E5: The cost of living crisis - with Clare Reilly, Lynn Beattie, and Scott Mowbray

The Pension Confident Podcast

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24 Apr 2022 /  

faces of host and guests of this episode of pension confident podcast.

The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to Episode 5 here, or watch on YouTube. Scroll on to read the conversation.

PETER: Hello, and welcome back to PensionBee’s Pension Confident Podcast. I’m Peter, your host, and unless you’ve been under a rock for the past couple of months, you’ll know that there’s something called the cost-of-living crisis going on right now. So this month, we’re going to be talking about the squeeze, why it’s happening, when it will be over, and of course, how your pension fits in because it does.

Music starts

The new tax year is upon us and the chancellor gave us his budget last month. The big takeaway was that the government can’t do as much as we’d hoped to protect us from surging prices. So I’m joined by three guests, experts in their fields who are going to help us understand what’s going on with inflation, how it’s going to impact us moving forwards, and how we can future proof ourselves financially, even whilst we’re in the middle of it. So we’ve got here Clare Reilly, who is PensionBee’s Chief Engagement Officer. Hello, Clare.

CLARE: Hi, Pete. Hi, everybody.

PETER: And I’m also joined by Lynn Beattie, who is a personal finance expert and author of The Money Guide to Transform Your Life.

LYNN: Hi Peter. Thanks for having me.

PETER: And lastly, I have with me Scott Mowbray, who is the co-founder and Chief Communications Officer at Snoop, an app that helps you save on your energy, broadband and mobile phone bills.

SCOTT: Hi, everyone. Thanks for having me.

PETER: Now, just as a reminder, on the podcast, anything that you hear here should not be taken as financial advice. Obviously, when you are investing, like you would do with your pension, your capital is at risk. Right. So we’re going to come on to inflation in a moment. But first and foremost, I want to start with Clare. Russia’s invasion of Ukraine has obviously had an impact on global markets. Do you have an update on that for PensionBee customers currently?

CLARE: Yes. So if you’ve been reading our blogs, you’ll know that PensionBee plans have close to zero investment or direct investment in Russia. But if you’ve been checking your balance recently, you’ll also see that your balance is moving around more than normal. And so the wider implications of war are impacting all pensions, as markets react to the news of the war, they react to the twists and turns in peace talks and of course, you know, that global supply of goods coming out of the region is severely impacted as well. But, you know, to put it into context, when big shocks happen such as war, such as the pandemic, stocks, which we refer to commonly as equities, they’ll respond almost immediately.

So when Russia invaded Ukraine on the 24th February, typical global equity stocks dropped by about 1%. They lost about 1% in their value compared to the day before. But if we think about how the market reacted to the pandemic, those same global stocks would have dropped about 9% in one day when we first heard news from the UK government that we had to cease all contact and non-essential travel. Obviously, if you are close to retirement, and you have plans to access that money in the short term, it can be pretty anxiety-inducing to watch your balance swing about, but we have to remember that fluctuations are normal behaviour for equities. And you know, we can expect their value to go up and down in the short term. So even though global equities have gone down this year, by like 3.5%, if we think about what’s happened over the last three years, they have consistently gone up 20% each year over the last three years. So we need to put it into a bigger context and of course, you know, even though we’ve got these bumps in the road now with your pension, you know, it’s important not to overreact to the kind of short term market shocks like these.*

And I should add there as well that if you do have any questions about your plan, then please feel free to contact the PensionBee team by using the website live chat, or you could just email the team at [email protected]. So that’s engagement@pensionbee.com.

Figures estimated based on the performance of the MSCI World (GBP) provided by State Street Global Advisors as at 31 March 2022. Figures are subject to rounding.

Cost of living crisis

PETER: Now, if you’ve noticed the cost of your shopping going up more than usual over the last year, you’re not imagining things. Inflation, that’s the rate at which the cost of things goes up each year was over 6% in the 12 months to February this year. That’s as high as it’s been since the 90s. Lynn, I’d like to start with you on this one. It’s been a very intense few years for the economy. So there’ll be a lot of listeners who will be worrying about how high prices could get. I mean, we’ve all heard the reports about people having to choose between heating their homes and buying their groceries. Could you give us some context around where we are right now in comparison to say, 1970s or so, because we have been here before with inflation?

