasn't familiar with the currency. And they just kind of looked at each other. It's like, it's, it was all over the place. But the point is, when you reach retirement land, you have to know how just mind money convert into income. And people don't know that. Historically, our will convert as you buy an annuity, you'd say I've got, let's call it 200 grand just to pick a number because it makes the math easy. We're 200,000, I'm going to give 200,000 pounds of my money to an insurance company, who will pay me an income like a salary for life until I die. That's called an annuity, pros and cons of that. And in the 90s, the annuity rate was 15%. Right? Yeah, 200 grand, you're gonna get 30 grand a year for life. Now, okay, there are challenges with annuities, in that, if you die, the money dies with you. But if you're looking for certainty in your life, and you can provide a spouse's pension, then there's something to look at their current challenges annuity rates, historically, 9090 15%, then we went into 2008 2009, there were a tiny fraction of that maybe two 3%. So your money wouldn't stretch raise bar at all. That's your conversion rate 3% on your money 15% on your money. Now it's nearer five 6%. And some people are buying or converting some of their pension pot, to give them a basic level of income. So they've got the state pension, plus a basic income, and then so they can combine they can have a bit of annuity, and then the rest of the money remains in a pot. This is the challenge, though, Chris, that when you have money in a pot, if you don't know how it actually works, you think that, well, I'll put it in a fund, and it will protect me from uncertainty, it wants to do that. Because probably three things. The first thing is, if you imagine, when you've got a pot of money, let's call it, what will be an analogy. Let's say you've got a tank of money. So picture in your mind, if you will, Chris, a cylinder of money. And that's your money for the rest of your life. And you've got an inlet valve, or a flow in and you've got an outlet valve. The problem is you've got three outlets. So the inlet valve is the returns you get when you get growth, because you're no longer putting money in as a contribution because you retired. Right? You got trickle of money drops into your pot, and as your pot and going into a cylinder. But you've got three outlet bouts. Number one, you've got the fees and the charges levied by the insurance companies and advisors and so on who are engaged, by the way they get paid first. Right? So that's happening no matter what, before you get paid. So this gentleman will have paid fees and charges to people. And that's one of the things we'll talk about in my score report a little bit later question. So outlet valve number one fees and charges, God do something about that. Because you can predictably reduce them, which means you keep more of your money inside you on track. Number two, is you're going to spend some money on you. So you're going to take money out, you're going to turn the tap on money out at whatever level you want to. But thirdly, you've got the risk of losses in whatever market you're in. Now, the problem is for most people, they don't factor in that markets can rise and fall. So you can have money coming in money going out and you don't know where you're going to be. So what happened then, in this huge transition between the type of pension where you didn't have to do much, just had to go to work, pick up a state pension, pick up your company pension, it didn't have any involvement. Now all of that risk has been transferred to you. So you have to be a manager of risk. Now, my favourite quote on risk, you've heard me say many times before Warren Buffett risk is when you don't know what you are doing. And you can't assume that just because you're paying somebody, they're keeping you out of harm's way they're not doing As we saw that article, three different insurance companies mentioned, all of whom massive, massive falls, you can't blame them, you cannot sue them, you cannot take action against them, if they fail to protect your money, because they can't, they might have a product, but the product doesn't always work, which is more about the risk. Do you want to say something quick, because I've been talking about for quite a while?

Christian Rodwell  15:28  

Well, I'll add another point that was in the article, which was that he believed that he was de risking, because of the age of 64. So a year ago, his pension was automatically transferred by his pension provider to a fund to keep his money safe in low cost investments, which was a spread of 75% bonds, which we believe to be safe, and 25% in cash, like his assets. So he thought that everything was being taken care of. Okay,

