Monthly Archives: August 2011

A report from the investment company Baring Asset Management, has warned that millions of the UK’s workers will be forced to ‘work ‘til they drop’ due to not having a big enough retirement fund.

A staggering one in ten workers admitted that they think they will have to work indefinitely because they have failed to save enough money to retire comfortably.

When they were questioned for the research, a further 11% said that they expected to still be working between the ages of 66 and 70 – a number that has doubled in just a year.

Official figures published by the Department for Work and Pensions also highlights that an estimated seven million people are not saving enough to give them a pension that they can live on.

The report shows that many workers will have to continue working for years and in some cases, up to a decade, after the age that their parents and grandparents were able to retire.

Chief Investment Officer, Marino Valensise of Barings, said simply, that people were ‘not saving enough’ and added: “With increased longevity and people not saving enough, the working population of those aged 65 and over will inevitably continue to increase.”

The future looks bleak for UK pensioners as the figures from the Department for Work and Pensions shows that a mere 15% of workers aged between 16 and 24 currently pay into a company pension.

Even in the 45 to 54 age group, just 58% of employees are contributing towards a company pension scheme.

Pensions Minister, Steve Webb warned starkly: “Young people face a very different retirement from their parents and grandparents.

“Only one in three people working in the private sector is contributing to a workplace pension. We are saving less and could face a poorer retirement as a result.”

Another report published recently highlights the impact that high inflation and low income rates will have on those who retire this year.

The Prudential’s report shows that a typical pension income of £16,600 will only be worth £6720 a year by the year 2031 – a drop of 60%.

The pension company says this is mainly due to pensioners not choosing to inflation-proof their pensions, with 80% of pensioners opting for a ‘level annuity’ meaning they receive the same monthly pension income throughout their entire retirement.

New research conducted by the Institute of Public Policy Research has found that approximately 100,000 people over the age of 50 will be forced to take early retirement, due to not being able to find employment.

Recent figures show that nearly 25% of people who have been without work for more than two years are in the over 50 age bracket.

Those who lost their jobs at the beginning of the recession and are still unemployed, will have to consider the fact that they may never find employment again and be forced to start drawing their pensions.  Obviously, starting their pensions at a much younger age than intended would mean that their pension fund was considerably lower than they had wished for and many people will face a poverty-stricken retirement.

Past reports have found that unemployed people over 50 are ten times more likely to still be out of work after two years.  More worrying is the statistic that for an older man, each year out of the workplace that shows it becomes 24.3% less likely to find work again.

The IPPR’s Chief Economist, Tony Dolphin, said: “Almost a quarter of those who have been unemployed for more than two years are over 50. The risk is that older people who have been out of work for this long stand little chance of ever working again. This means many will be forced into early retirement, which will mean a lower standard of living during their old age.”

Mr Dolphin worries that those who find themselves unemployed for long periods of time could well find themselves “shut out of the jobs market”, as they lose necessary work skills as well self-confidence when it comes to interviews.

The coalition is planning to introduce a welfare-to-work scheme to tackle the issue of long-term unemployment. The Employment Minister, Chris Grayling, said that ministers “have a plan for growth which will encourage businesses to expand and take on more workers.”

Over expectation and under saving are the two financial factors that are set to blight retirement for millions.

The problem is straightforward – most people expect a comfortable retirement with enough money to continue to finance the lifestyle they have from working, but they are not saving enough to pay for their dreams.

The latest influential economist to voice these concerns is Bank of England rate setter Martin Weale, who sits on the bank’s monetary policy committee.

He argues that the UK has a record of spending too much rather than saving, and despite the likelihood of living longer and increasing affluence over the past two decades, few have taken heed to save enough for the later years.

“Britain’s consumption needs are expected to rise in the future and, in the nearer term, saving is needed to make this possible,” he said. Weale is concerned that increasing consumption without an equal rise in savings will lead to an economic imbalance.

“This will create pressures to transfer resources from young people to old people reducing the consumption of the former to support the latter. So either young people or old people will find that they cannot consume as much as they might hope,” he said.

“Restoring the savings relationship of the pre-crisis years would reduce the required fall in consumption by over three percentage points, but such a cyclical improvement would come about only if income were to rise faster than consumption; it is unlikely that this could be generated by a purely consumer-led revival.”