LYNN: Yeah, we have been hit. Well, we’ve been in a worse place with inflation and interest rates. Is it going to go back to as bad as it was then, who knows? But yeah, we need some kind of intervention from the government to not let us get back there. But where I - what I feel is quite different to maybe 30 years ago is people’s sort of accessibility to debt. And I really feel like we’re lining ourselves up for a problem in a year’s time, in six months’ time, in two years’ time where we’re going to see astronomical levels of debt and people just not being able to cope and pay back that debt.

PETER: Yeah. Some of the things that happened back then, the 3-day week, energy being rationed, do you think that that is a potential issue that we might face or something that might be introduced? What do you think, Scott?

SCOTT: I don’t think there’ll be drastic measures. I mean, so you know, if you look at the 70s, I just think of glam rock, chopper rally bikes, David Bowie, and the undercurrent in the 70s was - the challenges were incredible. So kind of you started the 70s with the 3-day week, in lieu of this podcast, I was talking to my parents, because I’m not old enough to have grown up in the 70s. I was born in the 70s and my dad was talking about, he worked all the overtime he could do and then suddenly, a 3-day week was invoked and that kind of, you know, cut him at the knees, so to speak, and times are really difficult. So he talked about the kind of interest rates when we left the 70s. I think Margaret Thatcher, you know, when the government controlled setting interest rates it was 17%, as we entered the 80s. It’s a very different set of circumstances, I think. And as Lynn points out, the kind of accessibility to debt - buy now, pay later, credit cards, overdrafts. We are in a different world and it does need a different set of policy interventions. Hopefully not as drastic as we’re kind of talking about here.

PETER: I suppose the big question is, what can we do about rising inflation? We want inflation to go down, but how do we go about doing that Clare?

CLARE: I think it’s important for us to understand a bit more about inflation, like why inflation happens, because I think we’re all seeing the prices go up and maybe people don’t really kind of know what causes inflation. Inflation is rising costs of goods and services. And that happens when you have less supply and more demand, which we have right now at the same time. So we’ve got less supply, because some parts of the world are still dealing with the pandemic. So across China, we’ve got new lockdowns, factories just are not able to produce at the same rate. We’ve also got sanctions on Russia so you’ve got that whole global supply chain impacted of goods coming out of that region. And then of course, I think, even with the pandemic, you know, global supply chains haven’t gone back to what they were.

So that’s happening on one side, and then on the other side, you’ve got the rest of the world coming out of the pandemic, wanting to just resume all of their regular spending, having been locked up for two years. And so you’ve got that huge demand, weak supply and that’s what’s causing prices to go up. And as well, the problem with this war, and everything that’s going on, is it kind of creates this sentiment of scarcity as well. And that scarcity plays into the prices. And so I mean, well, how do we reduce it? I mean, so you either need to produce more, but as I’ve just said, that’s very difficult right now. So one way to control inflation is for central banks to increase interest rates. So you may have seen the interest rates - that’s borrowing costs - have gone up recently.

The Bank of England is helping to plan their spending by setting an inflation rate target of 2%. So raising interest rates at the moment, from 0.5 to 0.75% is going to help bring the rate of inflation down and slow the impact of inflation. So it’s really something to be mindful of when you’re consuming. I mean, not to be all doom and gloom, the Office of Budget Responsibility has said the cost of goods will start to go down again at the start of 2023, which is some good news.

PETER: Yeah. It’s funny, you talked about the correlation between the fact that we’ve just come out of a pandemic. People were locked down, we’ve got the bottleneck with the supplies, and people coming out of lockdown are kind of like spend, spend, spend, because we’ve not been able to do it for a while. I mean, it’s a very, very interesting, kind of dynamic when you look at how inflation works in the real world.

SCOTT: Yeah, I mean, definitely you need a bit of inflation but when it overshoots, it becomes a problem. Deflation is a problem, too, which is why the Bank of England focuses only on one thing, which is their 2% target. And I think you mentioned 6.2% inflation, it’s more than that at the moment. There’s a time lag in the data. And so people, you know, so what we’ve done at Snoop, for example, is said to people, we’ve tried to take them beyond the grim headlines and personalise what their inflation number is. So kind of by looking at transaction data, how much you pay for your bills. I think you touched upon a moment ago, Clare, that kind of the OBR thinks it’s going to hit about 9-10% and then return to normal in 2023. I think that might be optimistic, because also you’re talking about what’s happening in China, severe lockdowns. Who knew that Ukraine was kind of such a big producer and provider of corn? Russia and fertiliser. Farmers are going to struggle and that’s going to feed through, input prices are going to feed through to consumers. Yeah, I mean, let’s hope 2023 is a world which looks more reasonable, normal, affordable, but I think it might be optimistic.

