PHILIPPA: Welcome to the last episode of Series One of the Pension Confident Podcast. But no need to worry, because I’m happy to tell you we’ll be back with a whole new series in January 2023. I’m Philippa Lamb, and to wrap up this year, we’re going to demystify a subject that’s confused all of us at one time or another - financial jargon. Whether it’s stagflation, inflation, Auto-Enrolment, or all those acronyms - what do they mean?
From interest rates and income tax to dividends and bonds, sometimes it feels like the language of personal finance is specifically designed to confuse us. So, today we’re going to push back with jargon busting help from two expert guests.
VIX: Thank you so much for having me.
PHILIPPA: Also with us is PensionBee’s very own CMO, Jasper Martens. Great to have you with us.
JASPER: Thank you. And no, I don’t have a podcast like Vix.
VIX: Not yet, but eventually we all will!
Why it’s important to understand financial jargon
PHILIPPA: Before we start, as always, I’m going to remind you that anything discussed on this podcast should not be regarded as financial advice and when investing your capital is at risk.
Now, Vix, financial jargon, I know you’re an expert and I’ve worked in that field myself, but it’s confusing for everyone. You were telling me before we came in, there’s still stuff that trips you up. Is there a particular word?
VIX: It’s a funny one because I’m technically a finance expert, but my job is to be the person that asks the questions so people don’t have to. Because I think everybody’s so embarrassed that they don’t seek advice on these things. So you just kind of style it out and I’m good at that.
But I like the more exciting terms like bull and bear. They sound like sexy fashion brands to me, but I think they’re a lot drier than that.
PHILIPPA: Jasper, have you got a least favourite bit of jargon?
JASPER: In the pensions industry, we’ve got lots of jargon and the one that I’ve brought to the show today is an UFPLS.
PHILIPPA: What’s that?
JASPER: That’s an Uncrystallised Funds Pension Lump Sum, which only applies to a defined contribution scheme. And even after all of these years at PensionBee, I’ve failed to explain that in simple terms to anyone.
PHILIPPA: I’m not sure I want you to do that even now!
VIX: It’s like when someone explains the rules of a card game, I really want to understand and I’m listening, I’m giving you my eye contact, but I can hear the music from Smart in the back of my head.
PHILIPPA: Which brings us to the big problem here! Jargon’s off-putting, and every line of work has its own. The difference with financial jargon is, it’s really in our own interest to understand it.
JASPER: Yes, if you don’t understand your finances then you’ll fail to plan a happy retirement but also to have a good financial outlook. And sometimes you do need to go into the books and learn. Fortunately we’ve got the internet now to help.
Financial jargon in the news lately
PHILIPPA: But personal finance is particularly jargon filled, isn’t it?
JASPER: It is and I think the industry’s made it deliberately complicated. Sometimes I hear things like, ‘Well we’ve got these difficult words and acronyms because otherwise we have to write them out and it takes a long time.’ And I feel that if we keep the population clueless, then people won’t take action. And then those companies can earn money off of you. So, you better start finding out what those words actually mean.
PHILIPPA: I’m a cynic about that too. I think there’s a bit of a barrier being put up there. But listening to the news lately, it’s been filled with financial jargon and economic stories. I was thinking we might kick off with some of the terms we’ve been hearing regularly in the news. Some of the real basics, and the first one I have for you is income tax.
JASPER: We all love to pay some tax, don’t we Philippa?! So I think, with income tax, people generally understand what that means. You’re paying tax on the income you earn. And we have tax bands in the UK, so on the first £12,570 that you earn, you don’t pay any income tax at all.
And anything you earn over £12,571 and up to £50,270, you pay 20% basic rate income tax. Then, if you earn between £50,271 to £150,000, you pay 40% higher rate income tax. If you earn over £151,000, you pay 45% additional rate income tax.
However, it was announced in the Autumn Statement on 17 November, that the higher and additional tax thresholds are changing in 2023/24. So, from April 2023, if you earn between £50,271 and £125,140, you’ll pay 40% higher rate income tax in 2023/24. And if you earn over £125,140, you’ll pay 45% additional rate income tax in 2023/24.