Speaker 3  15:57  

now, look, I understand why we thought that. But let's, let's just go there, then. So there's this concept, which people have heard about, and they kind of loosely got what I've heard of that. And it's called lifestyle, and the concept of lifestyle in which for many people is default. And certainly, as people approach retirement, there's this idea that as you get closer to retirement, you just have less equities, less stocks and shares in your portfolio, and you have more alternative investments, like cash and bonds. The problem is, though, is this this idea of systemic versus non systemic risk, if things work together, in other words, you can predict when the sun is shining, you sell more ice cream, and when it's raining, you sell more balance, and you know what's going to happen, you can't do that anymore. Because the stock market is no longer as predictable as that. So there used to be a correlation, like, stock market went up, bonds went down, stock might go down bonds go, you know, there was a correlation. But that's broken. And we saw that in the credit crunch in 2008, when everything fell, and nothing went in the same sequence. And that's the danger, when the whole system breaks down. It's no longer predictable as it was before. And if you don't understand there's a risk to what people think is generally predictable. That 95 years and 100, that works. But in the five years that you happen to be retiring, it doesn't work, you've got to be prepared for that. And if you get to a place where the system fails you, and you've relied on that money, you're going to be an unconfident investor for the rest of your life on you. Really? Yeah. Cuz you're gonna say, oh, boy, it worked. But it doesn't work. And lifestyle in is meant to actually think about lifestyle. And the reason why lifestyle he came in, was to gradually reduce the risk. So people could buy an annuity, the best possible rate. So the whole concept of lifestyle and has been predicated on the idea of an annuity. Because if it isn't, right, if it isn't, and if you were to retire at 60, Bible 66, and you've got a quarter million quid and you transfer that all into cash, think about that, I'll go safe, and what return you're gonna get cash in historically, cash rates have been low. Now, they're a bit high right now, but historically, they're low. So that means if your cash rate is low, your conversion rate again, and that's a cash gonna pay you 3% How much can you draw? Right? So if you've got, you know, 200 grand, you're gonna get six grand a year. And if you spend more, you're going to be depleting resources. So this issue of managing risk managing your, your water cylinder becomes really critically important. Which is the reason why I think I'm encouraging people to get to grips with understanding that now. So if you're on your journey, where you've got money in a pension, and you're hoping one day someday things are gonna work out, there's a big danger, which is, we know that many people's relationship with their money, certainly when it comes to pensions, and there's some evidence of that in the story, isn't that? When did the gentleman discover that his pension wasn't going to give him what he wanted when he opened statement, your statement on CF, it's not the relationship you want with your pension, you need to be involved with it, and you need to see it as part of a dynamic being a part of a mix of different things that you have in your life. So relying on statements is not not the right way to do that. The concept then of being more aware of the fees and the charges, the way risk actually works. And then how you can do some things to de risk yourself. And there are strategies and techniques that you can use both inside of your pension and outside of your pension, to build greater security, diversification, to increase your chances of going where you want to get. Right.

Christian Rodwell  20:21  

I'm gonna I'm gonna pause you there, Kevin, before we go into the details of what you can do, what's the solution? Let's pop over to Trustpilot, shall we? Because we've had more reviews in this week. And I'd like to highlight one from Damien, which is short and sweet, Christian, Kevin, and Paul and the team offer a first class system to help you achieve your goals in life, and wealth. And there is an abundance of information and support available. And everything I believe you also got someone you'd like to shout out who

Speaker 3  20:49  

would like to share a bit of humorous engagement with somebody in the last week, a gentleman evil mind a shout about Stuart opens his name, Stuart ogen, runs a very, very successful kind of maternity medical business in the UK, and we were chatting. And he made me laugh because he said, I've got you Kevin, what do you mean? He said, Well, I've been I've been binge listening to the podcasts. I like it. He said, You know, I've got some interesting things. And so that's why I knew to random walk around different things that today and talk about pensions, probably best to try and create a plan rather than just randomly wandering through the world podcast. But he said, Yeah, that's fine. We had a really good and interesting chat. I liked him a lot. And he said to me, do you mind if I do something at the end is what's that? So you know how you always sign off your podcast. And you know, I do that? You go Same time, same place. I go until then my friend see here. He said, Can I do that? And so it will be finished? He said, see? Yeah, I thought that was really, really funny. And I really enjoyed that. So still hoping you get the shout out?

Christian Rodwell  22:01  

That's nice. Yeah, that's really good. All right. Well, before I rudely paused you there, Kevin, you're about to tell us what is the solution here?

