Monthly Archives: September 2011

Calls for the government to reverse controversial changes to pension drawdown rules have been rejected.

Financial secretary to the Treasury Mark Hoban has declined a u-turn saying the new limits are to protect retirement savers.

He was responding to a plea from pension provider AJ Bell to reinstate the annual cash lump sum drawdown limit to 120 per cent of an equivalent annuity rate rather than staying with the current 100 per cent reduced rate.

The limits were changed in April by a Government Actuary Department review.

Hoban has snubbed AJ Bell by refusing to rethink the move and claimed another pension reform – scrapping the need for pension savers to annuitise by 75 years old – only works with the lower limit.

“The change in the drawdown withdrawal rate to a single rate of 100% of the Government Actuary’s Department rate at any age was integral to ensuring this product was suitable for use over a much longer period,” said Hoban.

Hoban went on to explain that although the rate change is affecting pension incomes, he felt market volatility, low interest rates and high inflation are also combining to lessen pension income.

“In reforming pensions we have to balance freedom, fairness and responsibility,” said Hoban.

Andy Bell, head of AJ Bell, said: “From reading the response to my letter you can understand why the government would have an aversion to changing rules that were adopted as recently as April 2011. However, it demonstrates that they are failing to appreciate the strength and depth of feeling on this matter.
“We will continue to work on building the case for change and will look to evidence the depth of feeling that exists on this subject. We have two surveys running concurrently with clients and advisers and will announce the results in the coming weeks.”

UK families are experiencing the biggest test on their family budgets since the 1920s, according to the supermarket giants, Asda. They have reported the largest drop in monthly disposable income in their monthly Income Tracker since they began keeping their records.

The disposable cash available to the average family dropped £14 in August, leaving them with £162 a week, a fall of 7.9% from the same time last year.    

The retailers also conducted another survey which revealed that customers were being squeezed by rising costs from all angles.  However, two out of five questioned said that a halt in fuel bills would most aid them in the current financial situation.

With inflation rising to 4.5% in August and most of the major energy providers increasing their costs most families are facing pressure on their household budgets.

Asda predict that the pressure is likely to continue as the labour market takes a turn for the worse when public sector cuts come into effect.

In addition to energy prices increasing, transport costs are continuing to rise.  Figures released from the AA show that the price of unleaded petrol rose by 16.5% in the past year and diesel prices went up by 17.4%.

Asda’s monthly disposable income tracker is calculated as the amount of money left over once a family has paid their taxes, basic monthly costs such as mortgages, utility bills, food & drink and transport costs.  The tracker provides an indicator of monthly spending power for the average British household.

Asda’s chief executive, Andy Clarke, said: “It’s clear from this record drop in disposable income that British families have never had it so tough. Our customers are feeling the pinch – they’re clear they want more help to help make ends meet.”

Managing Economist for the Centre for Economics and Business Research (CEBR), said: “Rising unemployment has added further pressure to household finances in recent months, compounding the squeeze on spending power caused by high inflation and weak earnings growth.

“The Asda Income Tracker shows that family spending power has fallen sharply compared with a year ago. With the UK economy in a particularly precarious state at the moment, things could get worse before they get better. However, inflation should fall back in 2012 and the Bank of England is unlikely to raise interest rates anytime soon given the weakness in the UK economy.”

A Local Government Group has suggested a new plan that could save the coalition £900 million a year from public sector pensions.

The group have written to Eric Pickles, the Communities Secretary, with their proposals and he is said to be carefully considering the plan.  

The plan simply suggests that public sector workers could either pay the increased rates, as suggested by the Government, in two years times to keep their benefits or they could continue to pay the same rate as they do now but take a smaller pension once they retire.

The public sector trade unions however, have already decided against the suggestions and have said that they will still go ahead with ballots for industrial action over pensions on the 30^th November.

This latest proposal could affect up to two million public sector employees and could save the Government £900 million a year by 2014-15.  The plan would also mean that fewer workers would be likely to opt out of their pension schemes.