The Spring Budget

PETER: Okay, well, we’ve seen how inflation is increasing the cost of living and the negative impact that’s having on people’s lives. But we need some good news and believe it or not, it could come in the form of tax. After all, tax is one of the biggest levers the government can pull to increase or reduce the burdens on people’s finances and I think a good place to start would be to look at the spring budget, which was announced a few weeks ago. In it, the Chancellor, Rishi Sunak, stuck to his planned 1.25% rise to National Insurance. He also raised the income threshold at which people start to pay National Insurance. And he said that he’ll be cutting the basic rate of income tax from 20% to 19% but we’ll have to wait until 2024 for that one. Lynn, is the average family going to be able to cope?

LYNN: So the first problem with the National Insurance thing is, we’ve got a bit of a lag. So we’ve got the 1.25 increase, which is taking effect from right now. But then the change of the National Insurance limit, so it’s gone up by about £3,000. That doesn’t kick in until July, so we’ve got like three months now of people paying more. And also it only impacts certain people, it’s around £35,000- £40,000. If you earn less than that, then you will benefit after July. If you earn more than that, then you won’t. I’m reticent to comment on the change in income tax in two years’ time, because it’s not necessarily going to happen, right? And it’s based on the government meeting quite a lot of targets. I mean, who knows what’s going to happen in six months, let alone two years’ time? So it just felt like a bit of a dangling carrot and close to when there’s an election. Cynical me.

PETER: I watched it almost like, why even - why even mention it now?

SCOTT: Yeah. I mean, we can’t really talk about that now because the cost-of-living crisis is in the here and now. Announcing that in two years’ time doesn’t help anyone at the moment. The measures that he did announce, you know, in part were good, they’re just gonna be nowhere near enough to bridge the gap, basically.

LYNN: It wasn’t - it wasn’t enough. And people were angry after that statement. I sat there watching it thinking, where’s the help for the vulnerable people in the UK right now?

SCOTT: I think what he would say to that, it’s this idea of a household fund, isn’t it? He doubled it from £500 million, he put another £500 million in that for the most vulnerable. Is that enough? I mean, I think only time will tell.

LYNN: You have to jump through a few hoops to get hold of that money as well. There’s finding out how much your local authority has got, filling in the right forms. It’s like this, this induces a lot of anxiety for people, particularly, you know, the vulnerable, struggling people. They’re sometimes scared of even making a phone call.

PETER: I think the overall sentiment is there needs to be more intervention to really help people to make sure that, you know, people don’t fall into what is, you know, a really, really dire situation.

SCOTT: Yeah, I mean, we’re seeing that at Snoop, right? So this kind of money is really tight for a lot of people and when money is tight, people do turn to credit. People are turning to alternative credit cards, they’ll dip into their overdraft. These are potentially expensive ways to borrow and we’re talking about interest rates that are only heading in one direction at the moment and that’s north, so it will become more expensive. It’s a real problem because it stores problems for the future. People struggling under a mountain of debt. That’s the here and now. There is also a pension implication for that because when there’s no money, you know, there’s no surplus. Your savings will shrink to zero, right? You’re like, “Pension contributions, right? Maybe we need to cut back on those”. So there’s a problem well into the future caused by a cost of living crisis in the here and now. And kind of part of me thinks, you know, we might get to a place where there’s going to have to be interventions to make sure that people aren’t put in an even worse position than they actually need to be.

PETER: Absolutely. And Clare, this leads on very nicely to this point of the fact that when people are feeling the squeeze like they are right now, and let’s face it, it’s not over. I mean, the energy cap increases again later on this year. One of the last things people are going to be thinking about doing is paying into a pension. What would you say to that?

CLARE: I mean, look, it’s so important to invest, if you can. I mean, investments are going to grow faster than salaries and at this time, when we’re talking about the measures, all the measures the government didn’t do, you can still get tax relief on pension contributions and that is still free money from the government. You know, which is not, you know, it’s not very common. And, you know, the worry is, of course, when people see their budgets reduced, they’re having to cut certain aspects of their life. You know, you worry that pension contributions are going to be part of that. But ultimately, you’re going to retire with a lot less. And, you know, missing out on all those additional years of compounding could potentially have a huge impact on your pot in retirement. So it’s something to really think about because, you know, I know a lot of people are in survival mode, but you’ve also got to think about the long term as well.

