Monthly Archives: April 2011

Many British pensioners are missing out on vital benefits because they don’t realise they are entitled to them. Up to 1 in 5 pensioners in the UK have never claimed the benefits that they are allowed because they either don’t realise which benefits they can apply for, feel the system is too complicated and intrusive for them, or because they feel too proud to receive benefits.

Retirees could be missing out on up to £2,400 a year on benefits not claimed and the national average for unclaimed benefits by retired people is £675, saving the treasury a whopping £5.4 billion per annum.
To ensure that you or a relative isn’t missing out on these benefits and allowances you can check with either the Citizens Advice Bureau, your local council or online at www.direct.gov to see what you are entitled to.

Some of the allowances and benefits that you could be claiming for include:

Council Tax Discount:

Last year it was estimated that nearly 2 million older people who were entitled to council tax discount did not apply for it, losing an average saving of £728 each.

Pension Credits:

Usually aimed at lower pension schemes and moderate savers with savings of less than £10,000. The pension credits are split into two parts: the first being a guaranteed credit where their pensions are topped up to a guaranteed weekly income, and the second is a savings credit that is applicable after the age of 65.

Housing Benefit:

if you live in rented accommodation then you may be eligible for housing benefit which will contribute towards some or even all of your rental charges provided that you don’t have saving or capital of over £16,000 and you are not paying rent to an immediate member of your family.

Attendance Allowance or Disability Living Allowance:

If you need help at home because of a disability or illness you may be eligible to claim an attendance allowance. Note: the person caring for you does not need to be a paid professional, you will still be entitled to claim if the carer is a relative or your spouse. The Disability Living Allowance is very similar except that you need to begin claiming it before you start drawing your pension, otherwise you will be given an Attendance Allowance instead. These allowances are available to all pensioners regardless of their financial status.

Middle income earners can boost their retirement savings and beat a new higher rate of tax by manipulating their pension contributions.

Pensions expert John Lawson, of Standard Life, has explained step-by-step how someone trapped in the new higher rate tax bracket can switch back in to a lower tax rate with their pension.

The tax problem

Around 700,000 taxpayers are expected to pay income tax at 40% rather than 20% as tax thresholds are adjusted downwards. In 2010-2011, a taxpayer could earn £43,875 plus their personal tax allowance before hitting 40% income tax.

For 2011-2012, the threshold is £42,475 plus the personal tax allowance.

Standard Life says many workers not generally regarded as high earners, like nurses, police and junior doctors, are now in the top tax bracket. Other workers on commission and overtime could find themselves paying more tax as well.

National insurance is also an issue. The rate of national insurance for higher earners is rising from 1% to 2%. This rate starts when weekly earnings reach £817, which on an annual basis is £42,475 – the same as the income level at which higher rate income tax starts.
The solution

By adjusting pension contributions, retirement savers can save higher rate tax by expanding their basic rate tax band.
Here’s an example from Standard Life: Tom earns £45,000 a year. In 2010-2011 he paid income tax of £7,930 and £4,209 national insurance, leaving him take-home pay of £32,861.
If he earns the same this year, his tax bill will increase by £80 to £8,010 while national insurance goes up to £4,281, leaving him with £32,709 – £152 less than the last tax year. Tom can save £1,010 income tax by paying a gross pension contribution of £2,525. If Tom is in an occupational pension scheme, he can pay this from his salary before tax is deducted and get the tax relief that way.

Salary sacrifice

Tom can save on national insurance costs if his employer offers salary sacrifice.
Salary sacrifice is giving up part of your salary – in this case £2,525 – if your employer pays the amount sacrificed in to your pension. This would save Tom another £51 in national insurance. The employer saves too – £348 in this example and generally splits the savings with the employee by topping up a pension. If the total

Discrimination laws may soon stop insurers and annuity providers pricing products on age and gender – but living in a good neighbourhood is likely to cost you money in retirement.

It’s no secret that financial firms base their figures on postcodes.