Weale also explained a quick, sharp rise in the age the state pension starts will only lead to financial difficulties for many who will not have enough money.

“Since no-one expects working lives to rise to this extent in the short term it follows that a bigger increase will be needed in the long term. We probably need to save more as well,” he said.

Many over 50s will be dreaming of retiring to a place in the sun when they finally give up work – but better weather and a more relaxed lifestyle can still come with hidden financial problems.

Spain is the favourite destination for UK ex pats, followed by Australia and the USA, according to recent research by financial provider Standard Life.

On the back of this report, several equity release providers are suggesting a financial strategy of equity release in the UK to give the cash to buy a retirement home overseas.

The financial ‘solution’ must involve keeping the UK property as a main home, otherwise this breaches the conditions of many equity release lenders that specify the borrowers must repay the loan on moving from the property.

The problem then becomes tax – an ex pat keeping a UK home remains tax resident in the UK regardless of how long they live outside the country.

Any payments from a pension, annuity or other investments to that ex pat are subject to UK tax as if they still lived in Britain.

Switching to an offshore pension is not an option, because a retirement saver wanting to invest overseas is unlikely to make any tax gain.

Then come problems with the state pension. The payment rules are anyone receiving state pension who lives in a European Union country or one with a reciprocal pension agreement has their pension index-linked.

Australia and the USA do not have reciprocal agreements with the UK, so the state pension is not index-linked, meaning payments are frozen at the level paid on day one. Inflation and currency exchange fluctuations can erode this fixed payment quickly.

The solution for retirement savers looking to become ex pats is to seek expert, independent financial advice before leaving the UK.

Other financial factors also need consideration, like life cover, healthcare and opening foreign currency bank accounts.

“Many people think living abroad is cheaper than living in the UK, but this isn’t always the case. Retirement income will be subject to exchange rates, as well as other factors such as local tax laws and currency fluctuations that could eat into cash piles,” said John Lawson, head of pensions policy at Standard Life.

That place in the sun may beckon with a warm welcome in retirement, but you must look at your finances before you go.

Workers in the UK who earn the average salary of £26,000 per year will be £6,000 short a year for a comfortable retirement.

Pensions company, Hargreaves Lansdown, have released figures that show just how financially unprepared for retirement many Britons are.

Even pension reforms bought in by the coalition will not be enough to force most Brits to save more towards their retirement.

Auto-enrolment for company pensions and the £140 a week state pension will not solve the issues of under-saving, and more Brits will find themselves having to fund their own retirement or work until much later in life.

A 35 year old taking home the average salary of £26,000 per year who relies on the state pension and auto-enrolment, will have a pension income of £11,000.  The Government’s Pensions Commission worked out in 2005 that people should be looking to get £17,000 a year for a reasonably comfortable retirement.

Tom McPhail, Head of Pensions at Hargreaves Landsown, worries that many people will face a ‘catastrophic’ income crash once they retire if they don’t have other savings as well.

He goes on to say that people must understand that there will be a looming pensions gap in the UK and that it will be down to the individual to bridge the gap.

“There is no one policy measure that can fix this crisis on its own but a number of major initiatives, including state pension overhaul and auto-enrolment, which will take us a long way towards it,” he says.

“By no means is it mission accomplished, though. The changes over the next few years will only create the environment where it is possible for everyone to save for retirement – that doesn’t exist at the moment.”

The government are introducing a scheme where each employee in the UK will be automatically enrolled into a company pension scheme.  The new system is due to roll out in 2012 starting with large corporations, by 2016 even the smallest of firms will have to offer its employees a pension scheme.

Alongside this, a new flat rate state pension of £140 will be introduced in a major overhaul of the current complicated pension system.

However, middle-earning Brits are finding themselves in a pension gap quandary.

The Pension Commission had said that an employee earning £26,000 a year should be looking for a pension that is 67% of their annual income.

If they contribute the minimum, flat rate amount of 8% to their auto-enrolment pension fund they would only achieve 44% of their annual income in their pension.

A 35 year old who earns £50,000 a year and relies on both the state pension and their auto-enrolment scheme will find their target even harder to achieve.  Their pension would be £13,643 a year, a shortfall of £11,357 and just 27% of their annual salary.

