Monthly Archives: November 2011

Chancellor George Osborne packed no surprises for retirement savers in his autumn statement.

The measures he announced mean little change for the over 55s, who will continue to struggle against inflation, low interest rates and later retirement.

Some people will have to work longer until they can draw the state pension as the government intends to bring in a retirement age of 67 years old from 2026.

State pension age was going to rise to 67 between 2034 and 2036 and to 68 around 10 years later.

Now, the government is falling back on the excuse of increasing longevity to bring the change in earlier.

The reason behind the move really has more to do with financing pensions than longevity – people are living longer and at the same time, the country has to pay more in pensions if the state retirement age is not shifted back.

The net result is the retired will receive their state pension for the same number of years, but the date they start picking up the payment is pushed back.

Osborne said this rise would secure a “long-term future” for state pensions.

The change, he says, will not affect anyone within 14 years of retirement and will save the nation £59 billion in pension payments.

Other pension reforms already laid out a timetable for increasing state pension ages between now and 2026.

For men born before December 6, 1953, the state pension age is 65.

For women, state pension age increased from 60 to 65 in April 2010 , mainly affecting women born after April 6, 1950.

Women’s state pension age will ‘equalise’ or match that for men between April 2016 and November 2018.

From December 2018, the state retirement age for men and women will increase at the same rate – to 66 in October 2020.

Pension payments

Talk of switching the inflation index measure for pensions has fallen by the wayside. Instead, the state pension will rise by £5.30 a week to £107.45 for those who qualify for the full benefit from April.

Pension fund investments

The chancellor wants to unlock billions of pounds of cash tied up in pension funds to help fund major infrastructure projects like road building and better faster railways.

The government is earmarking around £5 billion from spending cuts to kick off the investment and wants pension funds to reciprocate by freeing another £20 billion. The £5 billion balance would come from further government investment in the next Parliament.

In reality, the government is not introducing any ‘new’ money – it’s old money diverted from elsewhere.

This scheme is a mixed blessing for pension savers.

Individual retirement savers won’t have the chance to invest directly – the government wants the fund managers to make the investment.

Some projects could attract the funding they need – like toll bridges that have a captured consumer base, but other projects with other options may not fare so well.

For example, the M6 toll road north of Birmingham is not as busy as forecast because drivers can avoid the toll by taking the old M6 rote through the north of Birmingham for free.

The risk is that the government will only raise cash for projects pension fund managers believe will give the best returns, not necessarily the projects that are best for the communities where they are established.

Interest rates

The chancellor made no announcement about interest rates – but confirmed he has authorised extending quantitive easing to £275 billion if required.

This is not good news for fixed income pensioners. Another round of quantitive easing may have a similar result to dropping interest rates further. The last rounds sparked higher inflation.

Retirement savers can expect no respite on the erosion of their cash in the bank, while pensioners can expect no better rates on their savings or annuities.

Tax changes

The chancellor made no mention of changes to personal allowances for income tax in his statement.

Expect the personal allowance to rise in line with inflation from April 6.

He has already confirmed capital gains tax rules and rates will not change during the life of this Parliament.

Budget statement reaction

Dr Ros Altman – Saga: “The chancellor has failed to offer help for savers. The impact of high inflation coupled with low interest rates is a huge double blow for savers. Increasing the ISA allowances would at least help them earn their meagre levels of interest without being taxed as well. Negative interest rates are bad enough, without adding the tax insult to savers’ injury.”

Michelle Mitchell, charity director for Age UK said: “The decision to speed up the timetable to increase the state pension age will come as a bitter blow to many people fast approaching retirement especially those in ill-health, caring for relatives and those out of work.

“Age UK recognises that as life expectancy increases it is reasonable to consider increases to state pension age and longer working lives, however this decision has been based on no published detailed analysis. Average life expectancy must not be the only factor that is considered as at the moment the huge disparities in healthy life expectancy across the country means that the poorest will be required to sacrifice proportionately more of their retirement.”