Tax talk

PETER: Yeah, I mean, I did read the response that you guys put out to the spring budget. I guess underwhelmed is kind of the overarching thing that you guys thought. But I guess on the tax side of things, whether there are any other, I guess, benefits when we talk about pension specifically, that can help people move forward?

CLARE: Yeah, I mean, so some of the tax cuts, you know, that you will see, we would suggest that you put those in your pension. And if you’re going to put, I think there were tax cuts, really about £300 a year. If you put £25 pounds a month in your pension, you know, ultimately, if that compounds over time by retirement, that could mean £15,000 extra in your pension. So there are little things you can do. So while there was nothing, you know, directly about pensions, there are savings that you can put back into your pension as well. On the state pension, I mean, we, you know, before the budget, the announcement was made around the state pension and around inflation. You know, so he confirmed that the state pension would rise with the rate of inflation, but it was based on last year’s inflation figures. So you know, so this April, it’s rising by 3.1%. But we know that inflation this year is going to go to around 9%. So, you know, that shortfall should have been addressed to limit the impact on people who are retiring at the moment and who are going to be living in retirement poverty in 2022.

PETER: So I think the main takeaway there is that tax relief will boost your pension contributions, and generally the long term impact that it has on your retirement planning.

CLARE: Yeah, so the delightful thing about pension tax relief is that the government is paying money back to us, which is not something to be sniffed at in these times. So tax relief, and pensions works like this, you get a tax top-up on contributions up to £40,000 or 100% of your salary, whichever is lower. Basic rate taxpayers will have tax relief claimed on their behalf by their employer, or by their pension providers. So Pension Bee, for example, does that for you, and that tax top-up is worth 25%. So for every £1 you put in your pension, it actually becomes £1.25. So that’s very simple. Now, if you’re a higher or additional rate taxpayer, you actually get tax relief. But you need to go and claim that yourself, so it’s totally up to you to do that and you have to do that through your self-assessment tax return. Now, that is something we know that people find overwhelming or daunting, or they’re not interested in doing because as a little bit of tax trivia, we discovered that 1.5 million higher earners do not claim that additional tax relief on their pensions, and they are leaving £2.5 billion unclaimed on the table as a result from the government.

PETER: And I’m wondering, Lynn, are there any other forms of savings or investments that might be able to match that kind of benefit?

LYNN: It’s this debate I am often having in my mind, and I have with a lot of people. It’s: where’s the best place to put your money? So it’s almost going back to this - should I put some money into an ISA? Should I ever pay my mortgage? And when you look at it all mathematically, I’ve got a maths degree so this is how I look at things, there isn’t anything that matches it. Even when you look at - you might get good returns on a Stocks and Shares ISA comparable to a pension, but you have to contribute to that Stocks and Shares ISA after you’ve paid some tax. But then there’s also psychological sides as well and timing impacts. If I think back to when I was in my 20s I didn’t put any money into my pension in my 20s because I just felt like the future was too far away. But then when I got into my 30s and 40s, my mindset changed dramatically. But then I’ve lost out on sort of the compound of those pension contributions. So there’s nothing that can compare to a pension.

Money management tips

PETER: I mean, I think when we talk about tax relief for pensions, I think it’s music to the years of anybody who’s got that extra cash to be able to put into a pension. But of course, money isn’t going as far as it could. And this is where I’d love to ask, you know, yourself, Scott and Lynn, around, you know, what are your - do you have any tips to help people actually cope with where we find ourselves right now?

SCOTT: Well, the starting point is, it’s going to be difficult. Money and income is a difficult topic because it kind of - it looks different to everyone. Those on the lowest incomes, what they need to do will look quite different to what I would describe as the squeezed middle and so you know, if you think of the squeezed middle - that might be family who are stretched, right? They’ve bought a house and they’ve got a mortgage, which is to the limits of what they could pay. They might have two cars in the drive and they might need those. A family that looks like that is very different to those on low incomes. And so that’s why I always start this type of conversation with: you must have a budget. You must know what your finances look like, what’s coming in, what’s going out, what’s left after if anything? And for those that are on lower incomes, if there’s nothing left, you need to go and claim every single benefit you possibly can. £15 billion goes unclaimed and this just kind of - but in terms of kind of general, I think Kirstie Allsopp, she got into a bit of a muddle recently, because it’s like, “Get rid of Netflix and then you’re alright, Jack”. There was a massive backlash on social media. But kind of, I think the principal in a way was kind of actually looking at all of your subscriptions. Have you got Amazon Prime? Have you got Netflix? Have you got subscriptions that you don’t use? I think we worked out at Snoop that people spend £640 on subscriptions. And you just know that some of those are going unused. You wouldn’t recognise it from looking at me, I used to have a gym membership a few years ago. A few years ago, a few years ago, the direct debit went to the gym more than I did. Get rid of it.