To ensure that this shortfall doesn’t happen, the person earning £26,000 would need to save another £220 a month, the person earning £50,000 would need to save an extra £405 a month.

Financial experts agree that the money doesn’t need to be saved in a pension scheme.  An independent financial adviser at Evolve, Jason Witcombe, said: “You don’t need to take a one-dimensional approach,”

“It doesn’t have to be a pension. If the tax relief works for you then of course it’s a good option. But paying down a mortgage is just as valid, as is Isa investing.”

As research from the Standard Life pension provider reveals that Spain is the number one choice for pensioners who decide to move abroad to retire, John Lawson, the head of pensions policy for Standard Life, warns people who are thinking about retiring overseas to plan carefully and seek out good financial advice.

It is estimated that over 1 million British passport holders have chosen to retire overseas.

Standard Life research has revealed that Spain is the top choice for people who are thinking about retiring overseas, followed by Australia, America, France and Ireland.

A recent survey by Aon has indicated that 57% of 7,500 respondents do not consider the UK as their preferred location to spend their retirement years. Some experts suggest that falling standards of living in the UK and the prospect of better weather will see many more Brits choosing to emigrate for their retirement.

Mr Lawson indicated that retiring overseas is a dream for many people, believing that the cost of living is much cheaper overseas. However, he warned that this is not always true and people should take steps to ensure that they thoroughly plan their finances before moving.

People retiring and moving from the UK need to be aware of how their state pension is affected – this can vary from country to country. If you qualify for a British state pension and choose to retire abroad, you can still claim it, but you need to make arrangements with your local authority.

However, it is important to note that if you decide to emigrate to a country outside of the European Economic Area (EEA) your state pension may not be eligible for a yearly increase.

Other than countries within the EEA, there are 16 more countries such as America, Turkey and Jamaica where expats do receive the annual uprating to their pension.

Retiring to many other countries including Australia and Canada, both part of the British Commonwealth, do not allow for increases to the state pension. In these cases, your pension is set at the weekly rate you had when you first moved to the country.

People who are considering emigrating need to investigate local tax laws in the country they are moving to. Exchange rates and currency fluctuations can also have an impact on your retirement income.

Risks associated with exchange rates and costs can be addressed by considering moving your pension fund into a Qualifying Recognised Overseas Pension Scheme (QROPS). These approved overseas pension funds have the benefit of investing into your new countries currency, remove your fund from UK regulations and can possibly come under better tax arrangements. However, some guarantees may be lost and the transfer may incur further costs.

Oliver Rowlands, from Aon Consulting, has echoed the financial concerns raised by Mr Lawson, adding that healthcare benefits also vary for expats. He said: “Cheap air travel and the communication tools available over the internet means that retiring overseas doesn’t necessarily mean being completely absent from your family’s life, making the prospect of emigration to other countries on an previously unseen scale a real possibility

One of the big decisions in retirement is about leaving an inheritance to children and loved ones.

Skiing – spending the kids’ inheritance – is popular with many and unavoidable for some who do not have adequate pension provision.

Nevertheless, for many, discussing death and inheritance is taboo – as if talking about it somehow makes the prospect more real instead of something that happens to other people.

For many, considering inheritances is often the first time any real consideration has been given to net worth – the value of an estate after all the bills are paid.

According to research by pensions and insurance giant Aviva, inheritance is something two-thirds of us would prefer not to mention, yet 40% of us are expecting to inherit when family pass on.

The stark truth is some young adults are relying on an inheritance to help them buy a home of their own and to release themselves from the shackles of debt.

Those approaching retirement are probably the wealthiest generation ever, thanks mostly to house price inflation and generous workplace pensions.

These baby-boomers will retire in to a lifestyle of comparative affluence based on the ability to buy property as the number of home owners steadily increased from the 1960s to reach a peak just a few years ago.

The good news is despite this expectation to have money passed on to them, the younger generation has given a green light to their parents and grandparents to spend their inheritances – mainly with equity release from their homes.

For many in retirement their home is their most valuable asset. Skewing UK house prices by age of owners reveals the current average value of a home for someone aged over 55 is £231,300, compared with £160,500 for all age groups.

