Any Pensions Questions? The state pension, tax relief changes and UK investing

This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Investments rise and fall in value, so investors could make a loss.

Full podcast episode transcript

Sarah Coles: Hello and welcome to today’s Switch Your Money On podcast from Hargreaves Lansdown. I’m Sarah Coles – Head of Personal Finance.

Helen Morrissey: And I’m Helen Morrissey – Head of Retirement Analysis – and I’m joining Sarah as co-host today while Susannah’s away on her holiday.

Sarah Coles: It is a good one for you to join us on, seeing as we’re looking at all things retirement. So, how does it feel to be in the hot seat today?

Helen Morrissey: I’ve certainly got some big shoes to fill – being here in Susannah’s absence – but I am ready for the challenge. There’s been a lot going on in pensions right now, and it is good to take some time to go through it all.

Sarah Coles: So, we’re calling this episode ‘Any Pension Questions’ – and we’ll be picking through the burning issues in the pensions world, including some of the things that have come into focus with the arrival of a new government.

We’ll also be speaking to one of HL’s Financial Planners – Didi Ager – who’s joining us a bit later on to talk about the kind of questions she’s been hearing from clients about their retirement in recent months.

So, Didi – what kind of things will you be covering?

Didi Ager: Hi, Sarah – it’s been a busy time in the retirement space, so I’m gonna take you through what clients’ key questions, queries, and concerns have been.

Helen Morrissey: Sounds great, Didi. We’ll also be talking to our Equity Analyst, Matt Britzman. This is a spectacularly busy time for our Equity Team because so many companies are reporting results. So, we’ve asked Matt to run us through some of the more interesting results that have emerged.

Sarah Coles: That sounds intriguing. As you say, there’s been a lot going on with pensions at the moment. So, before we explore those results, let’s dive into some of the major changes.

We’re just over a month on from the elections, and the new Labour Government has wasted no time in getting started on its pensions agenda. So, we’ve had a Pension Schemes Bill announced in the recent King’s Speech, which includes a shiny, new pensions review.

Helen Morrissey: Yes – and it’s worth breaking down what is in that bill. The first thing is that the Government is looking at how to deal with the issue of small, lost pension pots in the system. They’re looking at developing a system whereby, if you have pensions that you haven’t paid into for a while, then they’re brought together in one place – and this will make it much easier for people to track down what they’ve got and make sure that they aren’t missing out on money that could really boost their retirement incomes.

Sarah Coles: Yeah – that’s been a massive issue, hasn’t it?

So, we all move jobs much more frequently now than we used to – and it’s surprisingly easy to lose track of pensions we’ve built up with previous employers.

The most recent data from 2022 shows there was an estimated £26bn of lost pensions money in the system.

Helen Morrissey: Yes – it’s been particularly an issue since the auto-enrolment rules were introduced, which means that, when you start working for an employer, most people will automatically be brought into the pension scheme.

It means people pick up pensions in every job they have and leave them behind when they move on. If they don’t remember to update their details every time they move house, it can be easy to lose track of a pension pot. That 2022 data showed that the average found pension pot is around £10,000, but there will be many other people who have lost pensions worth far more than that – and we need to make it as easy as possible for people to find them.

Sarah Coles: So, it’s a step in the right direction – and, of course, the bill also contains measures around value for money. So, there’ll be a standardised test to check schemes are offering their members value for money, and this will need to go beyond costs and include returns, service, and member engagement.

The idea is that schemes that don’t meet these measures will be brought together with other schemes – or consolidated. So, overall, there’ll be a smaller number of larger, better-run defined contribution schemes.

Helen Morrissey: Yes – and you’ll notice that word, ‘Consolidation,’ keeps coming up. There’s also plans to consolidate the local government pension schemes as well. The idea around consolidation is that bigger schemes can push down costs and become more efficient. It will also make it easier for schemes to invest in what the Government terms ‘Productive Assets’ – for instance, infrastructure – which have the ability to boost the UK economy as well as people’s pension pots.

Sarah Coles: We’ve heard a lot about pension schemes investing more in the UK – not just from the current government, but the previous one too. So, the Chancellor’s been holding meetings with the industry to find out how best to make this happen – and there are some pretty punchy numbers being quoted.

One said that people’s pensions could be boosted by £11,000 by these reforms over their career. So, what d’you think about that?