Andrew Tully, pensions technical director at annuity provider MGM Advantage, said: “In times of rising longevity, it seems right the government has taken this action. Giving 15 years’ notice should give people sufficient time to prepare. It’s likely the increase to age 68 will also come sooner than the planned 2046.”

The over 50s are digging deep in the face of financial adversity to support their families and charities.

One in eight are working on instead of taking retirement to improve their finances – while a third are helping their children with hand outs and half plan to help others with donations.

Their generosity is heartwarming in spite inflation and low interest rates affecting incomes, according to Saga, the financial group specialising in aiding the over 50s.

The survey shows that the older the individual, the more likely they are to give money to their loved ones and charity.

Saga has followed the fortunes of 10,000 over 50s in a quality of life index, and has revealed that many are planning to spend a little more in the coming months weekends away and going out more in the evenings.

Despite the broad increase in confidence in the economy, 20% of over 50s are still struggling to make ends meet – mainly making savings by cutting their heating bills.

Many are still worried about crime, especially after the summer’s riots, ahead of concerns about health.

In general, the over 50s expect inflation to rise over the coming months – as high as 6%.

Saga’s director general, Dr Ros Altmann, said: “After falling consistently throughout 2011, I hope that the first signs of stabilisation in our quality of life index will turn into a solid improvement in 2012. It is also heart warming how much the over 50s are helping others, despite high inflation, by supporting family and charity. These really are generous generations.”

Meanwhile, in a separate survey by insurance firm Aviva, 90% of over 55s who are grandparents will buy them presents, with over half spending £30 or more on each grandchild.

Two-thirds will spend even more on their grown-up children than on their grandchildren.

Just one in three retirement savers are confident they can keep their finances on track for the next 12 months as budgets are stressed by inflation and the eurozone debt crisis.

The over 55s are suffering from the economic fall-out the same as everyone else – while many who have already retired are feeling the pinch from the rising cost of living and low interest rates.

Few can see any light at the end of the tunnel – with many industry insiders doubtful that interest rates will change in 2012.

The Nationwide Building Society, the second largest savings institution in the UK behind Lloyds Banking Group, has forecast the Bank of England will keep a lid on interest rate increases until 2013.

The findings are part of the Institute of Financial Planning (IFP) daily poll for financial planning week.

IFP chief executive Nick Cann said: “The result proves how difficult it is for people to predict what might happen with the economy, and their own household finances, next year. Strong leadership is required to take bold decisions to improve the position with the Eurozone.

“For people in Britain who are feeling the pinch when it comes to the family budget, underpinning this uncertainty is the need to have a financial plan to work through the next few years of economic uncertainty.”

The IFP recommends setting realistic savings and spending goals for the next 12 months.

Marlene Shalton, president of the IFP said: “People do seem to be uncertain about what lies ahead in 2012, which is not surprising given the current economic climate and the difficulties facing a number of European countries.

“People can obtain greater reassurance about their own financial situation if they think ahead and create a financial plan that they can adapt and follow when times are unclear. Having such a financial plan in place can bring more certainty to people’s lives and greater peace of mind too.”

Millions of over 50s are planning to delay giving up work by up to 10 years because they fear they do not have enough retirement savings.

Around one in three expect to work past 65 years old – with a fifth resigned to working for up to 10 years, making them 75 years old when they retire, according to a study by finance firm LV=.

The firm asked over 50s when they expected to retire, and 28% replied that they would have to work in to their 70s and blamed lack of money as the main reason.

Just over 10% will work on in the hope that deferring their pension will give them a bigger fund when they do come to retire.

Nevertheless, 37% said they would continue working because they enjoy their job.