In reality, a lot of these inheritances may not be what they seem because of the debt some people are taking in to retirement.

Aviva reckons inflation has triggered a debt trap for the generation aged over 55 years old. They each have an average unsecured debt of £17,112, including debt on credit cards (30%), personal loans (14%), overdrafts (10%) and store cards (7%).

Clive Bolton, ‘at retirement’ director at Aviva, said: “Despite the British taboo of discussing inheritance, it seems that three-quarters of Britons are happy for their parents to use the cash in their property to enjoy a better lifestyle in retirement. Retirees should be encouraged to talk openly with their families about their plans and dreams for the future. “Not everyone has the funds in place to support the retirement they once thought possible and we encourage those approaching retirement to look at their full range of assets, including pensions, investments and property.

“Equity release could be a solution for some, as it allows people to turn the potentially dormant capital in their homes into cash without having to move, thereby helping them make the most of their retirement years.”

Not everyone has to wait until the death of a relative or loved one to inherit. The parlous state of the finances of many young adults means as many as one in five have had significant cash gifts of up to£50,000 – and in some cases up to £100,000.

The money goes towards bailing out finances – deposits for houses, paying off debt and helping with bills and living costs during times children do not have a job – according to recent research by Skipton Financial Services, part of the building society.

The opposite conclusions of both sets of research seems to show that parents and grandparents are more reticent about discussing inheritances, but children are not afraid to ask if they need the money.

The Skipton research showed that on average, children were 28 years old and received £34,000 in cash. The findings also confirmed almost two-thirds of under 35s wanted their inheritance before they are 40 – but only 28% had discussed their need with their parents.

For many thinking about passing on an inheritance, one of the more shocking revelations is half of over 50s expect to have to live off the money and assets they had previously earmarked to pass on, while one in five do not intend to pass any cash on and one in three confess paying cash to their children will strain their finances during retirement.

“Whereas in the past they would have been happy and grateful to wait for any inheritance that could come their way, a growing number are expecting and relying upon their inheritance earlier and earlier, with more than half wanting their inheritance by the age of 40,” said Andrew Barker, managing director of Skipton Financial Services.
“It is particularly scary that, whilst almost two-thirds of youngsters are expecting to receive an inheritance, for the vast majority of these it is purely an assumption as only one in four have has a conversation with their parents about the inheritance.”
So where does the money go that is not left as an inheritance?

Of course, there are the skiers having a fun time, while others are eking out their cash to fund their retirement.

But the real truth is many parents think more of their pets than they do their families – and they show this by leaving £26 billion in inheritances to pets.

Another survey, by insurer More Than, revealed 40% leave more money to their pets than their families and more than half keep this cash gift a secret – and one in five will even leave the family home to a pet.

The message to families is lift that velvet curtain hiding the taboo of inheritance and death – because if you don’t, you might just find all the money you were expecting has gone to the dogs – literally.

A leading equity release lender has opened the door for home owners who have had borrowing applications rejected because their properties were considered unsuitable security.

A review of underwriting terms by LV= lets more properties in to the lending net for lifetime mortgages.

The firm explains that homes previously declined are now considered as adequate security for equity release – including sheltered accommodation and unique or unusual properties in an exceptional condition or desirable location.

The updated policy follows feedback from customers and advisers who were confused about the types of properties LV= would consider for equity release.

Vanessa Owen, LV= head of equity release, said: “We’ve really listened to customers and advisers ahead of making these policy changes. These new more flexible terms give us the ability to look at each case individually without potential equity release properties being automatically declined on our system.”
The new underwriting rules apply with immediate effect to LV=”s lifetime mortgage range, including -

• Flexible lifetime mortgages for a lump sum withdrawal of £10,000 or more followed by further lump sums of £2,000 or more
• Lump sum lifetime mortgage for a single withdrawal of £10,000 or more

Both mortgages are open to homeowners aged between 60 and 95 years old, and offer a negative equity guarantee.

A recent survey if IFAs by LV= found 98% predict big growth in equity release, while 48% of advisers consider that growing popularity in the product will be due to a shortfall in pension provision.