Speaker 3  22:08  

Well, look, I'm look, you can tell I'm a doozy ASIC about this. I'm very passionate about this. And it's it's not dissimilar to my passion about schools and schooling system, which is, you know, failing our people. So dramatically, rows and rows of young kids lining up doing SATs tests all day long. And there was a recent article, I saw Chris, which I'll just segue for a moment, where some of the politicians were actually given the SATs tests for 11 year olds, and, you know, so we're doing things wrong, fundamentally. And it does worry me to the core, what we're doing with our children, certainly not educating them on this, and they're gonna get more pension problems in the future. But this is another example, this story just brings into sharper focus, the fundamental problem, that people don't know how to manage risk, and one of the ways to do that, is understanding that certainly comes from recurring income, which is why think about annuities, recurring income, right, you give the money away, but the problem is you give the money away, you've lost the money. So you've lost the legacy. And you've got, you've got no buffer to be able to change things as you grow. Or as your money grows, you lose all of that dynamic. So you have to want to get involved with the pension. And I think, we believe, don't we, that empowerment is better than disempowerment. And that being aware of the wealth of the family, to educate and inform the next generation is just as important. So therefore, educate, inform yourself. So we provide a free service to our members, and generally paid for service to non members, but I'm willing to all I don't know how many I can do, but let's say you know, 50 or something, Chris, we just have to see what happens. We do something called a score report by what's your pension score? Uh, you know me by now SCR II mean something where I've got another acronym for you out there. I might have mentioned this historically. I'm sure we've done it before. But everybody gets a statement of benefit from their pension provider like this gentleman did. So the S stands for Statement of Benefits. In other words, what's the likely outcome? From the pot you've got given an expected conversion rate that's not dealing with the risk for now that you say, what does the insurance company we're gonna get? And how comfortable are you with that? And then add that to your other benefits from the state pension. C stands for charges. The more you pay in charges, the more is not being paid to you. And that gets even more important when you reach retirement. Because if you're reducing your risks or reducing your return, then a greater proportion of your total pot, that outlet valve has got bigger as a percentage of your pot. So keeping the charges down and being aware of what those charges aren't, we've certainly seen in recent months, some companies being very heavily criticised, or their charges. And we applaud that from the FCA. The Oh, is what are the boned options? So have you defaulted into a lifestyle fund? You don't really know what it means? Are you in a default? Anything? Do you remember I mentioned to you a while ago, Chris, there was a chancellor brought in a new rule or was bringing him on in to say that they were going to put by default, a percentage of everybody's money in a pension fund into high risk funds. Why? You know, and what right have they got to do that, but lots of people will fall into that trap, and fees and charges will go up as a result of that. So what are the options? You've got new funds? The R stands for retirement options. So what are the different ways you can interact with your time? Is it annuity? Is it drawdown? Which is the taking the money out of your hot water tank? Is it a hybrid combination? And so on? Should you even consider a SAS? You know, where we know that we believe in empowerment, SAS pension gives you permission to run your own pension with our guidance, you can get to a place where you can start to put some of these risk mitigation techniques in place. And the E stands for how have you nominated a beneficiary called an expression of which II for expression of wish and what that means is, if something happens to you, you'll make retirement? Who's gonna get them? And have you done that? So it remains tax free, because pensions are still value for money, in the sense that you get tax relief. And you can also get National Insurance relief as well. If you use something called salary sacrifice, where your you said you employ will you pay more money into my pension instead of me paying this amount of salary? And will you be direct the National Insurance contributions you up pays an employer into it and you get yourself a either a boost in pension or a boost in pay, actually, if you know how to do that. So anyway, we do a score report free for our members. Normally is that I think it's 295, something like that. Yeah, we would only charge for that, we'll do that free for our podcast listeners, we need to be quick. How would they do that question? Well, they were limited number, just because we couldn't do 1000s Because we would go into

Christian Rodwell  27:46  

too much work. Yeah. And the easiest way if you'd like to get your free score report would be to send an email to Hello at wealth builders.co.uk. And just put score in the subject line nice and clear. And then one of our team will pick that up and respond back to you. And we can send a picture of that tank as well to illustrate the single stream of income in and, and the three free valves going out. But leaky, the leaky tank. Yeah,

Speaker 3  28:12  

most most people's pension tanks are leaking. That's a challenge. But if you, if you don't need to visualise it, you don't see it. And if you don't see the money pouring out, you don't realise that, in the end, you could run out of money. And one of the shocking statistics, Chris, is this idea of turning on the tap and draining money from the tech, right? The average drawdown right, so when people turning on their tap, they're drawing a percent out. They're drawing twice as much as they're being recommended. And the inevitable consequence is people without money. And this is a tragedy. Because if you imagine you've worked hard all your life, you get into your 70s and your 80s and you've run out of money, what are you gonna do, you're gonna have to put something, your life is going to be compromised severely, you're definitely not going to leave a legacy. You might have to move home be forced to, you might have to go get a job again, you know, in your 70s, and we've had the greatest number of folks 70s Going back to work and all sorts of different things. You probably see them out there on in all sorts of different places to anything. So it worries me a lot. But the things that you can do about it, and probably now I won't go into the risk mitigation techniques. But I could do that if there was you know, it goes the demand for that. I could do that specifically.