Home and car insurers have done so for years – but increasingly where you live is having an impact on how much an annuity pays out when you retire.

The irony is the more expensive your home, the less an annuity is likely to pay out because statistically you will live longer.

Research from the Office of National Statistics reveals the best and worse areas for life expectancy.

For women, Kensington and Chelsea tops the list at 89 years, while Glasgow props the table up at 77 years. Men’s life expectancy averages around five year’s less – with 84 at best and 71 at worst.

The problem for many is life expectancy calculations vary between financial providers.

To test the theory, Retirement Solutions compared single life pension annuities with no guarantee for a 65 year old non-smoking man with a pension fund of £150,000 – one for a plush Kensington and Chelsea postcode and the other for a central Glasgow postcode.

The same five companies all returned a quote. Aviva, Prudential and Standard Life were the same or with difference of around £3 for each postcode.

Prudential quoted the lowest rate for Glasgow – £693 a month – while Legal and General was highest at £848. This is a huge difference of £37,200 over 20 years.

Canada Life quoted highest for Kensington (£833 a month) with Prudential least (£696). The difference was £32,880 over 20 years.

Canada Life quoted £812 per month for Glasgow and £833 a monthly return for Kensington – a £21 a month difference that adds up to £5,040 over 20 years.

Legal and General offered £848 a year for Glasgow and £815 for Kensington – a £33 a month difference totalling £7,920 over 20 years.

Legal and General says postcode modelling is not a perfect solution to pricing annuities, but claims statistics prove people in some postcode areas live longer than others.

Aviva reckons annuity customers have a 3-1 chance of receiving a better rate, with 33% picking up less, 33% the same and the rest doing better.

Working out the cost of how much you need to save for a comfortable retirement is not an easy task – and the answers probably a lot more money than you think you will need.

Most people hitting 65 years old now would have started work in the 1960’s – leaving school at 16 in 1962.

Back then, the £1 in the bank stretched a lot further, because your spending power has shrunk by 94% during your working life, according to research by BM Savings.

Around 50 years ago, in 1961, £100 in the bank was equivalent to having £1,796 today – in reverse that means earning £5.57 was the same as earning £100 today.

Down the grocers – because supermarkets were still a way off in the future – a loaf of bread was 6 pence – about one and tuppence in old money – milk was 3 pence a pint and eggs were 25p a dozen.

That added up to around 7 shillings, still leaving you with 13 shillings change out of that pound. Now, you’d need £4.47 to buy the same simple staples in your local superstore.

The big question is how much money will you need just to get by if you are saving to fund your retirement in 10, 20 or even 50 years time?

The question is just as important for anyone about to retire as someone starting out on their working life. After all, around one in four under 16s and an increasing number of adults alive now are likely to celebrate their 100th birthday

In 50 years, bread has gone up 1,892%, milk by 1,367% and those eggs by 1,032%.

Millions will celebrate their 100th birthday

This year, inflation has run as high as 5.5%, if you go with the Retail Price Index. What will happen over the next 50 years is more or less anyone’s guess, but BM Savings reckon our bread, milk and eggs will cost just over £12.00 in 2060.

The fact is that someone who started work at 16 years old in 1962 can expect to see their 100th birthday in 2046, and many more who started work in the 1970s could be alive in the 2050s.

Granted, most will have an index-linked state pension worth £140 in today’s money to fall back on, but that provides more of a safety net than a decent standard of living.

The government wants to make everyone save more for retirement. Leaving £100 in a savings account for the past 50 years would have generated around £2,125 in interest, hardly enough for a decent retirement fund but then the average price of a house was £2,350 and a Manchester United season ticket was £8.50.

No one in the 1960s could have foreseen the economic up and downs of the past 50 years. The pound eroded in value most in the 1970s, with retail price inflation raging at an average 13% a year.

If prices continue to climb at the government’s target of 2% for inflation, over 50 years, spending power could decline by 63%. That’s the same as £100 today being worth £269 in 2060.

