What a pension actually is

Contents

• 00:00 — The thing you already own
• 06:50 — What your employer is putting in
• 15:30 — Where the money actually is
• 25:15 — The one number on the statement
• 35:40 — Why the statement is unreadable, and whose fault that is
• 45:00 — Old jobs, lost pots
• 53:35 — What to do this week

Transcript

Yara Mensah: This is the episode that started everything, so I want to do it properly. What is a pension?

Ingrid Halvorsen: An account with your money in it.

Yara Mensah: That's the whole answer?

Ingrid Halvorsen: That is very nearly the whole answer, and I have spent forty years watching the industry make it sound like something else. People think a pension is a product — something you bought, or were sold, or signed up to, that will one day produce a number by a process they are not qualified to understand.

Yara Mensah: And it isn't.

Ingrid Halvorsen: It is an account. Money goes in from your pay before you see it, your employer puts money in beside it, and the total is invested and left alone for a long time. You own it. It is yours in the way your savings account is yours. The only unusual thing about it is that you cannot take it out until a certain age, and that restriction is the entire reason it works.

Yara Mensah: Let's talk about what the employer puts in, because I think that's the piece people genuinely do not know.

Ingrid Halvorsen: They contribute alongside you, and in most schemes what they contribute is tied to what you contribute. Which means there is usually a level you can pay in below which you are declining money that was allocated to you.

Yara Mensah: Sorry — I want to say that again more bluntly. If you're paying in less than whatever your employer will match, there is money with your name on it that you are not taking.

Ingrid Halvorsen: That is correct, and it is the most expensive single mistake on your syllabus. It is also completely invisible, because nothing arrives to tell you it happened. You simply get less, quietly, for years.

Yara Mensah: Where is the money, physically? People ask me this and I think they're embarrassed to.

Ingrid Halvorsen: They should not be, it is a good question. It is held by a provider, invested across a very large number of companies and government bonds, and it is separate from your employer. If your employer disappears tomorrow, the pension does not go with it. That separation is the thing people worry about most and it is the thing that is most solidly true.

Yara Mensah: Let me push on "invested", because that is the word that makes people nervous. What is it invested in?

Ingrid Halvorsen: Unless you have chosen otherwise, a default fund, which for most people is a very broad spread of company shares and government debt, held across dozens of countries and thousands of companies. Not a stock. Not a bet. A spread so wide that no single thing in it matters much on its own.

Yara Mensah: People hear "shares" and think of the number going down.

Ingrid Halvorsen: It will go down. Repeatedly, and sometimes by a lot, and there is nothing wrong when it does — that is the arrangement rather than a fault in it. The thing that makes a pension different from money you might need next year is the restriction we complained about earlier. You cannot take it out. So a fall does not force you to sell.

Yara Mensah: The restriction is the protection.

Ingrid Halvorsen: The restriction is the protection, and I would put that on the front of every statement if it were mine to design. People experience the lock as the government not trusting them. It is closer to a seatbelt.

Yara Mensah: Does the default fund change as you get older?

Ingrid Halvorsen: In most workplace schemes, yes, automatically — it moves gradually toward steadier holdings as you approach the age you said you would retire. Which is worth knowing for one practical reason: it uses the retirement age recorded on your account, and that is very often a number nobody ever set, left at whatever the default was when you joined.

Yara Mensah: So a wrong date quietly changes what you own.

Ingrid Halvorsen: It quietly changes the schedule, yes. It is a two-minute thing to check and almost nobody has checked it.

Yara Mensah: Now. The statement. Because a statement arrives and it is four pages and nobody reads it.

Ingrid Halvorsen: Read the balance. That is the number. What is in the account today.

Yara Mensah: And the big projected figure on the front?

Ingrid Halvorsen: I will be candid, since I have built those models. A projection is arithmetic performed on assumptions — about growth, about how long you work, about inflation, about what you do at the end. Change any one of them a little and the answer changes a lot. It is presented as a forecast and it is closer to an illustration.

Yara Mensah: So why is it the biggest thing on the page?

Ingrid Halvorsen: Because it is the number people want, and because it is required. I do not think it is dishonest. I think it is a number that gets treated as a promise by everybody who receives it and as a caveated estimate by everybody who produces it, and that gap is where all the confusion lives.

Yara Mensah: What should the statement look like?

Ingrid Halvorsen: Balance. What went in this year, from you and from your employer. The charge. Three numbers, one page. What arrives instead is a document written to satisfy a regulator, which is a different reader with different needs, and the person it is addressed to is not the person it is written for.

Yara Mensah: There is a charge in there too, isn't there. Everybody's favourite subject on this show.

Ingrid Halvorsen: There is, and on a workplace pension it is usually modest, because there are rules about how much a default scheme may take. It is still the number I would look at second, after the balance, and for the same reason your fund manager gave you: it is the only figure on the page that is certain.

Yara Mensah: Is it on the statement?

Ingrid Halvorsen: It is somewhere in the documents, often not on the front page, usually called an annual management charge or an ongoing charge. If you cannot find it in five minutes, that is worth noticing about the provider rather than about you.

Yara Mensah: Old jobs. I have three pensions I have not looked at.

Ingrid Halvorsen: So does almost everyone who has worked since automatic enrolment. Each old job leaves a pot behind. They do not vanish, but they do get lost — you move, the provider changes name, the paperwork stops arriving, and after a while you no longer know how many you have.

Yara Mensah: Should people combine them? That is the advice you hear everywhere.

Ingrid Halvorsen: Sometimes, and it is not the automatic answer the internet thinks it is. Combining makes them easier to see, which is worth a lot. But an older pension occasionally carries a guarantee that a modern one does not, and moving it throws that away permanently.

Yara Mensah: How would somebody know?

Ingrid Halvorsen: They would ask the old provider, in writing, whether the pot carries any guaranteed benefits, and wait for the answer before doing anything. That one question is the difference between tidying up and giving something away, and it costs a stamp.

Yara Mensah: So find them first, decide later.

Ingrid Halvorsen: Find them first, decide later, and be suspicious of anybody who reverses that order for you — particularly anybody who telephones about it.

Yara Mensah: So the homework is the boring one.

Ingrid Halvorsen: Write down every employer you have ever had on one piece of paper. Not the amounts, not yet. Just the list. Nine people in ten have never had that list in one place, and you cannot look after something you have not counted.