Helen Morrissey: Well, if we can make schemes more efficient – and drive down costs – it should have an impact on how much people end up with – but investment returns can’t be guaranteed, so we need to take those figures with caution.

Sarah Coles: Yeah – I think that’s fair enough. We’ve also had the data the Budget announced recently – set for 30^th October – and the rumour mill has started cranking up around what changes the Government might make to pensions. And these rumours can be pretty unsettling, can’t they?

Helen Morrissey: Yes, they can. So, we’ve had all the usual rumours swirling already – like whether the Government will make changes to pensions tax relief – and you’re possibly moving to a flat rate of tax relief.

Of course, we don’t know if any of these things will come to pass, but they do make people confused about how to plan ahead – and that’s never a good thing. When I do webinars and presentations, this does come through really strongly. People are worried about allowances changing.

There was a lot of concern about whether Labour were going to bring back the lifetime allowance, for instance – and I’m also getting a lot of queries around the State Pension right now. People are worried about making voluntary contributions to fill gaps in their National Insurance record in case the State Pension becomes means-tested in the future.

This is another area where we need to see the Government focus on because the State Pension forms the backbone of people’s retirement income – and they need certainty as to what they’re gonna get and when.

Sarah Coles: Yes – we definitely need more certainty. So, with that in mind, let’s bring back Didi – one of HL’s Financial Planners – who talks to clients all day about their concerns.

Can I ask you to start by telling us – what’s the key question that people are asking about their pensions right now?

Didi Ager: Thanks, Sarah – that’s a good question.

The biggest area of concern for clients at the moment really lands around whether they will have enough money in retirement. That’s a question that pervades at all times, normally, as the top question – but, with the cost-of-living spike, it was a nasty shock for many – and some have actually been forced back to work, which has been a worry in the back of a lot of other people’s minds.

So, to answer this question, it’s important to visualise what you’d want to do in your retirement – and then what that would look like – as well as thinking through each phase of retirement and working out what you might need.

So, thinking through how your time will be spent – whether you’re planning to travel., go off on walking trips, play golf, gardening, volunteering – or keeping your hand into work. Trying to work out, actually, how you will spend your time then helps in building the picture around, ‘Will you have enough money for there to be adequacy across your retirement life?’ – to be answered – and, by helping the client visualise how they’ll spend the time, it helps us to build a more realistic forecast of the type of budget they’d need, rather than just simply taking a percentage of their old income and assuming that would cover everything they’d need.

Helen Morrissey: So, people can be retired for a long time. What kind of changes should people consider and factor into their planning, Didi?

Didi Ager: That’s a really good point. With a lot of people, retirement could last 20, 30 years – maybe even longer. So, what I always suggest they do is break their retirement into chunks of time – thinking through what would be needed across the different phases.

So, if you think, typically – most clients, they’ll want to do a burst of travelling. As soon as they get retired, they get the freedom – they wanna go off travelling. Then, after a certain while – maybe 10 years or so – a lot of people start wanting to slow down a bit. But they can actually have new needs arising in later years – with needs such as higher medical costs, and perhaps even needing more support at home. So, by thinking through the different phases – and how needs might change – that then helps to build a picture of how the client might want to fill their days across the course of retirement.

From there, we also need to consider their family structure and dynamics. So, for instance, ‘Do they have any financial dependents or family members to be concerned about?’ And, ‘What would life be like for the client or their loved ones were the worst to happen, unexpectedly?’ ‘Would they be okay and able to cover bills?’ – and the same question if they have dependents relying on them. And then, from there, I’ll look at what that client has available for retirement.

As you can see, there are a number of questions that people need to actually answer before we can assess whether they have enough to retire on.

Sarah Coles: I realise it’s not realistic for you to do a full financial analysis right here, but can you give us an idea of some of the key questions that you ask?

Didi Ager: They need to consider how retirement will look. So, for instance, ‘Might they think about easing into retirement – cutting back a couple of days?’ If so, ‘What that might look like – and when might they stop work completely?’ They also need to weigh up when they’re gonna need to lean on any pensions and non-pension savings and investments for their income in retirement – and consider how much they’ll need at each point of easing back into retirement, and how long the periods of their different phases of easing into retirement – if that’s what they’re looking to do – will last.

