Monthly Archives: September 2010

The latest workplace pension report from Scottish Widows shows that the number of staff that want advice on their retirement savings options has increased by 76 per cent from 2009.

Scottish Widows, head of marketing communications Ann Flynn says workplace education or advice can be a good way to engage this section of the workforce.

She says: “Something is clearly not working here and we need to work hard to make sure the younger section of the workforce is catered for properly.”

Flynn suggests that expanding the range of financial services offered in the workplace is one way to get younger people involved in pension saving.

There is a wide range of retirement saving options for employers and employees, the problem is many employers these days are not providing pensions for staff and therefore staff are not getting any on site pension advice.

The government is looking at pension compulsion and possibly introduce a scheme of auto enrolment where the employer must contribute a minimum amount towards employee pensions. This type of scheme could well be in force from late 2012 or early 2013. Employers need to prepare for this and one of the things they could do is take independent financial advice now so that they have all the facts well in advance.

There are a number of risks to consider before you purchase an annuity at retirement. here at Retirement Solutions we have consider 5 important ones for you.

1. Inflation – The purchasing power of your money will erode over time, so what you can but today for every £1 of annuity will reduce the longer you live.

2. Longevity

- Life expectancy is increasing – thanks to advances in medicine and science – but healthy life expectancy is not increasing at the same rate: although we are living longer in retirement, we are likely to spend a proportion of that time in poor health.

The following table shows the average life expectancy (LE) for males and females aged 65 today. This compares with the average term of ‘disability-free’ life expectancy (DFLE). This is defined as expected years of life free from limiting long-standing illness or disability.

Projected years of Life Expectancy (LE) versus Disability-Free Life Expectancy (DFLE)¹

Source: Living Time

3. Changes to your cirumstances – such as the death of a partner, a divorce or change in financial circumstances such as repayment of a mortgage.

4. Annuity Rates – no one can predict what annuity rates will be at any point in time in the future, if you purchase an annuity today you know the rate attached to it. Annuity rates may go up or down in the future, but it is most likely they will go down for the foreseeable future.

5. Investment risk – that is the risk to your capital. Annuity purchase does not risk your capital, but there are other more flexible annuity options you may want to consider.

Sources:

1. Office for National Statistics (ONS) Health Statistics Quarterly Spring 2008 (2004 data)

A recent report has again highlighted the very real issues facing pensioners in the UK in relation to inflation and how it affects them.

Various measures are presently used to establish the rate of inflation, what seems to be universally accepted is that the true rate felt by the pensioner community can be much higher in reality. There are a number of reasons for this. Since the link between average pay and the state pension has been abolished the gap between a pensioners income and the average pay has increased. This factor always needs to be considered when examining pensioner disposable income in relation to day to day expenses. This then brings us to the issue of inflation. A cycle for the calculation of inflation is one year, however if the start point is one which has an extremely negative effect on pensioner expenditure, even if inflation on that expense is 2% the effect on the household where income is fixed may be much greater than in a household with two people working. Many elderly people live in what was once the family home and as such may carry significant levels of council tax. If a council tax rises by 6% and the state pension has risen by 1.5% this, due to the figures involved is hugely inflationary on that pensioner household. It is ironic that at a time when more people feel that the family home, which for earlier generations was a source of safety and financial stability can now be a financial burden. Not only does this generation of pensioners have to find ever increasing running costs for the home they may well also have secured debt on the property which needs to be serviced on a monthly basis. In truth the family home to some is no longer a financial asset on a day to day basis. These are some of the reasons that the demand for equity release products is on the increase.