£8 a pint will have you crying in your beer

Putting that in perspective, a pension pot of £100,000 buys an annuity returning around £5,740 a year. In 20 years, that £5,740 will give a pensioner spending power of around £2,984 at 2011 values, a decline in value of 48% over 20 years with 2% a year inflation.

Even in the relatively short period of the last decade, a pensioner who retired in 2000 needs £131 in 2011 to buy the same as £100 bought then, and the past decade has been the least financially volatile out of the past 50 years for prices.

The decreasing value of money is reflected most in a basic shopping basket.

The average price for a pint of beer has risen 26 times over the past 50 years from 11p in 1960 to £2.94 in 2010. That pint could cost almost £8 by 2060 if prices rise by 2% each year.

Suren Thiru, economist at BM Savings, said: “There is no doubt that the value of money has fallen dramatically since 1960 because of the substantial rise in the general level of prices. It is likely to be reduced significantly further over the next 50 years even if inflation is kept firmly under control.

“However, today’s typical saver is very different to half a century ago with a much greater proportion of savers now viewing their savings as an investment, whereas 50 years ago peoples’ primary motive for saving was probably a precautionary one. A saver’s nest-egg will still go a long way with careful financial planning.”

TABLE: The changing cost of everyday items, 1960 – 2060

Long Term Care Specialist Joins Retirement Solutions (UK) Ltd

Retirement Solutions (UK) Ltd is thrilled to announce that Ian Atkinson has joined the company to develop its long term care strategy.

Ian is a care fees planning expert with an in depth knowledge of long term care legislation, including financial assessment, the Charge for Residential Accommodation Guide (CRAG) and the deprivation of assets rules.
He has previously spent 4 years working with Age UK (previously known as Age Concern), developing relationships with professional contacts and clients alike. Prior to this, he spent 4 years as the National Account Manager for PPP Healthcare, where he assisted in the development and marketing of long term care products.

Ian is delighted to take his expertise to Retirement Solutions (UK) Ltd, commenting;
“Retirement Solutions (UK) Ltd is amongst the market leaders in retirement finance. Working alongside this knowledgeable team to develop the long term care products is something I’m thoroughly looking forward to.”

David Bell, Director at Retirement Solutions, is equally pleased with the appointment, adding;
“Long term care is an area of real importance for us and something becoming increasingly important to retirees. With Ian’s expertise, we’re confident that our long term care solution will be market leading.”

To find out more, visit http://www.retirementsolutions.co.uk
Contact Details:
David Bell, Director
Retirement Solutions (UK) Ltd
Telephone 0161 485 3401
Email: david.bell@retirementsolutions.co.uk

Malcolm Wicks, the former Labour pension’s minister, has warned that it is an injustice to not take into account the life expectancy of the different social classes and that by raising the state pension age to 66 by 2020 and then to 68 in the future, means many will never see their state pension.

Mr Wicks says that there is a higher portion of those from the lower social classes that die before they reach age 65. Around 19pc of these are men and a staggering 10pc of women from the lower social classes die before the age of 60.

If you have accumulated a pension and are thinking about taking the benefits early then talk to an independent adviser about the options available to you. If an annuity is considered the best option for you then make sure you or your adviser use the ‘open market option’ and shop around to find the best annuity rates.

If you have any lifestyle or health conditions, such as smoking or you are on prescribed medication for certain health conditions then make sure you check with the specialist annuity providers that sell enhanced and impaired life annuities. If your life expectancy is affected you could qualify for higher annuity rates.

If you do not require income from your pension then there are massive tax advantages by not taking any benefits from the pension. It means if you die before taking any pension your whole pension fund can be paid to your estate free of any tax.

Reports suggest that around 60% of retirees could qualify for enhanced annuity rates, but only about 18% actually apply for them, the remainder just cannot be bothered. Enhanced annuity rates can get you as much as 40% more retirement income, surely that should not be ignored?

Just Retirement, one of the  leading enhanced annuities providers say there are more than 5,000 different medical conditions that on their own or in combination qualify for enhanced annuity rates.