So, for example, they might have short-term needs which will pass – or they might have a short-term income shortfall that will disappear perhaps when the State Pension kicks in. Then, we need to look at every approach they could use to actually generate that income. So, what sources of income they’ve got and from when, for instance. Is it all in pensions? Do they have a combination of pension and non-pension areas we can look to? And then, we also look at whether the retiree would have enough secure income to cover their essential expenditure in retirement.

Helen Morrissey: So, there’s a lot to consider – and there must be some questions that people might not actually consider without going through this process?

Didi Ager: Absolutely – and one of the key areas that a lot of people don’t necessarily consider is whether their partner would have enough secure income to cover their essential expenditure if they were to die before them.

So, they can often also overlook one-off, larger expenses that may crop up over retirement – and the key one that people tend to forget about are big items, such as car-changes – when things like that might need to be factored in. And, if that particular client has downsizing as a consideration, it’s really important for them to work out what that might realistically realise once the conveyancing, the stamp duty, and the removal costs have been considered – because, sometimes, people overestimate what downsizing might actually bring to them as and when the time comes.

Sarah Coles: Yeah – the cost of moving is horrendous. Speaking as someone who’s moving – it is really shocking stuff.

There’s an awful lot to consider – so what other key factors are you gonna take account of in these circumstances?

Didi Ager: It’s vital – in planning for retirement – that we look at the tax efficiency of their retirement income strategy – and that helps to mean the money goes further.

So, it’s also important – in speaking about tax efficiency – to remember that current tax rules can and do change over time. When advising my clients – and constructing their retirement income strategies – I always want to devise, where possible, a blended income strategy that makes the most of their tax allowances, where possible – and that then can help things keep going for longer – by getting actually getting a little bit more out of each pound of income – and we also need to remember that, actually, taking account of inflation is crucial.

Helen Morrissey: And we were talking earlier about all the uncertainty surrounding pensions at the moment. How does that affect clients’ thinking?

Didi Ager: The biggest question at the moment – in relation to pensions from clients – is based around what a review of pensions by the new government might mean. So, from a retirement perspective, the most frequent question in that regard is whether the 25% tax-free cash rate will also be changed, and whether the maximum of £268,275 that was brought in on the abolition of the lifetime allowance will hold steady in terms of the amount of tax-free cash people can take as a maximum. But, of course, there are some things we can’t know.

So, we can go through their options based on the current rules. At the front of my mind – when faced with this question by clients – is just ensuring that they don’t look to replace one tax with another – or, worse still, unwittingly, end up in a worse position.

Sarah Coles: That sounds really interesting. Can you explain how that might work and give some examples?

Didi Ager: Yeah – what I try to do is to identify any knock-on impacts of taking the money from the pension. So, if a client says, ‘I wanna take my cash-free cash now because I’m worried that there might be a change’ – the one thing that you have to think about is, in taking that tax-free cash, you’re removing the money from that valuable pension wrapper. So, once the money is outside of the pension – you’re exposing it to any income or gains to tax – and, furthermore, whilst the money’s in the pension, it’s typically viewed as being outside of the estate for inheritance tax purposes. So, worse still – if a client took the money – and they didn’t need it – and they left it languishing in cash for the longer-term – it would also lose spending power versus inflation.

So, the biggest unknown is whether anything will change if there are changes – what those changes might be – and there’s the question of whether the timing would be immediate, retrospective, or from a given date allowing people time to reflect before making decisions.

So, taking money out of a pension is not a small consideration – or something that should be done rashly – without considering the wider implication and getting advice if you need it – just so that you understand, ‘Are there any knock-on impacts to think about?’ And putting a robust plan in place and reviewing it on a regular basis is always paramount to ensuring clients lead the lifestyle in retirement that they want.

Sarah Coles: It’s really helpful to get an idea of the concerns people have around their retirement planning – so thanks for talking to us today.

Didi Ager: It’s been a pleasure.

Sarah Coles: There’s always a lot to cover in the pensions world, but we’re going to drag ourselves away from ‘Retirement’ for a moment and bring in Matt Britzman, who’s been working his way through an unbelievably busy company-reporting season.

So, Matt- can you take us through some of the highlights from the season? I know Microsoft has reported – what were the highlights there?

Matt Britzman: Yeah – so we had a good set of results from Microsoft – and don’t let anyone tell you otherwise.