So those are the UK tax bands and usually, you won’t really see the tax being taken off. Because what’s given to you in your take-home pay, is different to your income as the tax will, in most cases, already have been taken off. So I think that’s where sometimes the confusion kicks in. But most people will be paying tax within those tax bands.
PHILIPPA: And inflation?
JASPER: Inflation’s basically the price of things you buy in shops increasing in value.
VIX: I knew that one!
JASPER: Oh, you knew that one? Great! Do you know the difference between RPI and CPI?
VIX: Oh, no. I didn’t realise that I had to revise for this podcast. Is that the Retail Price Index?
JASPER: Yeah, so I’m going to pretend I already knew everything about it and I didn’t look it up whatsoever.
PHILIPPA: Yeah, he did. I saw him doing it. RPI?
JASPER: Retail Price Index and Consumer Price Index.
PHILIPPA: What’s the difference?
JASPER: The simplest way to explain it, it’s the way you measure inflation. And with the Retail Price Index, we include things like the cost of living and housing, so your mortgages are included. And usually that one is higher than the Consumer Price Index. And to make things more complicated, for example, the government or a company might use the RPI and another will use the CPI.
PHILIPPA: So you need to know which is which?
JASPER: You need to know. But normally, I’d say, roughly they’re quite similar. One tends to be a bit higher than the other.
VIX: So, I’m speculating here but does which one is used depend on which one is higher? Because I’ve only ever seen RPI on bills, when they’re explaining why my bills are going up.
VIX: And again, like you say, it’s this willful ignorance. It looks legit, so I just huff and puff about it and just shrug and move on.
PHILIPPA: Yeah, well what else are you going to do about it?
VIX: Then I shred it and feel sad.
PHILIPPA: Okay, interest rates. I know it sounds basic, but let’s talk about interest rates.
JASPER: Well where do you start? Because it’s such a broad topic. But interest rates, I think for most people, it’s either the money you earn on your savings. So, the bank pays you an interest rate because you’ve given them some money in their bank and therefore they give you a percentage in return.
But interest rates can also cost you. So if you’ve got a mortgage, an interest rate’s the money you pay to borrow money from a bank or another organisation. And interest rates are usually set by a central bank.
PHILIPPA: Central bank being, in this case, Bank of England?
JASPER: Exactly. So for example, recently the interest rate has gone up from 2.25% to 3%. And that’s the rate that the banks pay to borrow money off the Bank of England.
PHILIPPA: And that’s what’s called the base rate?
JASPER: The base rate, exactly. And the banks who borrow that money can then lend that money to you, as a consumer. And they’ll probably put a margin on top of that. So what you pay is definitely not the base rate. You’ll usually pay a bit more.
PHILIPPA: So everything hangs off the base rate. So when we hear on the news about the Monetary Policy Committee at the Bank of England changing the base rate, it does matter because it impacts the amount of interest we might get in our savings account or the amount of money we might have to pay for a mortgage.
JASPER: Yes. So the amount of interest you pay when you borrow money to buy a house gets more expensive if the base rate goes up, but you might also get more interest on your savings. Usually, the Bank of England and other central banks will change that base rate to curb inflation. Because if it gets more expensive to borrow money, consumers hold back and don’t spend as much.
PHILIPPA: We spend less?
JASPER: Exactly. And that’s why the bank has that tool. And sometimes it’s nice for us, as we get more savings in our bank account, but in many cases it’s not so nice. And the cost of living really is now the issue here, where that rate has gone up and therefore our mortgage payments are going up.
PHILIPPA: As I said Vix, you work in this industry so I have to say, you’re a part of the problem! But you’ve talked about bull markets, there’s gilts, there’s stagflation, there’s asset management. I mean it’s just bamboozling. Does the industry really design itself in such a way that it’s building that wall between it and us?
VIX: It’s impossible to know, isn’t it? But I think the big issue for me is that this isn’t taught in schools.
PHILIPPA: Oh yes. We’ve talked about that on the podcast before - you’re not taught any of this stuff at school, are you?
