The Wealth Creation Machine

“Are you looking to build wealth?”

“Do you want to secure your financial future?”

“How about free money every month?!”

If you answered “YES” to any of the above questions…

YOU NEED A PENSION!

Pensions are in somewhat of a marketing crisis. They are more important than ever, but chronically misunderstood.

‘Pensions’ are seen by many as a dirty word. The word isn’t sexy or alluring and tends to conjure up images of withering away in later life, too old to enjoy your money.

Personally, I was anti-pensions when I got my first job after university. How dare they ‘steal‘ money out of my pay each month! I had better plans for that money, such as buying records and ‘The Sesh’.

Other common phrases thrown about:

“I want to enjoy myself now, I’ll be too old to have fun in retirement”.

“I don’t need a pension, I probably won’t last that long anyway”.

“I don’t need a pension, I’ll be getting an inheritance or can just rely on the state”.

Now, if someone had rebranded my first pension as a ‘Wealth Creation Machine‘, or a ‘Free Money Generator‘, it may have been enough to penetrate through my thick layer of youthful ignorance:

In this post I’ll cover what a pension is, the financial benefits to you and why they are more important than ever.

So, what is a pension?

A pension is a long term savings account, which you can utilise throughout your working life to build yourself a future income – so you don’t have to work forever.

They come with some great benefits:

• Tax relief on contributions (which I’ll explain shortly).
• Your investments are sheltered from income tax and capital gains tax (you will potentially pay income tax when you access the funds in later life, but that is beyond the scope of this post).
• Free money from your employer (yes, it really is free!).

Hopefully the above gives you an idea as to why a rebranding for pensions is in order. If you are still in doubt as to why a pension is a Wealth Creation Machine, then let me break it down for you.

The government doesn’t want to have to support your ‘broke-ass’ in old age, so they are incentivising you to save for our own retirement – one of the ways is through tax relief.

Tax relief is the government ‘grossing up’ your contributions. Which means, they pay tax relief on the contributions you make into your pension, at your highest marginal rate of income tax… I’m afraid that is rather dull ‘pension-speak’, the below infographic explains it better:

So, as a basic rate tax payer you only have to pay £80 of your own money to get £100 into your Wealth Creation Machine, as the government pays the other £20 (yes, the relief for higher and additional rate tax payers is pretty juicy and a point of contention for many).

If the above isn’t enough of a benefit for you, then let’s look at how a ‘boring old pension’ is actually a Free Money Generator.

You may think that your employer is doing you dirty by making you contribute into a pension, but it is quite the opposite.

In a workplace pension scheme if you pay 5% of your monthly salary into the pension, your employer has to pay a minimum of 3% in as well. That really is free money.

Be sure to enquire about your workplace pension scheme and ensure you understand it fully.

Some employers are good chaps and will offer higher percentages (they have tax incentives to do so). At my previous role when I paid in 8% a month my employer paid in 12% – so each month 20% of my salary was being invested and over half of that was free money!

Lets look at an example based on a gross monthly salary of £1,600 per month with the minimum monthly contributions (5% from the employee, 3% from the employer):

By now you should be seeing that a pension is anything but old and boring. For many of us they are the best vehicle for creating real wealth.

We’ve gone over tax relief and free money from the employer, which are two great benefits. Now, let’s look at them in action. How does investing £80 per month in a pension compare to £80 outside of a pension?

The below infographic is based on a 6% annual return for 30 years with three different scenarios:

1. £80 a month invested outside of a pension
2. £80 a month invested into a personal pension (no employer contributions)
3. £80 a month invested into a workplace pension

The results are in and the evidence is clear. You need a pension. Preferably a workplace scheme.

At no additional monthly cost to yourself, you can end up with a pot nearly 50% larger than if you were investing outside of a pension.

Remember that the above graph is based upon you only ever earning £1,600 a month and investing 5% of that for the next 30 years. Increase your income and your monthly contributions and the numbers will fly up.

OK, I’ve done all I can here.

Pension = Wealth Creation Machine.

I’ll wait for the government to get in touch for help launching the pension rebranding campaign.

If you think the above sounds great, but are still in the YOLO mindset of “I want to enjoy myself now, I’ll be too old to have fun in retirement”, then the next part is for you. Buckle up.

Aside from a pension being a Wealth Creation Machine, there are three main reasons you need one:

1. We are living longer than ever before.
2. You cannot rely on the state to support you.
3. Being poor in old age would suck.

With the rise in the general standard of living and medical innovations, we are set to live longer than any other generation that came before us. In the UK the over 80’s is the fastest growing demographic.

When you are old and grey your YOLO mindset won’t save you then.

The chance of reaching the ripe age of 100 is becoming more and more likely.

A female born in the 90’s has a 1 in 4 chance of hitting triple digits! Even if you work until 70, that is 30 years of income required to sustain your existence.

If you think that the state will support you in old age, you may get a nasty surprise when the time comes.

With less babies being born and more old people than ever, the state pension you receive may be very small or not exist at all!

The third and, in my mind, most important reason you need a pension is that being poor in old age would suck.

Being old is changing, we are set to be active for longer – which means you’ll be YOLO’ing into your 70’s and possibly 80’s.

You will thank yourself for having set up a Wealth Creation Machine 40 years ago when you are yachting around the Greek islands or being able to help friends and family without a worry.

I hope this post has opened your eyes to the importance of looking out for your future-self and utilising the tools at your disposal.

If you don’t have a Wealth Creation Machine, do some research and take action. The below are some useful resources if you are in the UK:

• Pensions Advisory Service
• Money & Pension Service

Please feel free to get in touch if you have any questions, I’m always happy to chat and help where possible.

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Thanks for reading.

Tom Redmayne

Financial Planner-in-waiting/Future Pensions Minister

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