Overall, Microsoft reported a 16% rise in revenue – ignoring currency impacts. There was some softness in training after they were announced because of a small miss from the Cloud division – specifically Azure – and a slightly weaker outlook. But we’re splitting hairs, really – and it’s hard to be too critical when growth from Azure is expected to be 28% to 29% next quarter.

Helen Morrissey: Why was the Azure result so impactful?

Matt Britzman: Well, Microsoft is now far more about Cloud computing and artificial intelligence than it is Excel and Word.

AI services contributed a big chunk of Azure’s growth last quarter – and we expect that to continue. For now, demand is outstripping capacity, which is holding growth back a touch. But we’re not overly concerned – it’s a nice problem to have.

Investment in new infrastructure is ramping up, but there are genuine concerns that AI isn’t delivering the end products and services needed to support all the build-out – but we think that misses the bigger picture.

Megatrends like AI take time – and rarely track in a perfect line.

Sarah Coles: So, is it all about AI for Microsoft?

Matt Britzman: No, not at all – there are more strings to Microsoft’s bow. The personal computing division is reaping the benefits. So, the acquisition of ‘Call of Duty’ maker, Activision Blizzard – this is offsetting the client and physical hardware sales. Then there’s the stack of products we can’t live without – with an increasingly valuable stream of subscription-based revenue from the likes of LinkedIn and Office.

Helen Morrissey: But, on the flipside, there are some challenges too, aren’t there?

Matt Britzman: Yes, there certainly are. When you have the size and reach of Microsoft, regulation is always a key risk. We don’t know how the new AI world will be regulated – or whether it’ll hurt or hinder the largest kids on the block. For now, it’s something to watch and be mindful of.

Ultimately, Microsoft is a top dog – reflected in the valuation above the long-term average. We continue to view its mix of infrastructure and software services as essential components and benefactors of the coming AI transition – but, as we’ve seen across the sector, markets can get ahead of themselves. When that happens, nothing short of perfection is tolerated.

It feels like that’s where we’re sitting right now – increasing the chances of volatility.

Sarah Coles: Thanks, Matt. So, sticking with something in the tech space, you’ve taken a look at PayPal too, haven’t you?

Matt Britzman: Yes – PayPal’s second-quarter revenue was 9%, which is ahead of expectations. That’s thanks to an 11% increase in total payment volumes, with unbranded card processing being the largest contributor.

However, there was a positive contribution from all the other channels bar eBay – which now accounts for just 2% of volumes. We still see plenty of structural growth drivers in the electronic payment industry, but the model is facing some strong headwinds.

Helen Morrissey: That sounds interesting – but what are those headwinds?

Matt Britzman: In the digital wallet space, competition is intensifying from the likes of Apple Pay and Google Wallet.

The space is becoming equally crowded in terms of services to merchants – and here there are new entrants with arguably better technology offerings. Still, PayPal has scale on its side – and, for now, it remains the market leader in online payment processing.

Sarah Coles: So, where are the challenges coming from?

Matt Britzman: Payment’s strongest volume growth is coming from its unbranded business, which allows businesses to put their own name on payment solutions – but it’s starting to come up against some challenging comparisons.

We remain concerned about the lower profitability of payments on this side of the business. However, it also opens the door to provide retailers with additional services, such as the ‘Buy Now Pay Later’ offering – which we think may see further traction as consumers increasingly turn to credits from their spending.

PayPal is fighting hard to remain relevant. Its new Fastlane checkout promises a better payment experience – and there’s this new advertising platform too. Some of the bill for this is being funded by an aggressive cost-cutting programme. There’s more of that to come this year, but trimming the cost space can’t offset lower profitability indefinitely without negatively impacting the ability to grow and innovate.

Helen Morrissey: So, where are the positives?

Matt Britzman: A robust balance sheet and strong free cash flows give firepower to make acquisitions – and invest internally in upgrading the products [s.l. read 19:30] – or distribute cash to shareholders. But remember, no returns are ever guaranteed.

Previous operational missteps and increased competition have put serious downward pressure on PayPal’s valuation, which is below its long-run average. Margins are moving in the right direction again, but we’d like to see a long-term trend develop before getting too excited.

Results are also benefitting from robust payment volumes – supported by continued consumer resilience – but there’s no guarantee that will continue, so be prepared for ups and downs.