The letter to Eric Pickles says that its suggestion “delivers the required level of savings, other than wholly through an increase in employee contributions, minimises the impact on the lower-paid and offers choice to individuals.”

Along with the choice of contribution rate to pay, the plan also suggests that the pension age be increased from 65 to 66 from April 2014.  This would save £300 million a year, the local government group claim.  The other £600 million would be raised by the scheduled increase in contribution rates with the lower-paid still being protected.

The new plan would ensure that no public sector worker would have to pay an increased contribution rate for at least two years, and that they would have the option of whether they wanted to reduce their pension benefits rather than pay a higher rate.

The Department for Communities and Local Government is said to be making its decision as to whether to adopt these suggestions, or forge ahead with its own plans for private sector pensions at the end of September.

A spokesperson for the department said: “This is a genuine consultation to which we are committed in order to try and agree a way forward with the unions and employers,”

“Public service pensions will still be among the very best, with a guaranteed pension, but we must ensure that they remain affordable in the future and deliver better value for the taxpayer.”

Unions have dismissed the suggestions, with the GMB stating that the plans had “significant problems” and Unison saying that it could not “sign up to these plans, which are proposed to raise nothing more than a £900m ‘tax’ on local government pension scheme members for the government in the short term”.

The General Secretary for the TUC, Brendan Barbar, said in a BBC interview that as yet there had been no “dramatic change” and that the unions and the Government were still “a long way apart” on the matter of public sector pensions.

Rising divorce rates for the over 50s are impacting on retirement savings and pensions.

Over 50,000 over 50s were divorced last year – a rise of 10 per cent on 1999 – with the result that more new singles are taking responsibility for their personal finances.

Many are setting up a home, opening bank and savings accounts and considering their financial futures for the first time, says the study by Tesco Bank.

Women are likely to have more financial difficulties following a marital breakdown as only a quarter (26 per cent) were responsible for big financial decisions while married.
One in four admit they never considered saving, a third had never applied for a mortgage and 10 per cent have never had any financial products or accounts in their name.

The findings are part of the bank’s continuing look at family finances.

Tesco Bank’s George Gordon said: “We commissioned the ‘Family Matters’ series of research to get a better understanding of some of the financial pressures faced by our customers.

“The second report in our series sheds light on a growing trend of later life separation and the financial pressures this can create for the over-50s; particularly those who have had limited financial independence in the past.”
Taking control over finances is empowering for many new singles, especially women, according to the study.
Around two thirds (63%) of women divorcing in their 50s said dealing with their finances eased them through painful process, but only around one in three (36%) of men agreed.

Many women (64%) commented divorce gave them a sense of financial freedom, compared with half of men.
Sue Hayward, who writes about money, consumer and family finance issues said: “There’s usually one partner who holds the purse strings in a relationship and it can be daunting if you’re left financially single when you separate. The trick is to sort your finances in bite-sized chunks; tackling one area at a time and make use of all the help that’s available.”

The live now, pay later attitude to money has resulted in thousands of over 55s living an impoverished lifestyle in their retirement.

Incomes are stagnating as savings are failing to generate worthwhile returns and the rising cost of living diminishes spending power.

The latest study by life and pensions provider Aviva lifts the curtain on just how bad finances are for many over 55 years old.

Typical monthly income for the over 55s has dropped to £1,216 a month in September, compared with £1,294 a month in June. This is the lowest average monthly income fore the retired since Aviva started monitoring their finances in February 2010, when the figure was £1,250 a month.

Breaking the statistics in to age groups, the figures show that the older you are, the lower your monthly income is likely to be.

For over 75s it’s £999, while 65 – 74 year olds can expect £1,314 and those aged 55 – 64 collect £1,230.

Shockingly, almost a quarter (23 per cent) of over 55s survive on an income of less than £750 a month.

Rising prices is also affecting savings – more over 55s are digging in to their cash reserves to pay monthly bills while low interest rates are failing to generate large enough returns to cancel out the withdrawals.