There are still those who effect an equity release plan for aspirational reasons however there are more and more people using the product as a solution to short and medium term financial difficulties.
The factors effecting pensioners are the most severe for many generations. People are entering retirement in many cases with considerable amounts of debt, there are fewer final salary pension schemes, the value of personal pension funds has been slashed, annuity rates are incredibly low, interest on savings is negligible and we have briefly examined the income gap between work and retirement and the effect that this has from an inflationary standpoint. It is a mixture of these trends which is driving more and more people to examine using their main residence to provide a financial lifeline rather than for it to add to their difficulties. To that end they are exploring how equity release can help them

One point to make is that an equity release product is not the answer for everyone or in every circumstance, it is for this reason that specialist professional advice should be sought in every instance to discover whether equity release is the correct answer for that particular situation

Those that have no income including children can contribute a maximum of £3,600 gross per annum – that is you put in £2,880 and the Revenue will put in £720. This type of saving can also give your children an incredible boost to their retirement fund as well as being tax efficient for the parent.

What are the drawbacks to childrens pensions

The only drawback if there is one to children’s pension contributions is that benefits cannot be taken until age 55 which could be many years away. Pension experts though say that even one contribution can reap significant benefits at retirement for a child.

Many pension companies will put the childs pension in the parents name and then once the child reaches 18 years old the plan will revert to them and if they wish they can make contributions themselves. Once the child reaches retirement age (currently age 55) they can under current rules take 25% of the fund as tax free cash, with the remaining fund being used to purchase an annuity.

The tax advantages of pensions of course could change in the future and also you should consult an independent financial adviser as the charges on pensions between one provider and another can be significant and affect the growth of the fund.

Many people in their 50′s are concerned about leaving their family unable to pay the bills if they die. Many of these people also think they are too old for life insurance and might not get accepted. Well this is simply not true and there are policies available that offer over 50 life insurance with guaranteed acceptance with no medical.

First of all we will point out that unless you have serious health issues you should always apply first of all for life insurance that is underwritten, the reason being is, if you are accepted then you are likely to get a much higher death benefit than from a policy where you are guaranteed to be accepted. Another reason is the policies that guarantee acceptance only pay a full claim after a period of time, with some insurance companies it is 12 months, but others it is 24 months. You can apply for over 50 life insurance online through one of the many prices comparison websites that are on the internet.

If you do have serious health issues or cannot face going for a medical then you can apply for one of the guaranteed acceptance and no medical policies that are on the market. Sometimes peace of mind that you do not need to have a medical is worth paying a higher premium for. These policies do have some useful features are here are just a few of them:

• Guaranteed cash lump sum
• Full cover after 12 months
• Payments fixed for the duration of the contract
• No medical
• Premiums from as low as £5

Also some of these plans even give you a free gift once you have paid some premiums, often something like £30 of vouchers for one of the major retail outlets.

Everyone by now must know that annuity rates are at their lowest for 15 years and those that dont must walk round with their eyes shut. retirees need new retirement income solutions to see them through their retirement years. Longevity has increased and many face living 30 years or so in retirement, without flexible retirement income solutions they are likely to run out of income.

For many retirees annuity purchase will be the only option available, those people with small pension pots that need the security of a fixed income for the rest of their life and cannot afford to take any investment risk.

For others with larger pension pots, they will be looking for more flexible options for their retirement income, and will want to delay full annuity purchase as long as possible. So what are the flexible retirement income solutions for 2010 and beyond?

Maintaining flexibility

Let’s take a typical client needs an income of £12,000 to live on. He feels that he needs some flexibility in the short term and does not want to commit to buying an annuity yet. If he takes too much risk then when he does come to buy an annuity he will not have sufficient invested still to buy the £12,000 he needs to live on. And if he minimises risk in the early years he may be not be able to afford to cover day to day expenditure before annuitisation.

It is certainly a conundrum and this is why we advise you to seek the help of an independent financial adviser before making serious decisions around retirement income solutions.

Overlap is an option on an annuity that allows the annuitant to choose when they’d like a dependant’s annuity to start, if they have opted for both a Joint Annuity and a Guarantee Period. An annuity policy can be set up on a ‘with’ or ‘without’ overlap basis.

If the annuitant dies during the guarantee period, then the continuing annuity payments can start either at the end of the Guarantee Period or from the date of the annuitant’s death.