PETER: Lynn, what do you have any tips in that area to help people cope?

LYNN: Yeah I just think get the best deals on everything possible. Maybe tackle like one thing a day, just so it doesn’t feel so overwhelming and the savings can build up. It can be like thousands over a year. There’s lots of things you can do with your food shop like you can downgrade on brands. Maybe go for supermarket brands. Write a meal plan or go with a shopping list, don’t just pop to your local Co-Op every couple of days.

PETER: Quite a bit. And Clare, do you have any tips when it comes to the pension side of things in general, in terms of everything that’s going on at the moment?

CLARE: Keep up the pension contributions. If you are employed, ask your employer whether you can do salary, or bonus sacrifice to save on National Insurance. I mean, we should all just become savvy and sophisticated consumers right now. We should be doing everything we can. We should be following Lynn, we should be using Snoop, we should be doing everything we can to get every trick and tip in the book out there.

And the one thing I will say - it’s not necessarily related to pensions - but don’t be afraid to ask for help. You know, if you are in trouble, there are so many charities and organisations out there that will really help you if you’re suffering in silence when it comes to debt. There’s Step Change, Citizens Advice, National Debtline. There are so many organisations out there that will know the suffering you’re going through if you’re in debt, and you’re not talking to anyone about it and you’re really, you know, in a bad place. Just Google “Struggling with living costs Citizens Advice”. There will be a webpage that will tell you everything you can do to get support with energy costs, support with housing costs, support if you’re struggling to buy food. There are resources out there, and don’t be afraid to look for them and don’t be afraid to ask for help.

PETER: In kind of rounding this up, I wanted to play a little bit of a game and put you guys on the spot. So if you had the ear of Rishi Sunak, and you just had one minute to share an idea about his tax policy which could be changed to help people right now, what would that be? I’m going to start with you, Clare.

CLARE: Okay, Rishi, I want to talk to you please about the cost of childcare. If you are a parent, you know it is cripplingly expensive and families around the UK are dealing with that right now. So I would like the Treasury and Rishi Sunak to mandate gender-inclusive paid parental leave for all parents in the early stages of a child’s life. And I would like to mandate affordable childcare in the workplace through employer tax incentives so that women have a choice about when and not whether they return to work. And I have an economic argument, because I know the Treasury like those. So basically, there was a study and they said that of the women who were struggling to return back to work, 46% said they were prevented from taking on more hours at work as a result of unaffordable childcare. And that’s about 1.7 million women. So the economic argument is that if those women had access to adequate childcare services, they could increase their earnings by £7.6 billion. £10.9 billion a year, which would generate up to £2.8 billion in economic output per year. There we go.

PETER: What are the answers? Scott?

SCOTT: I think, for me, I would ask the government, Rishi, whoever can make it happen to make it easier for people to claim all of the benefits that go unclaimed, and there’s not necessarily an economic argument that the Treasury would love. But there’s this kind of argument for increasing thresholds in line with inflation, and there’s quite a lag in so many areas in that sense. It would be something called fiscal drag and it’s kind of - the lag is just too deep, I would say in many cases.

LYNN: So I think tax policies can be complicated or can be simple. But the £20 Universal Credit uplift, which has just been taken away, was a really super simple lever that the government could just switch on that would give a chunk of money back to the most vulnerable of our society. Can we put a little bit of money back into the pockets of people that desperately need it?

PETER: Very interesting thoughts there and hey, we don’t know for sure that Rishi doesn’t listen to this podcast. Now, before we go I’d like to say a massive thank you to our guests Clare Reilly, Lynn Beattie and Scott Mowbray. If you’ve enjoyed listening to this podcast, please do rate us and subscribe. Every rating and review helps us spread the word. You can find loads more information about the topics discussed in the show notes. If you’d like to get in touch with any feedback or questions, you can simply send an email to [email protected] or send a tweet to @PensionBee. We’ll be back with another episode next month all about Shariah savings and why it could be a great option for you. As always, keep saving and stay pension confident.

Catch up on episode 4 and listen or read the transcript.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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