Holly Black: Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me today is Steve Webb. He is Director of Policy at Royal London.
Hello.
Steve Webb: Hi, Holly.
Black: So, we're here today to talk all things pensions, which I think most people associate with later life and retirement. But actually, it's something more and more young people are starting to think about. Is that something you are seeing?
Webb: Absolutely. I think the big change has been that now that when you have a job as long you are age 22 or over and earn £10,000 a year or more, your employer has to put you into a pension. So, lots of people would never have thought about in their 20s or 30s are now actually in a pension that's been done for them, done to them and perhaps they don't even know a lot about it. But millions of people under 40 are now in pensions for the first time.
Black: And at 22, you could be working for 50 years. Is that too early to be thinking about retirement?
Webb: People like me tend to say it's never too early. The thinking is that actually the amount of money you are going to get from the government, the state pension, isn't much. So, in today's money, it's a bit under £9,000 a year. Well, not many of us want to live on £9,000 a year in retirement and the rest is down to us. Now, perhaps a generate ago, the company would have sorted it; there'd be a nice company pension and so on. These days, you have to take responsibility. And so, the sooner you start, what's often called the miracle of compound interest starts. So, basically, that means money you put in at 22, you get a bit of investment return. And then, the next year, that money, you get a bit of return on that and return on that and so on and so on. And it's much less painful to just get started early and that money really grows and grows. If you leave it till later, you really have to hammer the money in, and you may not have it.
Black: And with auto enrolment, the minimum amount you contribute went up in April. It now sounds like a lot, but it's not once you actually work it out, is it?
Webb: That's right. The headline figure is 8%. So, 8 pence in the pound, if you like. But that's coming partly from your employer. So, your employer is putting 3 of that 8 in, if you like. The government through, what's called tax relief, is putting in another penny in the pound. So, that's 4 of the 8 is coming from, if you like, somebody else. So, what it actually costs you is 4 pence in the pound of what you earn. But it turns into 8 pence with the money your employer is putting in. So, it's like doubling your money overnight. And compared with any other way of investing pretty much, that's a fantastic rate of return.
Black: And I would think of it as free money as well. An extra 4p from your employer that wouldn't be getting in your salary anyway?
Webb: That's right. And we're just talking about legal minimum there. And many employers, particularly bigger employers, will go further. So, for example, we've just said, if you put in 4, it turns into 8. But maybe if you put in 6, it turns into 12. Find out from your employer. Because again, those billions of pounds of money that employers are willing to put in. But they will do it if you do it. And so, it's a partnership.
Black: So, if I'm a young person and I've just been auto-enrolled for the first time, do I need to do anything or does that all just happen by magic by itself?
Webb: Well, the beauty of auto-enrollment is, your employer has chosen the pension arrangement for you. And the government has laid down some rules about the quality of that scheme. So, for example, there's a limit on how much can go out of your pot in charges. So, it's a pretty good thing to be in. You can choose to put more in. That's always a good thing. And the best time to do that is when you've just had a pay rise. It's that moment when you haven't got used to spending it. Once you're used to spending it and then people wag a finger at you and tell you off, that's not great. But if you've not got into the habit of spending that extra money, just increasing that contribution a bit when you've had a pay rise, just makes it less painful.
Black: Rather than going down the pub with the extra money.
Webb: You can spend a bit of the extra money. So, I'm not suggesting every penny of your pay rise goes on your pension. I don't think pension should be about not having a good time now. But just gradually inching that money up and it actually doesn't take that long to get it to a reasonable level. Just do a bit at a time.
Black: Well, thank you so much for your time. And thanks for joining us.