Smoker annuity rates

Smokers can usually get around 15% more income by shopping around, there are a number of annuity providers that offer enhanced annuity rates to smokers. Some providers, such as Reliance Mutual, specialise in smoker annuity rates rates, unless you shop around and take independent financial advice you probably would never find out that you can get these enhanced rates as a smoker.

Medical condition combinations

The combinations of medical conditions mentioned previously are where you can get extra annuity rates, for example, if you were considerably higher than average on you body mass index (BMI), or in simple terms height and weight, this combined with smoker might get you further enhancements. So you might get something like 20% enhancement to your retirement income.

Many of the most common qualifying medical conditions are very prevalent in those that reach retirement, these prevalent conditions are common in those over age 65. They are high blood pressure and high cholesterol and again retirees can get enhanced rates for these conditions.

Far too many retirees fail to shop around at retirement, mainly because unlike car insurance and home insurance which you renew each year, annuity purchase is generally only done once in a lifetime. Don’t waste a lifetimes saving without shopping around to get better annuity rates.

Research shows that families from the working classes are more likely to suffer from the later retirement age.  Currently nearly 1 in 5 lower class British men die before they reach the current retirement age of 65.  As the retirement age rises to 66 in 2020 and later to 68, this will further disproportionately affect the poorer members of society as even fewer get to actually draw the pensions they have paid into all their working lives.

19% of men in blue collar jobs die before they reach pensionable age compared to just 7% of middle class, white collar professionals.  Working class women are also more than twice as likely to die before they reach the current pension age of 60, compared to just 4% of their wealthier counterparts.

As well as the less economically fortunate people not living to draw their pension, those that do live into retirement will typically only be pensioned for 14 years compared to an average of 18 years for middle and upper class men.   Women also see a four year gap between the social classes when it comes to how long they will receive their pensions for.

 

Successive Chancellors have chased their tails looking for pension simplification only to add to the mishmash of confused rules that govern the system.

Pension changes come like buses – in groups of two or three after gaps of expectant waiting.

After a flurry of upheavals in the past 12 months, it’s time to take stock of where the nation stands with pensions.

The government has finally halted the madness of pension musical chairs by surrendering early access to retirement savings is a reform too far – so here’s a recap of where we are after the changes of April 6.

Annual pension contribution limit

The amount a saver can put in to a pension fund in any tax year is slashed from £255,000 to £50,000 – the cut is immense but the bonus points are savers pick up tax relief on contributions at the highest rate they pay income tax and can carry forward three year’s of unused contributions.

The Labour government implemented this change mainly as a tax avoidance strategy to stop high earners ploughing their money in to a pension to avoid paying income tax on earnings above £100,000.

Scrapping annuity rules

Retirees no longer have to switch their money in to an annuity at the age of 75 years old to avoid massive tax penalties.

Flexible income drawdown

Drawdown lets anyone over 55 years old access some or all of their pension fund, providing they can prove they have independent means that gives them an income of £20,000 a year or more

Tax cuts on pension funds

Drawdown schemes left to beneficiaries on death pay tax at 55%, but no inheritance tax on drawdown funds.

Flat rate state pension

A standard one-size-suits-all state pension of £140 a week and the scrapping of means-tested pension credits.

Default retirement age scrapped

The default retirement age (DRA) was set at 65 years old – but the restriction is removed so individuals can decide whether to give up or continuing working to whatever age they wish.

Lifetime allowance decreases

The lifetime allowance (LTA) will gradually slip back from £1.8 million to the 2006 level of £1.5 million.

The aim of these changes is to shift the responsibility of saving for retirement to the individual during their working life – and in return relaxes the rules on accessing the money in a pension fund.

The other buzz word of the moment is lifetime savings. The government wants everyone to start saving more money earlier to finance their retirement.

The likelihood is some linked pension and savings hybrid will emerge that will lock pension funds until the age of 55 while still allowing access to other savings along the way – like having a supercharged ISA running alongside a pension.