The research also found one in five over-50s – equivalent to 4.3 million people – had retired but have since gone back into work.
• 11% were part-time, 6% gave their time as volunteers and 3% had returned to full-time work
• 37% worked on because they felt too young to retire
• 32% missed taking part in the working environment
• 30% cited money, with 20% claiming their personal and/or state pension wasn’t enough to support them in retirement and 10% needed to go back to work to help continue financially supporting their family

Many dispel the view that retirement is all work and no play for the over 50s as many (31%) explained they could afford to pursue personal ambitions by changing careers or setting up their own businesses.

Fewer hours (27%) and less stress (18%) were also popular reasons for working on in a different role.

Ray Chinn, LV= Head of Pensions, said: “The trend of people retiring well into their 60s, or even their 70s, has been increasing slowly over the last few years. The rising cost of living, low interest rates on savings and the fact that as a nation we are living longer has had a significant impact on our retirement aspirations, and the amount of money we need to live a comfortable retirement.

“Our findings have shown that a significant number of over-50s expect to work many years past the state retirement age, and we’re likely to see this increase further.”

Retirement savers can lose up to 15% of their pension funds to hidden charges from investment managers who waste money on unnecessary share trades, according to industry insiders.

Private pensions are stripped of around 0.7% in trading fees every year that are not disclosed to savers.
For savers contributing to a pension for 20 years, this can mean around 15p in the pound is siphoned off each year and can add up to several thousands of pounds of lost money.

Investment managers SCM Wealth claim retirement savers have paid out a staggering £3.1 billion in dealing costs that have rarely added any wealth to their funds.

The firm is urging the Financial Services Authority to tighten controls against undisclosed dealing costs so retirement savers can better see how much investment managers are charging them.

Alan Miller, chief investment officer at SCM Private, said: “The hidden pension fund dealing costs that we have identified could be removed simply through investing via index funds.

“Levels of transparency within the savings industry are shockingly poor, both in terms of transparency of fees and transparency of investments.

“The FSA and fund management trade bodies should force fund managers to reveal to investors the full costs of rampant buying and selling.”

SCM scrutinised 1,287 individual pension funds handling £392.5 billion of retirement savings.

A typical holding was retained for just nine months and the average 15-year return of unit trusts was a miserable 4.2%.

Pension companies and advisers recently came under attack for ripping off pension savers for ‘churning’ – switching pension funds to a different provider.

Consumer Focus, an independent consumer group, alleged retirement savers were losing out because pension transfers could lead them to lose money in charges and commissions.

Lord McFall, chairman of the Workplace Retirement Income Commission, also suggested high charges put off pension savers and that fees should be capped at 1.5% of the fund value for the government’s new NEST scheme.

The over 55s could easily ease the financial problems of retiring if they knew more about the options of phasing in pension payments, claims a new report.

Too many over 55s regard retirement as either unwillingly being forced to remain at work or a sudden stop.

Research suggests that some of the mechanisms for more of a gradual lifestyle and financial shift to retirement are already in place but too many people approaching retirement are unaware of their options, according to a report from think tank the International Longevity Centre-UK (ILC).

Gradual retirement offers a wide range of opportunities for older workers to downshift in their current job, move to self-employment or part-time work.

Benefits of deferring the state pension

Over 55s who gradually slip in to full retirement also help the government’s goal to push back the state retirement age.

One of the main findings of the ILC survey was 59% of over 55s were unaware they could defer drawing their state pension in return for higher benefits, while 40% said they would consider delaying retirement if the option was available.

If the government better publicised the finer points of the state pension scheme, the over 55s would realise that they do not have to start payments at the state pension age.

Passing on drawing the state pension for a year increases the amount due by 1% for every five weeks of payment is deferred, up to a maximum 10.4% for the year.

The deferred pension could then be drawn as an enhanced payment or lump sum.
The calculation is slightly different for a lump sum payment – which is paid at 2% above Bank of England base rate.

Tax-free pension drawdown

Another gradual retirement financial option that can bridge the gap between fully and partially is pension drawdown.