VIX: Yeah, I can tell you that I’ve lost my watermelon or my umbrella in French - I’ve never used that. But I wouldn’t be able to give you a concise understanding of how interest and inflation would affect literally every element of my life, in terms of borrowing and saving.
There are so many terms that are confusing. Who’s coming up with these? What’s stagflation? It sounds like when I said yes to going to Becky’s hen in a local pub, and then six weeks later, somehow I’m in a WhatsApp group with somebody called Laura who’s asking for £1,000 for an Airbnb that I don’t remember saying yes to. Oh and also I’ve got to dress up as a unicorn. That’s not what it is, but there are no clues as to what it is?
PHILIPPA: Yeah. And that’s an old one. I’ve no idea where the word stagflation came from. It’s crazy, isn’t it?
Now look, acronyms are my personal least favourite. Jasper, again, I want to start with a common one, and I want to start with FTSE. You hear about the FTSE all the time. We might know it’s something to do with the stock market, but what exactly is the FTSE?
JASPER: Well, the FTSE is the Financial Times Stock Exchange, which is basically an index of companies that are listed on the stock exchange. And so, if we talk about the FTSE 100, we’re talking about the 100 biggest companies on the FTSE, the Financial Times Stock Exchange. That’s basically what it means. It’s just an index of companies that are listed there.
PHILIPPA: Another stock market acronym - IPO.
JASPER: Well I know that one because PensionBee did one in April 2021. It’s an Initial Public Offering. And that’s when your company is going to the market, and before you do so -
PHILIPPA: I’m going to stop you there. Going to the market? Let’s go further back to the basics.
VIX: This little piggy?
PHILIPPA: So you’re a company -
JASPER: Ok, I’m rolling up my sleeves!
PHILIPPA: So, you’re a company and you’ve grown to a certain size and now you’d like some investors to lend you some cash?
JASPER: What you’re trying to do is get people buying your shares, so that you can raise money. When a company goes on the stock market, they’re trying to sell shares. And if your company is good, and it has good unit economics and has a good future, investors will say ‘I want some of those!’ and they’ll buy those shares off you.
PHILIPPA: So the public offering is, you offering your shares for sale?
JASPER: Yeah. To anybody who wants to buy them.
PHILIPPA: Got it. Savings is a big area for acronyms isn’t it? Again, we hear a lot of them but knowing precisely what they are is something else. Here’s a nice one for you. What’s the difference between an ISA and a LISA?
JASPER: Well first of all, can I just say that I feel like I’m doing a test here?
PHILIPPA: That’s exactly what’s happening.
JASPER: I should’ve known!
VIX: We both know the answers. We’re just checking that you do.
PHILIPPA: I’ve got them on a piece of paper here.
PHILIPPA: And what are they?
JASPER: So basically, they’re both tax efficient ways to save for later. In the case of a LISA, you can save that towards your first house purchase.
The Lifetime ISA, like all ISAs, is a tax-free savings account. You won’t be taxed on what you put in, and you receive a 25% bonus on your savings. You’ll get a £1 bonus for every £4 you put in. You can put up to £4,000 into a LISA every year, so the maximum bonus you can receive each year is £1,000. In addition to this limit, you can’t pay more than £20,000 per year across all your ISAs.
LISAs are tax-free and the government provides a bonus of 25% on the money you put in. So, for every £4,000 you put into your LISA, you receive a £1,000 bonus.
JASPER: And ISAs are just savings, but they’re tax efficient. So, every year you can save around £20,000 into that Individual Savings Account and you wouldn’t pay any tax on that amount.
ISAs are popular ways for people in the UK to save or invest their money tax-free. There are four types of ISA:
Stocks and Shares ISAs
Innovative Finance ISAs
Lifetime ISAs (LISAs).
The government puts a limit on how much individuals can save or invest in them in a single tax year. This limit is known as the ‘ISA allowance‘.
This ISA limit is the maximum an individual can save across the range of ISAs. So for example, if you saved £5,000 in one ISA and £3,000 in another in one tax year, you’d have used up £8,000 of your total allowance.