What’s next for pensions?

The next key date is October 2012, when the National Employment Savings Trust or NEST workplace pension is launched.

The plan is to simplify retirement saving for around 7 million workers by making employers automatically enrolment everyone on their payroll in to a company pension or a NEST scheme. Companies will have to contribute at least 3% of eligible earnings in to the fund while employees will pay in 4%. To incentivise saving, the government will top up the fund with another 1% of tax relief, making a total contribution of 8% of eligible earnings.

Paying in to a NEST is phased in between October 2012 and 2017, depending on the size of the employer’s workforce. Some employees can opt out of NEST under certain circumstances.

A statement from Mark Hoban, financial secretary to the Treasury, seems to have drawn a line in the sand over further pension reform for the government.

In announcing early access proposals would be put on the back-burner he clearly said that further radical pension reform would have to wait until the results of NEST performance were assessed, so this pushed anything other than running repairs to the system back for up to five years.

Other options to finance retirement

The age-old problem that besets older people is they are “asset rich and cash poor”.
The value of the assets accumulated during someone’s lifetime can add up to a sizeable sum of money – especially with roaring house price inflation stoking the fire.

The standard retirement plan was to buy a house, pay off the mortgage before retirement and then give up work with a pension to fund a modest lifestyle.

Now, equity release is the alternative solution as that strategy fails, retirement goalposts move and inflation increases house prices but is also a double-edged sword that also blunts interest on savings.

Equity release, sometimes called a lifetime mortgage, is a way of extracting some of the cash locked in to a home for spending. Generally the schemes work by giving the homeowner a loan with any interest and capital repayments rolled until they die or enter long-term care.

Then, a final reckoning repays the loan and any excess is paid in to the homeowner’s estate or invested to pay for care.

What’s the best way to save for retirement?

Choosing from the huge range of saving and investment options on the market comes down to a simple strategy:

• Benchmark current savings, investments and other assets to make an educated guess about the likely income available for retirement
• Look at personal retirement goals, like what age to give up work, where to live and ongoing expenses, like food, utilities, transport, entertainment and holidays etc
• Take professional, regulated advice from an independent consultant who can demonstrate experience in retirement planning.
• Ignore products and look at goals and how to reach them – then align goals with products that match those targets.

Review savings performance regularly – no less than every two years to make sure products and strategies are in tune with any changes in pension rules

Homeowners opting for an Aviva equity release scheme to ease their financial worries in retirement can benefit from easier terms with revamped packages from market leader provider.

The financial firm has introduced three major changes to lifetime mortgages following feedback from customers:

• Guaranteed inheritance

A guaranteed percentage of a property value will be passed to family, loved ones or an estate on death or going in to long term care

• Flexible upfront loan terms

The firm’s 75% cap on initial borrowing is removed and replaced with a flexible option to take any cash lump sum between £10,000 and 100% of the available amount. If less than 100% of the available amount is drawn down, the rest is kept in a reserve until needed.

• No draw down or redemption fees

All administration fees for drawing down from the fund reserve and redemption fees are scrapped.

Clive Bolton, ‘at retirement’ director at Aviva, said: “We understand that many people are facing financial challenges in retirement. Equity release is an increasingly important option for people approaching retirement to consider, because it allows them to unlock some of the cash from their home, which is often their largest asset.

“At Aviva equity release we offer a comprehensive range of retirement solutions, and over the last few years we’ve seen increasing demand as more customers enjoy the benefits of equity release.

“We’ve researched what customers want from our lifetime mortgage plans, and the improvements we’ve introduced will help meet their needs.”

The new products come at a time when interest in equity release is soaring as more retirees find they are struggling with finances but have valuable assets in their homes.

Ros Altmann, Saga Director General considers equity release is the natural place to look to help with a pension shortfall.

“It’s no surprise that people are increasingly relying on their house to help fund their retirement. Downsizing and releasing equity from homes is a trend that we predict is likely to continue for many years to come,” she said.