Another 66% of over 55s are in the dark about easing retirement finances with pension drawdown.
The new drawdown rules that kicked in on April 6, 2011, lets over 55s take income from pension funds while the fund remains invested and continues to benefit from any fund growth.

The idea is someone can work a shorter working week and compensate the loss of hours by drawing a small amount of income from the pension fund to balance out their finances.

No minimum drawdown has to be taken, irrespective of age. Under this rule, not only can retirement savers take small incomes or lump sums, but they can leave their pensions untouched while they continue working.

Drawdown payments that cumulatively come to less than the tax-free lump-sum amount allowed under the scheme may also be tax-free as well.

The ILC findings also revealed some other insights about how the over 55s view retirement:

• 46% would delay retirement if employers offered more support for reducing working hours or flexible working
• 36% would put off retirement if the state pension age is increased more than already planned

• 55% support accessing part of their state pension early, in return for a lower pension when they retire in full.
• 67% are against workers above the state pension age continuing to pay National Insurance Contributions

The full survey results are published in the ILC’s report Gradual Retirement and Pensions Policy, by Dr Craig Berry, a senior researcher at the think tank who previously worked with the Treasury. Link to full report: Gradual retirement and pensions policy

Retirement should not mean poverty

Dr Berry offers a number of conclusions and recommendations in the report, including:

• Making a more positive case for extending working lives to stop the over 55s viewing retirement as a watershed that means a drop in income and living standards rather than recognising the benefits of staying in work longer

• Investigating a ‘graduated state pension’ so people wanting to slow up could access part of their state pension – even if they would therefore receive lower pension payments when they retire in full.

• Promote pension tools that already encourage longer working lives, like state pension deferral, as many over 55s would keep working if they knew the rules better

Baroness Sally Greengross, the ILC chief-executivesaid “We know that financial circumstances play a huge part in retirement decisions, and so the pensions system is clearly having an impact on the path to retirement that is chosen by individuals.

“Retirement should be seen as a process, not an event. We must do whatever we can to increase the options available to workers entering later life, so they are able to continue contributing to the economy in a sustainable way.” The International Longevity Centre-UK is a leading independent think tank tackling issues on longevity and demographic change.

Millions of over 55s are hoping for a big win on the lottery to pay off their debts and fund a comfortable retirement, according to new research.

Almost three out of 10 of retirement savers believe winning the lottery is the only way they can improve their finances, according to the Institute of Financial Planning (IFP).

For many, a smallish windfall of £5,000 would be life-changing – allowing more than a third (38%) to repay debts, while 29% would save the cash.

Overall, retirement savers told the IFP that they will face a stark retirement without enough money to fund a basic standard of living.

Only 14% of women and 23% of men are satisfied with their financial circumstances.

Around a third of workers (31%) are not contributing any money to a pension – and 14% have no money set aside in a pension – while 10% of workers believe they will never save enough to let them give up work.
The findings herald the IFP’s financial planning week (November 21 – 27, 2011).

Many cite the country’s economic woes as the main reason they cannot save – instead their money is eaten up by inflation and paying debts.

Money issues are making many over 55s unhappy – with 77% confessing they would feel better if they had more cash.

Nick Cann, the IFP’s chief executive officer, said: “These findings present a worrying picture for so many people who are facing an uncertain future yet not taking appropriate steps to improve their situation. There seems to be awareness but no link to action.

“Financial planners can help but the challenge is to ensure a greater engagement with the consumer so that they have confidence in the route that they are taking. During Financial Planning Week we’re providing practical tips, tools and information that people can use to improve their finances and get a clearer understanding of the choices that they have.

“These things can hopefully help them to take simple steps which will improve the quality of their lives as a result.”

The over 55s are facing a financial gap of more than £13,000 for long-term care before factoring basic living costs.

According to new research from the Safe Home Income Plans (SHIP), a typical two-year stay in long term care costs £51,906, while the over 55s can expect an income of £27,796.