Average savings are £10,648 – 12 per cent lower than in June, when the over 55s typically had £11,907 in the bank.

Attitudes to savings do not reflect action – while three out of four over 55s are concerned about rising prices, one in four have less than £500 in savings.

Those still in work coming up to retirement not only have the lowest savings – but almost half (46 per cent) are saving nothing.

Because they are not saving, many over 55s rely on borrowing to fund holidays and unexpected bills.

Borrowing is up – average debts climbed from £17,112 in May to £20,000 this month.

In fact, 35 per cent have a credit card; 18 per cent a personal loan; 12 per cent buy on HP and 17 per cent have an overdraft to cover spending.

Few over 55s (4 per cent) are confident that their standard of living will improve in the short term, while one in three believe things will get worse.

Clive Bolton, ‘at retirement’ director at Aviva said: “The over-55s have seen their finances deteriorate over the last quarter as people struggle to keep up with the rising cost of living on a relatively fixed income.

“That almost a quarter of this age group have less than £500 in savings and 40 per cent save nothing each month is a clear indication that this age group is struggling financially.

“While there is a limited amount that the long-term retired can do to improve their finances, these figures highlight the importance of a lifetime approach to retirement planning. Taking out a private pension, building up a respectable savings pot and paying down debt are all simple steps that people can take to ensure they don’t face these problems in retirement.”

The Aviva study also looked at how much the over 55s believe they should contribute to long term care costs.

Seven out of 10 answered they should not be expected to pay although 81 per cent are concerned about how they will meet the cost.

Just 2 per cent have taken out long term care insurance.

Confusingly, the general opinion was no one wants to pay for care, but it’s clear the government cannot afford to pick up the tab.

Although opinions varied about who should pay and how much they should contribute, more than half (53 per cent) felt the final bill should have a cap for everyone.

Unsurprisingly, more than half (53 per cent) of over 55s have made no provision for long term care, while and 14 per cent expect the government to come to their rescue by paying the fees.

Those that have considered care costs hope to meet the bills out of savings and investments (13 per cent), equity in their homes (9 per cent), pensions (3 per cent) and cash help from their family (3 per cent).

Almost two-thirds (62 per cent) believe they should not have to sell their homes to pay for care.

Our research clearly shows that the majority of over-55s do not believe that they should have to pay for care in retirement. However with a rapidly ageing population, this is simply not possible and over-55s realise that they are likely to have to make some sort of contribution to the overall cost of their care,” said Bolton.

“What form this contribution will take is not clear but with just 2 per cent of over-55s claiming to have long-term care insurance, the likelihood is that they will need to look to other assets such as savings, investments or housing equity.

“Many people are looking to the State for guidance on care funding, standards and entitlement so now is the time for the Government to take advantage of the opportunities presented by the Dilnot Commission and take steps to build a sustainable system.”

Paying for long term care costs casts a shadow over retirement for many.

Just one in five are relaxed about how they might fund their care in later years, while the rest are concerned about their prospects.

Although almost everyone had a different opinion about how to pay for long term care, around half agreed they did not know enough about the topic – or even how much the likely costs might be.
To help, they would like clearer information from the government.

A recent survey compiled by insurance giants Aviva, shows that most over-55s are ‘terrified’ of having to pay for long-term care in their old age, and many believe that the government should foot the bill instead.

70% of over-55s questioned said that they didn’t think they should have to pay for long term care in retirement.

As things stand, the state will not contribute towards long term care costs for people who have assets (including property) worth more than £23,250.  This is forcing many ill and frail pensioners to sell their homes in order to pay nursing home fees and other long term care costs, leaving little or no inheritance for their families.

The recent Dilnot report suggests that this threshold should be raised to £100,000 and that a cap of £35,000 be put on care fees that any individual should pay.

However, according to the Aviva’s Real Retirement survey, those who did think that they should make a contribution towards their long term care, only wanted to pay £3,600 for a lifetime of care.  The cost of long term care is an average of £35,000 per year.