If the annuitant chooses from the date of their death, should they die during the Guarantee Period, it will mean that their surviving dependant will receive two incomes for the remainder of the guarantee period, as the payments would ‘overlap’. The main point to consider is, does the beneficiary that will receive the continuing pension need two incomes should the policyholder die soon after the policy is started?

The diagram below from Just Retirement graphically demonstrates the difference between the two options.

With or without is just one of the many options available to retirees when annuitising and if you are having trouble understanding any of the options and whether they would be of benefit to you then you should go and speak with an independent financial adviser (IFA), the IFA will explain all the options and help you choose the correct ones for your personal circumstances.

Many retirees probably wonder how the annuity providers go about pricing their annuities. We therefore though we would enlighten you on how annuity pricing works.

To ensure annuities return a guaranteed income for the rest of the customer’s life, they are mainly backed by low-risk Gilts and Corporate Bonds. Gilts are considered to have no risk while Corporate Bonds tend to create a better return, but carry increased risk as the company issuing the Bond may become insolvent.

Annuity providers must hold reserves for expected defaults of Corporate Bonds. These reserves come from the extra expected yield to be gained by buying the Corporate Bond rather than the Gilt. This is known as the Credit Spread, which is made up of a liquidity obligation and a default obligation. At the moment annuity providers typically reserve 25% – 50% of credit spread for Corporate Bond defaults.

Source: MGM Advantage

Because not all annuity providers price their annuities the same, to ensure you get the best annuity rates you need to use your open market option and shop around on the entire market. The other thing to remember is that not all providers will deal with the general public, there are some that will only deal with an independent financial adviser. So if you really do want the best annuity rates you need to seek independent financial advice.

Information contained in a press release from one of the largest enhanced annuity providers Just Retirement suggests that possibly 55 – 65% of retirees might qualify for enhanced annuities. Enhanced annuities are available to those with lifestyle or medical conditions. It was recently reported that 12% of all annuities sold are now enhanced due to qualifying conditions.

The main issue is that during their lifetime many retirees are not used to declaring lifestyle or medical conditions, the only time you declare these is if you apply for some kind of life or health insurance. According to Just Retirement, there are 1500 conditions that can qualify on their own or in combination.

Nigel Barlow from Just Retirement commented in the press release:
“While the smoker annuity is well known, many may still not be aware of the effect that high alcohol consumption, obesity, high blood pressure and high cholesterol can have on them. It is obviously better from a general perspective to try to be as healthy as possible and to avoid these things altogether. We would recommend that people seek help with any of these factors and are aware of the health issues they can cause. If any of the factors are present at retirement, however, an enhanced annuity takes into account the effects and pays out an increased income to recognise this. Enhancements are available based on the health of the annuitant or their spouse, so an even higher
proportion of joint life cases could qualify.”

An article in the Telegraph last month stated that eight out of 10 first-time buyers get a deposit for house purchase from the bank of mum and dad, their parents. Well many parents and grandparents are sitting on a large asset, which is their home. Equity release could be used to raise some of the equity in the home to help their own children or their grandchildren get onto the property ladder.

One of the many uses of equity release is gifting to children or grandchildren and seeing them enjoy some of their inheritance while they are still alive. By raising equity from their home this gift could be used to fund a deposit for house purchase or a house move up market. Only recently it was announced  that the average age of a first time buyer is now around 43 years of age. A gift of cash from the equity could help reduce this down.

Any release of equity would be free of income tax for the borrower, but could be considered a gift for inheritance tax purposes in the event of the borrowers death. You would be wise to seek independent legal advice before.

Raising equity on the property and using it to fund house purchase could be a good idea while UK property prices are low. Buy at a low point could mean if house prices rise again that significant equity gain in the new property could be very profitable.

Equity release used to fund house purchase deposit can be in the form of either lifetime mortgage or home reversion scheme and you should seek independent advice before committing to any product purchase.