Many dip in to savings to plug the gap, but this still leaves a 26% shortfall before considering specialist medical care or living costs like clothing and treats.

The gap varies depending on where the over 55s live as well. In the North East would find that they have £3,156 surplus to pay for sundries, but those in East Anglia (-£25,808) and London (-£24,013) would be significantly worse off.

SHIP says the figures reveal income and savings will not cover the full two years of residential care, so retirement savers would need to raise extra cash or rely on funding from the state if they have assets of less than £23,500.

The SHIP solution is equity release, as the average home value of a property owned by the over-55s is £227,448 or £175,542 more than the cost of care.

Andrea Rozario, Director General of SHIP, said: “There is a real chance that over-55s might need to pay for some form of residential care as they get older, and as these figures show they will struggle to pay for this from their income and savings. Anyone who has assets of more than £23,500 will be expected to fund their entire care bill themselves.

“People in some parts of the country do not have sufficient savings or a high enough income that they would be able to cover even the cost of basic care needs. If we take medical needs in to account or factor in a budget for clothing and lifestyle choices then this is even worse.”

“It is clear that alternative funding options need to be considered, especially if people still want to be able to choose their care home or maintain a certain standard of living. Their home is one of the largest assets at their disposal, and today’s over-55s are fortunate in that they are one of the generations who have accumulated significant housing wealth. By using it to fund the cost of care, they can eliminate the additional stress of financial difficulties – while retaining their home.”

Over 55s in drawdown due a pension review in December could see their income plunge as gilts hit a record low.

Gilt yields and drawdown pension incomes are linked as the rate is the basis for government actuary calculations for retirement payments.

Yields hit a rock-bottom 2.5%- which could see over 55s losing up to 25% of their annual drawdown income.

In September, thousands of over 55s lost retirement income as the GAD rate (Government Actuary Department) dropped from 120% to 100%.

Billy Mackay, marketing director of pension provider AJ Bell, said: “For a 60 year old male with £300,000 going into drawdown on 1 December 2006 the maximum income was £22,320

“When their pension benefits are reviewed in December, even if their pension fund is still worth £300,000, they will see their maximum income drop to £16,800, almost 25% less income. If their pension fund has fallen in value the drop in pension income could be even greater.

“This drop in income will come as a shock to many especially when you consider the effect of rising inflation over the past five years, the drop in real income is far worse.

“We have urged the government to reinstate the 120% factor and to review the link between gilt yields and pension income, and will continue to press the case. We hope this latest drop in the gilt yield and the negative impact it will have on pensioners’ incomes will give them reason to look at the issue again.”
The rising cost of living is also biting in to fixed pension incomes – the latest Office of National Statistics figures for October calculates inflation at 5.0% – 3% above the government’s 2% target rate.

“We will continue to campaign on this as we believe that the government are failing to appreciate the strength of feeling on this issue. Falling pension incomes and current inflation levels are taking a heavy toll on pensioners’ lives,” said Mackay.

Banks and building societies are still handing out shocking, inaccurate advice to customers despite a series of misselling disasters.

Years of paying billions in compensation for complaints piling in about misselling pensions, endowment policies and payment protection insurance seem to have done nothing to make the arrogant monoliths give their customers better advice.

Consumer champion Which sent secret shoppers aged over 60 posing as retired savers.

They asked advisers about reinvesting a lump sum above the £85,000 Financial Services Compensation Scheme deposit limit that was just maturing from a one-year fixed-rate bond paying 2.5%.

Undercover researchers

The undercover researchers found just five from 37 advisers in high street banks and building societies gave good advice about investments, with the majority of advisers showing a poor understanding of the risks of investing, and made misleading statements about the features and costs of available products.

Which claims many of the advisers recommended products that were inappropriate for inexperienced investors aged over 60 – with 17 recommending complicated and high charging investment bonds, with four of the advisers failing to mention that these came with hefty exit fees – sometimes as high as 12% – if you want to get your money out in the first five years.