Whilst those surveyed admitted that they didn’t want to pay for any care they might need in retirement, most realised that the state would be unlikely to be able to afford to pick up the bill.

51% said that those ‘better off’ should be made to contribute more and others said that any contribution made should be based upon a person’s income throughout their lifetime.   Over half said that there should be a cap on the fees to be paid.

The cost of long term care in old age is a significant worry, Aviva found that 12% of the over-55s are ‘terrified’ of the costs that could be accrued.   A mere 2% of those questioned said that they had firm plans in place to take care of such costs should they arise.

A motion was passed by the Liberal Democrats at their annual party conference earlier this week to put pressure on the government to implement the Dilnot recommendations as soon as possible.

Age UK will be hosting events alongside the Care and Support Alliance at the Conservative party conference early next month.  They will be discussing how to push through the Dilnot reports suggestions.

Grey gappers taking long breaks overseas are travelling in style to make sure they do not miss out on their home comforts.

More over 55s are taking time off to travel – but cut the their time away so they can pay more for luxuries.
The travel market is switching from young adults travelling for a gap year while at university to ‘grey gappers’ spending some of their retirement going around the world.

This year, only 19 per cent of students are considering a break because they cannot afford the trip because of rising living costs and increasing university fees.

In contrast, one in four over 55s (25 per cent) are heading abroad for a break.
On average, they will spend £4,136 on their 15 week trip at a rate of £53 a day. The under 35s spend around five months on their travels, but spend an average £3,100 at 330 a day.

Over 55s head for Australia (36 per cent), New Zealand (27 per cent). The USA, Singapore and Spain make up the rest of the top 5 destinations. More exotic locations also have a lure – with eight per cent going to India, nine per cent to Vietnam and 10 per cent to Hong Kong.

Sarah Munro, of the Post Office, which compiled the figures, said: “Age shouldn’t be a barrier when it comes to experiencing different cultures and spreading your wings.

“While holidays are a fantastic way to explore a new country, taking that extra bit of time out to travel and really get to grips with a place is great fun no matter how old you are.”

Many over 55s (37 per cent) are keen to take grandchildren on adventure holidays overseas, inspired by Channel 4 TV’s My Family’s Crazy Gap Year.

They say the appeal is experiencing different cultures (76 per cent); learning foreign languages (60 per cent) and general education (61 per cent).

Retired homeowners who wish to bolster their pensions by downsizing their property may be in for a disappointment depending on where they live.  Variations in the housing market mean that selling their properties to move into something smaller in the same area and raising some cash isn’t always an option.

A lot of pensioners are looking to downsize their property in order to release equity from their homes.  In addition to this, many see smaller properties as cheaper to run, with lower council tax bills and utility bills.   

However, research of the 25 local authority areas in England that have the highest proportion of property owners aged over-55, reveals that downsizing doesn’t always pay off.  There is up to a £100,000 difference between areas that generated the most revenue with downsizing and areas that generated nothing.

The equity release trade body SHIP, researched these local authorities and looked at the typical price of a property owned by the over-55s, they then compared that value to the cost of an average home.

In a few areas the older people tended to own more valuable properties with greater equity to be had by trading down, with some areas showing an average of £50,000 could be raised by downsizing their homes.  But in other areas the over 55s owned less valuable homes, meaning that downsizing for revenue was much more difficult.

In some cases downsizing would actually leave the homeowners out of pocket by the time they had paid all the costs of selling their properties, buying a new home and the removal fees.

The Director General of SHIP, Andrea Rozario, said: “In a perfect world you would be able to buy a new home, stay in the area that you like and still have a nice little nest egg left over after the costs of moving. But that is not always possible. For some homeowners, releasing equity to raise funds is their only option.”

In areas that have a lot of over-55 homeowners there are a lot of people that want to downsize, meaning a lot of people are chasing the same ideal housing to retire in and that demand is forcing up prices.