Owen said: “It is encouraging to see the majority of IFAs believe that equity release has a strong role to play in helping to solve problems such as the funding of long-term care and a lack of pensions provision in retirement.

“For many people their home is their greatest asset so it is understandable that more people will want, or need, to access the equity in their home.”

The change in policy follows on the decision of The Halifax to withdraw a home-linked retirement plan only available through brokers.

Nearly 40% of UK households saw their monthly finances drop between this July and August.

A study conducted by the financial information company, Markit, detailed how family finances deteriorated at their quickest rate since February 2009, which was in the middle of the last recession.   

1500 adults were questioned and many said that their savings and/or income had fallen, and that their debts had risen over the last month.

Only 6% of UK households said that their financial situation had improved over the last month.

Using the Household Finances Index (HFI), which tracks household spending, savings and debt management, Markit reported that family finances had fallen for three consecutive months to its lowest level since the HFI was compiled in early 2009. The HFI fell from 34.4 points in July to 33.2 in August.

Savings fell the sharpest amount for nearly 2 and a half years and the cash that households had available to spend fell by most since the survey began.

Take-home pay dropped the most for the past nine months, and was reduced even more by the continuing rising prices of household essentials such as food and energy.

The falls were across all the UK regions and spanned all age and income groups.

Across the country the northern regions fared the worst with the biggest drops, while the south-east of England saw the slowest rate of deterioration.

Senior economist at Markit, Tim Moore, commented that the depressing report reflected the current global economy saying: “Recent events have made a week seem a long time in economics and August’s survey is the first sign that the slew of downbeat headlines has knocked consumer sentiment.”

He went on to say that people’s purchasing power was likely to continue to be squeezed in the short term with the Bank of England predicting inflation will reach 5% before the year is out, mainly due to rises in utility and fuel prices.

Other surveys compiled by accountants ICAEW/Grant Thornton and the British Retail Consortium (BRC) also report a dismal financial future.

A UK Business Confidence Monitor by ICAEW/Grant Thornton revealed that confidence in business had dropped to its lowest level since the middle of 2009 when the UK was still in recession.

A 1% decline in quarterly shopping footfall survey by the BRC, showed that fewer people were visiting the high street than a year ago.

Director General for the BRC, Stephen Robertson said: “Fewer people are shopping because households are facing high inflation, low wage growth and uncertainty about future job prospects.”

Forget all the headlines about pension black holes or impending financial doom and gloom to concentrate instead on how to take out your retirement savings through your later years.

The argument is not about have you enough money to finance your dreams but a formula that helps make that money last for up to 30 years.

With longer life expectancy, many over 50s can expect to live in to their 80s – and beyond for women.

How much you need to fund those years depends on personal circumstances and expectations.

Anyone who wants to spend their retirement on a perpetual world cruise obviously needs a larger retirement pot than someone with more modest aspirations.

The trick is balancing that expectation with hard cash – sending yourself a monthly reality cheque, if you like.

To work out the amount to write the cheque for, take your retirement pot and pay yourself 4% of the total every year.

So, an average pension fund on retirement of around £30,000 would pay £1,200 a year over 30 years or so.

That’s just £100 a month or the princely sum of £23 a week.

With inflation running at the Bank of England’s target figure of 2%, the figure is adjusted to take account of the rising cost of living – by £24 a year giving an extra 46p a week.

With the proposed flat rate pension of £140 per week, that adds up to the average retiree picking up £163.46 per week or £8,499.92 a year. For those that work in months, that is £708.25 per calendar month.

Now, an over 55 can measure that expectation gap of what they want to do in retirement against what they can afford to do.

Recent research by pension provider Axa Wealth reckoned basic living costs in retirement come to £16,000 a year – without taking long term care costs in to account. These figures mean most pensioners start playing catch-up with a shortfall of £7,500 a year.

That promise of catching up on all those things you wanted to do but couldn’t while working looks more like a cruel joke for the over 55s approaching retirement.

Accelerating the pension withdrawal to meet those expectations depletes the fund quicker, so if your hopes are greater than those your pension can fund, you have few options -

• Save more before retirement
• Work longer
• Consider equity release to boost savings
• Reduce your expectations

Making the most of your money by sensible investment and savings advice from an experienced independent pensions adviser is one way to make retirement more comfortable.