In the 2021/22 tax year, the total allowance stands at £20,000. This limit resets at the start of each tax year on 6 April 2023. If you don’t make use of your entire allowance before then, you’ll lose any remaining amount.
JASPER: Does that answer the question?
PHILIPPA: Are we happy with that?
VIX: I think so.
Pensions industry jargon
PHILIPPA: So Jasper, the moment you’ve been waiting for, let’s talk about pensions! Because, as we know, the pensions industry is big on confusing acronyms. There are a lot of very confusing terms. Which ones do you think listeners really need to have their heads around?
JASPER: I think, especially at the moment because it’s been in the news a lot, it’s the triple lock on the State Pension.
PHILIPPA: And what’s that?
JASPER: It’s basically indexing your pension. That means that the UK Government is legally binded to make sure that your State Pension rises in line with one of three locks. Lock one is the rate of inflation, which was at 10.1% in September 2022. This is the rate in which the Chancellor confirmed that the State Pension will rise in April 2023. Lock two is the increase in average earnings. And lock three is a fixed amount of 2.5%. The highest of those three is the one in which the State Pension will grow.
PHILIPPA: Okay. Vix is looking confused!
VIX: Does that mean that the State Pension only ever increases and never decreases?
PHILIPPA: That’s a very good point. Can the State Pension go down?
JASPER: No, the minimum it will go up is 2.5%. But if inflation, or average earnings are higher than 2.5%, then the State Pension will increase in line with those instead. The highest one will win.
PHILIPPA: And it really matters right now because we’ve got very high inflation all of a sudden. If you’re dependent on the State Pension, then it’s really significant isn’t it? Because everything you’re spending, you’re getting 10% less for.
VIX: And everything’s costing 10% more.
JASPER: It sounds really great, right? And it’s really beneficial for people who’re taking their State Pension because they’ll get that increase. But what about everybody else in this country that aren’t getting the State Pension because they’re still working and earning? What about them? And that’s what’s often criticised in the media - that pensioners are getting the best deal. So, I would say, the jury’s still out.
PHILIPPA: Jasper, what’s risk?
JASPER: This isn’t being a risk devil or a risk taker.
VIX: Or a skydiver! I’m not going to go on this rollercoaster because the harness looks a bit loose? No! That’s not what risk is.
My mum got divorced about 10 years ago and she didn’t take care of any of the household finances, she ran our home and brought me up and did a brilliant job of it. But I think my mum’s perception of pensions was, it was kind of a benefit that work gave to you and it was a flat rate like a savings pot.
I remember, we went to the bank and sat down with a bank manager because I didn’t understand enough to help her. Even though she was like ‘You work in finance, you can help me make these decisions’, I was like ‘Oh, no thank you!’
They sat her down and they said, ‘Right, we want to understand what your interest in risk is.’ Like, how much of a risk taker are you? My mum was scrambling around, and she sort of fancied the bank manager as well, which didn’t help. So she wanted to seem a bit sexier and a bit riskier, and I could see the cogs turning in my mum’s head. And she was like, ‘Hmm, you know, occasionally I like a scratch card.’
JASPER: Risk is about how you want to invest your money. Other than the State Pension and defined benefit pensions, every other pension in the UK’s actually an investment, whether you like it or not.
It can be cash, it can be bonds, it can be stocks, it can be anything really. But the typical cocktail is a mix between shares and bonds, and then maybe a little bit of cash and property, and all of those come with a risk. Now, if you’re young and you’re growing your pension savings, you might actually want to take a little bit of risk as share prices can go up and down, as we are seeing right now.
PHILIPPA: But you might get potentially better returns?
JASPER: Yes, especially in the long run. And when you get a little bit closer to retirement, you might want to take less risk and therefore, you might be looking at investing in property, bonds or cash.
Now most pension plans that are out there will be a mixed cocktail. So, you might have a very strong cocktail when you’re young and maybe an alcohol-free cocktail as you get nearer to retirement. But most pension providers will start you off with a very ambitious cocktail when you’re younger and all you need to do is contribute. And then what they’ll do over time, is they’ll change the cocktail. So they’ll add more water to it.