Another 18 advisers claimed that advice was free, but banks and building societies are paid commission for their recommendations taken up by customers.
Mistakes and misleading statements

Yorkshire Bank told one researcher to invest £50,000 in a bond netting more than £4,400 in commission that was not disclosed.

Almost half of the advisers failed to mention the Financial Services Compensation Scheme, and others made rudimentary mistakes about how much protection consumers receive.

One Santander adviser incorrectly stated that investments with the bank were covered up to £85,000 instead of £50,000.

A NatWest adviser stated: “Let’s face it, the major banks aren’t going to go under.”
The same adviser gave the researcher a leaflet about compensation, saying: “You don’t have to read this.”
Consumers need advice they can trust

Richard Lloyd of Which, said: “Now, more than ever, consumers need advice they can trust on what to do with their money. It’s shocking to see such low standards. It’s also disappointing to see that things haven’t improved in the past year, despite two high street banks being fined for advice failings and poor complaints handling.

“We are reporting our findings to the Financial Services Authority and urging the regulator to investigate and punish the worst offenders. We want the FSA’s Retail Distribution Review to force banks and building societies to be more upfront about the cost of their advice. We will also be talking to the banks and building societies about improving their standards.

“Our investigation shows that the high street isn’t the best place to go for investment advice. If in doubt, consumers should always talk to an independent financial adviser.”
Banks fined millions for misselling

In January 2011, Barclays was fined £7.7 million and ordered to pay almost £60 million compensation for misselling unsuitable to customers, 80% of whom were aged between 60 and 90.

In May 2011, Bank of Scotland was fined £3.5 million for poorly handling complaints and misselling investments. The FSA investigation into Bank of Scotland found that 77% of the complaints came from inexperienced customers and 55% were aged over 60 years old.

What customers should expect from investment advisers

The standard of advice from banks, building societies and independent financial advisers customers should expect is clearly laid out by the FSA:
• Advisers should disclose their status as independent or tied and make it clear whose products they can recommend

• The workings of the Financial Services Compensation Scheme and how the scheme applies to recommended products

• They should carry out a thorough fact find

• Advisers should establish the customer’s attitude to investment risk and make recommendations based on this

• Advisers should discuss the customer’s tax status and how any recommendations would affect this

• Customers should have any recommended products fully explained, including the risk of losing any money

• Any fees and charges should be fully explained

Savings accounts offer meagre returns

Not only are banks and building societies under fire over the quality of their advice, but savers have little choice of a safe haven to earn any return on their money as the institutions continue to peddle accounts with meagre rewards.

The figures speak for themselves – only six out of 2,000 savings accounts offer any real rate of return to taxpayers.

Even though the Consumer Price Index – the government’s official inflation measure – dropped from to 5.0% for October from 5.2% in September, savers have no reason to celebrate.

Taxpayers have no options when looking for instant/easy access accounts, bonds or notice accounts – and higher rate taxpayers paying at 40% or 50% have no choices other than a couple of Cash ISAS.

Non-taxpayers fare slightly better – with a choice of 23 savings accounts offering a return against inflation out of the 2,000 in the marketplace.

David Black, Defaqto’s Insight Analyst for Banking, who compiled the figures said: “Savers continue to be hit by the dual effects of high inflation and the historically low-base rate. Even basic rate taxpayers are losing money in real terms on their savings with their only respite being from a handful of Cash ISAs or restricted availability regular monthly savings accounts.

“To get the best available returns, savers need to review their savings on a regular basis. In particular, people should look to use their ISA allowance, and take advantage of introductory bonuses and guaranteed minimum rates on savings accounts.

“Strategies worth considering are paying off expensive debts – such as store cards, credit cards and overdrafts – and, for higher rate taxpayers especially, opting for an offset mortgage as it effectively pays tax free interest on savings at the mortgage rate.”