Sarah Coles: And, sticking with financial services, your next company is a bank?

Matt Britzman: Yes – NatWest.

So, I have spoken about it on a relatively recent podcast, but these results are worth mentioning. NatWest has just delivered a knock-out set of results – beating expectations over the second quarter on pretty much every metric that matters.

Performance isn’t as good as this time last year – the markets have been expecting that for some time. It’s about looking forward now – not back.

Helen Morrissey: So, what particularly caught your eye?

Matt Britzman: As a traditional lender, loan default rates are an important risk to watch for. Impairment charges – and that’s money put aside in anticipation of people defaulting on loan payments – were better than expected because customers continue to show remarkable resilience in the face of higher interest rates.

We think it’s reasonable to expect low default rates to continue for the rest of the year. The positives make up the other side of the equation – and we continue to see retail customers searching for better rates from longer-term saving accounts.

That’s been an ongoing headwind over the past year – but, crucially for NatWest, the pace of deposit switching has slowed significantly. That’s good news for margins – and something for investors to monitor.

Sarah Coles: It can’t all be positive – where are the challenges?

Matt Britzman: Costs are a challenge and a key focus for the new CEO – and we’ve been pleased to see continued progress on that front. Mortgage-pricing has also been a pain-point too – as more profitable business written over the pandemic was replaced – but that headwind won’t be so difficult in the future – because the profitability of new business and existing business is now the same.

There’s also the benefit of the structural hedge. Now, you can think of this as a bond portfolio that’s set to roll onto better rates over the coming years. NatWest is rolling off some of the lowest rates in the sector and should be one of the biggest beneficiaries.

Helen Morrissey: So, what are you expecting further ahead?

Matt Britzman: We see NatWest as one of the best-placed UK banks to benefit from several sector tailwinds. The investment case is further supported by the 5.2% yield – and potential for buybacks backed up by a strong balance sheet. But no returns are guaranteed, yields are not reliable in the case for a future income, and the valuation isn’t as attractive as it was earlier this year, as sentiment towards the sector has improved.

Sarah Coles: Thanks, Matt – we really appreciate you taking the time, when I know it’s incredibly busy time for you. In fact, it’s a very busy time for us all – and there’s so much we could talk about – but we’re keen to get your feedback on what you want to see.

So, are there any topics you’d like us to cover – or any burning questions you want answers to?

We put together a survey – which you can find a link to in the Show Notes. Please do let us know what you think.

Helen Morrissey: You’re listening to Switch Your Money On from Hargreaves Lansdown – and, before we go, there is time for a quick fact of the week.

As we’ve been talking about retirement, I’ve been rooting through some data – trying to find a good fact for you, Sarah.

Sarah Coles: I’m bracing myself for this – let it go!

Helen Morrissey: I’m gonna delve into our Savings and Resilience Barometer for this one. So, what percentage of UK households are on track for a moderate retirement income? And I should say that this kind of income isn’t anything flashy – it’s what will cover all of your basics, plus a few extras like holiday in Europe once a year or a second hand car.

So, your options are:

50%

38%

Or is it 30% of households on track?

Sarah Coles: This is a difficult one. I know we’ve got a long way to go when it comes to saving for retirement – ‘cause we talking about the Barometer in the last episode – so I’m gonna go with 38%.

Helen Morrissey: You would be right, Sarah. Just 38% of households are on track, so we need to do what we can to boost our contributions – and make sure that we haven’t lost track of any old pensions.

Remember that money in a pension is not usually accessible until age 55 – and it’s going up to age 57 from 2028.

Sarah Coles: I think my Achilles heel is checking my pensions too often rather than not often enough. I have to force myself to stay away from my app during more volatile times!

But that’s all from us this time – and, before we go, we do need to remind you that this was recorded on 6^th August 2024 and all information was correct at the time of recording.

Helen Morrissey: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments and any income they produce rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future. Tax rules can change and benefits depend on personal circumstances.

Sarah Coles: Yes – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

This hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Helen Morrissey: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflict of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information. So, all that’s left is for me to thank our guests: Didi, Matt, and our Producer, Elizabeth Hotson.

Of course, I should also thank you, Helen, for taking on some hosting duties – I hope you enjoyed it!

Helen Morrissey: I certainly did – thank you for asking me – and thank you all very much for listening. We’ll be back again soon – goodbye!