PHILIPPA: So you’ll end up with mineral water at the end of it?
JASPER: Exactly. You want less risk when you’re two years away from taking your pension. And that’s what risk is all about.
PHILIPPA: Okay, I’m happy with that. I’ve got more pension related terms for you - what’s an annuity?
JASPER: So, let’s say you’re getting to an age where you want to retire and you’ve saved a pot of money. You can give that to a pension company or a life insurance company and in return they’ll say, ‘Oh thank you Jasper, thank you for your pension. And for that, I’ll give you a fixed amount until you die.’
And an annuity rate, let’s take 5% for example, basically means that you get 5% of your pot every year until you die. Now that’s usually linked to interest rates. So this is where the base rate comes in.
So if interest rates are really low, annuity rates will be low too. And annuity rates have been historically very low. Now, with the interest rates rising from 2.25% to 3%, even though it might not sound like a lot, it’s a huge change.
PHILIPPA: What about drawdown? We hear about this all the time - but what’s drawing down your pension?
JASPER: So, with an annuity, you give away your pension pot and in return, you get an income every month. In the case of a drawdown pension keeps your money invested for longer. At the same time, you can take your pension flexibly, withdrawing money whenever you need it. Up to 25% of your savings can be taken tax-free, with the remaining 75% subject to income tax. The amount you pay depends on your total income for the year and your tax rate.
VIX: Is that subject to the same income tax rules as your salary?
PHILIPPA: Like we were talking about earlier.
JASPER: So for example, people who are emptying their pension pots when they’re 55, that’s drawdown. Basically, you draw down your whole pot until it reaches zero. So, let’s say you have £100,000 in your pension and you take that in one go: suddenly, your income in that year is £100,000 and you’re going to have to pay a lot of income tax.
VIX: That’s an expensive boat!
JASPER: But if you take small chunks every year as income and leave the rest invested, it has a chance to grow over time.
You can take up to 25% as a tax-free lump sum or take 25% of each withdrawal tax-free. Your tax-free amount doesn’t use up any of your personal allowance, but once your withdrawals exceed this threshold you’ll be required to pay income tax. It’s important to consider how much you withdraw from your drawdown pension, and when you do so, to ensure you don’t move into a higher tax bracket.
If you’ve a small pension with a value of £60,000 you can take 25% as a tax-free lump sum, leaving £45,000 in drawdown. Once you exceed your personal allowance, each withdrawal will be subject to income tax. However, if this is your sole income you’ll only be charged the basic rate of income tax, as your total pot falls within the lowest tax band.
If you’ve a larger pension with a value of £400,000 you can take £100,000 as a tax-free lump sum. You’ll then have £300,000 to invest via drawdown. The amount you choose to withdraw in any given tax year will determine how much tax you pay and you could easily be required to pay higher rate or additional rate tax if you withdraw too much too soon or have other earnings. If, for example, you choose to withdraw a further £100,000 in a single year you’ll have to pay higher rate tax at 40%.
So it might be better if you take small chunks every year as income, and you leave the rest invested so it has the chance to keep growing over time.
PHILIPPA: Pension policy documents, they’re full of jargon, aren’t they? What are the common benefits and acronyms that we might find in pension policies?
JASPER: So you might find things like a Guaranteed Annuity Rate, a Guaranteed Minimum Pension, Protected Tax-Free Cash, Protected Pension Age. Basically these are guarantees that were given to customers in the past.
So just to give you an example: a Guaranteed Annuity Rate. If you were with pension company A and you wanted to buy an annuity, you’d get a really good rate from pension company A, because they didn’t want you to go to pension company B, C, or D. Nowadays, websites like Money Helper actually help you to shop around because there might be better deals out there.
PHILIPPA: Like we do with utilities?
How and where can we learn about finance?
PHILIPPA: It’s all about better education around money and finance, isn’t it? And it always seems to me that basic finance skills, and I know you feel the same way about this Vix, is something that we should be teaching kids in school?