Properties such as bungalows have always sold at a premium, Director of the Country Homesearch Company in Wadebridge, Reg Parry explains: “They are popular because they are hardly ever built now and often enjoy slightly bigger plots than new houses. Also, homes that have been adapted to suit the needs of older people can cost between 15 and 20 per cent more than equivalent properties.”

Investment company, Investec Wealth & Investment, ran their own studies looking at property downsizing across all age groups.  It found that most homeowners overestimated how much money could be raised by 1/5^th.

The company’s senior financial planning director, Nick Gartland warns: “With the housing market remaining in the doldrums, homeowners shouldn’t rely too heavily on downsizing.”

Equity release allows retirees to borrow money against the value of their home without having to sell the property.  Typically the cost of equity release is between £1,000 and £2,000, which includes all legal and financial advice.

The big losers in the current round of pension reforms are likely to be men and women in their 40s and early 50s.

Millions of retirement savers face an uncomfortable financial decision – either live now and pay later with a poorer retirement or cut living standards now in readiness for funding their later years.

Many will find the decision unpalatable, but if the government acts to change the state pension age to 67 by 2026, those who do not save now may face a financial struggle.

Putting back the pension age means anyone aged between 42 and 53 has to wait an extra year to draw their state pension.

“We’ve been clear that the current timetable for moving the state pension age to 67 is too slow, due to the staggering increases in life expectancy and we are committed to reviewing the date,” said a spokesperson for the Department of Work and Pensions.

Pension advisers reckon someone aged 47 now needs to put an extra £14 a week away to make up that lost year of state pension. The extra saving would give around £7,500 of annual income.

Delaying the decision means upping the ante. A 53-year-old needs to save an extra £50 a month to make up the same deficit as someone aged 47.

“People need enough time to plan appropriately, whether that means working longer, if they can, or saving extra,” said Tony Attubato, of the The Pensions Advisory Service, an independent advice group.

“People really need to think about what kind of income they want in retirement and whether it will be enough.”

The problem is even worse for around 300,000 women who were due to collect their state pension at age 60 but now have to wait until 65 or possibly longer if the dates are put back.

Meanwhile, The Prudential reports millions of workers would rather spend than save and either have no pension or fail to put enough cash away every month to fund their retirement.

Not only will they have a frugal lifestyle in retirement, says the pension provider, but they are missing out on £15,000 tax relief provided by the government to boost their funds.

Most retirement savers don’t realise how much long term may cost when they are older – and even if they did, few can afford to pay the bill.

As a result, they are turning a blind eye to who funds their lifestyle in their later years, says a study by the Chartered Insurance Institute (CII).

The CII, a professional body for independent financial advisers, is concerned too many workers approaching retirement do not have enough provision to take care of themselves in their old age.

The report, Who cares?, highlights that the average cost of nursing home care costs around £26,000 a year,  with an average stay of 24 months, giving a bill of £52,000.

The problem for an average pensioner is their fund only generates £10,000 a year, leaving a massive gap.

The report asked retirement savers and pensioners about long term care and found:

• 80 per cent had no idea how much long term care costs

• 50 per cent wrongly believe care is free

• An average pension fund does not return enough cash to fund long term care

Funding problems are worsened by the economy’s low interest/high inflation environment that means returns on savings are outpaced by the rising cost of living.

David Thomson, CII director of policy and public affairs, said: “There is clearly a massive disconnect between public perception and reality.  Most of the public have no idea of how much their long-term care will cost and consequently are unlikely to be making any provision to meet that cost.  Even more worrying is that half think long-term care is entirely free at the point of use.  The reality is starkly different.

“Our research shows MPs have very little appetite^] for a model that is fully funded by the state, over half preferring instead a partnership model similar.”

Thomson wants savers and those approaching retirement to consider the3 cost of care in the financial plans instead of ignoring the issue.

“This problem needs to be addressed through measures to increase public awareness and by reinforcing public confidence in any new financial services market that might develop,” he said.

Download a copy of the report from: www.cii.co.uk/pages/research/researchandsurveys.aspx