Christian Rodwell  29:40  

Yeah, maybe we'll do a part two. Yeah. Yeah.

Speaker 3  29:42  

Because you know, the there are things you can do, you can and you are allowed to interact with your pension. There are many, many things you can do to reduce the risk of the pension pot that you've got. And that's a real benefit. Because when you're in control of your wealth, and we recommend people Paul Craig, a family wealth business, a business in itself, where the purpose of that business is to create a paycheck for life for you. And a paycheck for life. Actually, I don't even like the word paycheck, because that sounds like you've got to go and do some work for it. But you're getting an income stream for life for you and an income stream for like pitch generations. And that demands them, more knowledge, more interaction, and a greater degree of participation, not just for you, but also for the next generation as well. Because the final piece of my thoughts on this, Chris is, I saw another article on salary quite avidly, where the insurance industry, the advisors are feeling, a fundamental loss of the money they've got under management, you know, this is how advisors are running their business, how much money they got under management, as the baby boomers shuffle off, and leave money to the next generation. How do you think this gentleman's children are going to feel about an insurance industry and about the viruses, they're going to lose that relationship, but that money is going to dissipate, disappear. And in the end, you compound that problem with uninformed children receiving money, they don't know what to do, it's going to be a nightmare waiting to happen, it genuinely is, if you can get your head around this idea of creating business of the wealth of the family, and you look at things just look at them, see if they're relevant, risk mitigation techniques, or even things like SAS, where you can involve the old value, then, for me, SAS is an intergenerational tool. That means if, if advisors, thought more about SAS than they did about controlling the money, they'd be able to build a relationship. And next generation, that's what we're doing at wealth builders in it, where we're building relationships up to generation, mid generation down generation, to encourage the holistic nature of wealth being planned and maintained, as opposed to let's hang on to the money in the current pension pots for as long as we can, and hope to sell our business before the young, the young people get the money in the pot of the money's all gone. It's going to be a fundamental shift in the wealth of the next generation, a fundamental shift in how insurance in the industry deals with it. And I think the way to deal with it now is to get involved. So don't think you can't get involved. It's not that complicated. It's a hot water tank, for goodness sake. And there are ways that you can do to book flooding around the water tank to prevent the leaks. And maybe we should do an accession, Chris, because, you know, we want to stimulate people to get more involved in their pension instead of just wishing that somebody's taking care of them when we know. And this story brings into complete focus. They are

Christian Rodwell  33:01  

not. I hope this episode has been the catalyst in some way. Because this is a big, big problem. More than 6 billion pounds has been wiped from the value of older workers pensions in last 18 months. And that means hundreds of 1000s of workers have lost an average of 40% over the last two years. So is that some of your money and if you're not aware, you're not looking? Then it may well be so let us help you. Don't forget if you'd like to score report, send an email to Hello at wealth builders.co.uk Be quick because I'm sure we'll get lots of requests for that. And do come and join us come and say hello face to face. Let's have a drink. Either in London next week. We're in Birmingham on 29th of November so head to wealth builders.co.uk forward slash events and grab your ticket now.

Speaker 3  33:43  

Yeah, good job that we're buying the Dream Cruise because the way pinches is gone. I can't come to the event. I've got a pension.

Christian Rodwell  33:50  

The waters all around. Yeah. All right. Well, thanks for listening today. Hope you enjoyed this episode. Kevin will catch up Same time, same place next week. Yes.

Unknown Speaker  33:59  

Until then my friends do it. See ya.

Speaker 1  34:05  

We hope you enjoy today's episode. Don't forget that we are constantly updating our resources inside a wealth builders membership site to help you create, build and protect your wealth. Head over to wealth builders.co.uk/membership right now for free access. That's wealth builders.co.uk/membership