VIX: It absolutely is, because just in this session I’ve understood more than I’ve ever known. It can be scary, you’ll read the first couple of paragraphs of something and if you don’t engage with it straight away, I’ll just move on.
PHILIPPA: It’s bewildering isn’t it?
VIX: I sit down and I try but it’s confusing and I think people are embarrassed to ask questions. I was with my mum in that session, and she’s not a stupid woman, she’s a very intelligent woman, but she’s just had no exposure to this whatsoever so she didn’t know what to ask. And her view was that she just wanted somebody to tell her what to do and they weren’t able to do that.
That’s the one thing that a pensions advisor cannot do, you have to opt in. But she didn’t have the financial skills to opt in. And that dragged on for much longer than that session, because we came away from it and it manifested on the route home. She hadn’t really taken in what was said enough. So it took us a long time to get there.
PHILIPPA: I’m hoping there might be people who’re listening to this, who might not know anything about pensions actually, because we do talk about the basics. And we’re not frightened to talk about the basics because, as you say, no one really wants to admit they don’t know what drawdown is. And with the situation that we’re all in, economically, this stuff matters more than ever.
JASPER: Yes and I think as an industry, we’ve got to do much better than what we’re doing right now. At PensionBee, we want to make pensions simple so you can look forward to a happy retirement. That’s our mission statement. But every week there will be moments where it’s almost like someone presses a button and we’ll realise something is too jargony. So every piece of content we produce has a proper tone of voice check because we have to avoid these things creeping in.
PHILIPPA: Are you surprised just how low the level of understanding is in the finance industry? Because I always feel that, even in myself, as well as in others, who’ve worked in this field. There’s always stuff that, if you’re really honest, you just don’t properly understand?
JASPER: Yeah. Half of the time people don’t know that a pension’s actually invested, or that it costs you money.
PHILIPPA: And there’s no shame in not knowing that, is there?
JASPER: There’s no shame. I didn’t know that a pension costs you money when I joined PensionBee in 2015. I thought my company was paying for it but no, I was paying for it.
VIX: I found out today!
PHILIPPA: Have you got a favourite way of educating yourself more about this? We’ve got this podcast, there are other podcasts. But have you got any favourites, Vix?
VIX: I’m approaching 40 years old and I’m a Peter Pan. In my mind, this is something to worry about later. I’m astonished that there are 21 year olds walking around now that didn’t exist when I was a teenager. But I think we all want to believe that we’re still young enough that we could change the game. So I think it’s brilliant that all these resources exist, but particularly now, with the cost of living crisis, where people are trying to work out how they can budget until the end of the month, budgeting for even 10 or 15 years feels like a problem for another day.
So I think the press and financial experts need to do more to highlight the difference between tackling it now versus leaving it a few years - five years, 10 years, 15 years - because there’s a penalty for that. I’m already paying a penalty for that now I’m approaching middle-age. That hurts to say out loud!
PHILIPPA: If we’re talking to young Vix, Jasper, where would you send her? Is there a book, are there some websites you can go to, to look up financial terms?
VIX: I mean they’re really under-selling this!
JASPER: They’re looking at how to turn something boring into something actually really exciting and hopeful. So that’s what they do. They’ve also launched a really good community hub especially aimed at women and their savings, because they tend to be behind in terms of their pension savings, for example. So I think that’s really good. And of course, Money Helper‘s also definitely a really good one to go to.
PHILIPPA: That’s all really helpful. I’m gonna wrap it up there. Thank you both very much.
VIX: Yeah, it’s been a brilliant educational day for me, so thank you.
JASPER: Yeah, thank you both!
PHILIPPA: That’s it for this episode and Series One. A final reminder that everything you’ve heard on this podcast should not be regarded as financial advice and wherever you invest your capital is at risk. We’ll be back with you in January 2023 with Series Two and we’ll be kicking off with financial personalities - what’s yours and can you harness it to help you reach your savings goals?
If you’ve got a moment, we’d love it if you could rate and review us on your podcast app, or you can share your feedback and suggestions for future episodes by emailing email@example.com. Thanks for being with us this year. Have a great Christmas break and join us again in January.
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.