Monthly Archives: December 2011

2011’s ever increasing bills, complicated tax changes and low interest rates has seen the average middle-class household expenses rise by almost a fiver a day.

Several studies published recently, have confirmed that this year has dealt the tightest squeeze on family’s expenses for some 80 years.   

Price comparison website MoneySupermarket.com revealed in their survey that the average total of household bills shot up by £900 to £15,912 in 2011.  The figure is based on all household expenses, including fuel bills, food shopping, home insurance and running a car.

Accountancy firm, Grant Thompson also published a report that showed that the complex changes to tax credits had affected a lot of middle-class families badly. For instance; a family comprising of one worker earning £50,000 a year with a stay at home partner and two children was £545 worse off in tax credit due to changes in the qualifying threshold.

The same family would also have to shell out £200 more in income tax and National Insurance, which coupled with the increase in everyday cost of living expenses and the lack of pay rises and bonuses, has meant a decrease of £1,650 in the family pot over the year, or nearly £5 a day.

However, the real impact of the financial crisis is likely to be higher still due to the increase in VAT to 20% last January.  In addition to this, the Centre for Economics and Business Research has predicted that food, petrol and energy prices will continue to rise during the first six months of next year.

In a different study conducted by the Resolution Foundation, it was discovered that any tax cuts to take place in April for low and middle income households would be undercut by tax credit cuts.

Their study showed that a two-children family with a salary of £40,000 a year would actually see a decrease in their income of 8.9% from 2010 to 2012.

The Financial Services Authority (FSA) is warning people to be aware of the increase in pension release scams. The FSA said: “We are concerned that people may only see the instant financial gain rather than the severe future losses they could experience when they retire.”

The scam works by cold-callers ringing up people offering them a pension transfer scheme, claiming that transferring their pension into an alternative plan will save them money. Often they will advise transferring the pension to an overseas plan to escape paying UK tax, or selling the pension to raise revenue. 

Presently, only people aged 55 and over can take money from their pension funds however, there are some schemes that allow you to borrow money from your pension.  The issue with such schemes is that most people will lose money in the long-term.

The FSA warns that: “There’s a possibility that these deals are a complete scam and you will lose your entire pension. In addition to that loss, you will have to pay tax, penalties and charges to HMRC.”

Another issue is salespeople ‘churning’ pensions by moving pensions to other suppliers and pocketing huge fees for doing so, with some people’s pension shrinking by 20% or more because of the switch.

The FSA warn that those who choose to take money out of their pension fund early will be liable to tax charges, because the transaction will be seen as an unauthorised payment. These charges could be up to 55% of the value of the payment for the holder of the pension and at least 15% of the payment will be charged to the scheme administrator. Additional penalties fees will also most likely be applied.

Moving your pension to an overseas provider will mean that your pension is not protected by the UK financial authorities, should anything go wrong in the future your money will be lost with no hope of any compensation.

The FSA’s website offers information of all registered financial firms in the UK, to check that a company is on the register go to www.fsa.gov.uk/pages/register/ They also have a hotline that you can call if you suspect you’ve been a victim of a pension transfer scam – 0845 606 1234.

Government legal advisers have said that co-habiting couples should be given the same inheritance rights as those who are married, should either one die without making a will.  

There are currently some 5 million Britons who live with their partners but have chosen not to marry. Under the new proposals they would have the same rights to inherit as married couples, once they had been living together for five years.  Unmarried couples who have children together would get the same rights after just two years.

The new proposals are not without critics though, as many have slammed the plans and accused the Law Commission, who produced the plan, of trying to encourage cohabitation and undermining marriage as well as attempting to bring in a cohabitation law via the back door.

The Law Commission has said of the new proposals that it “reflects the growing prevalence and public acceptance of cohabitation.”  It denies that it is favouring cohabiting couples by pointing out that married couples have these inheritance rights straight away, but cohabiting couples have to wait for five years, or two if they have children.

The commission produced a scheme to give full legal rights to cohabiting partners back in 2007, but although the plan was backed by many lawyers and judges it was shunned by Justice Secretary, Ken Clarke this autumn.

The new law reforms for cohabiting couples cover inheritance for those who have made wills as well as those who haven’t.

The report revealed that if a partner dies the other partner can only inherit their estate after lengthy court proceedings, regardless of how long they have lived together and whether they have any children together.

Jill Kirby, a lawyer and author on the family said: “This is an attempt to bring in a cohabitation law through the back door. Yet again the Law Commission is chipping away at the institution of marriage.”

Over 55s who do not understand that they can shop around for the best deal for investing their pension could boost their retirement income by more than half.

Almost a third (31%) have never heard of the ‘open market option’ or ‘omo’, says financial firm MGM Advantage, while another 70% may miss out on enhanced retirement income because they do not know how an annuity works.

An annuity is an investment offering a guaranteed return to over 55s over their remaining lifetime.

OMO lets pension savers compare the market for an annuity paying the best rates rather than settling for the product offered by their pension provider.

Picking the wrong product can lead to earning £10,000 less on a £50,000 pension fund – and possibly more for someone with a serious illness or medical condition, says the firm.

Craig Fazzini-Jones, Executive Director of MGM Advantage said: “There’s no doubt that more must be done to raise awareness of annuities and the importance of exercising the OMO to shop around. It is grossly unfair that those who are most in need of additional income in retirement are unlikely to be able to afford the services of an IFA, or be aware of the benefit of shopping around for better annuity rates and higher income in retirement.

“By providing clear and simple educational messaging, the benefits of shopping around for an annuity are clear to see with those who qualify for an enhanced annuity benefiting from a considerable increase in income of over 50% throughout their retirement.”

The findings also showed a third of retirement savers (34%) were unfamiliar with “any details” about annuities and only 37% had a vague idea of what any annuity was.

Women were the most unaware, with 80% not fully understanding their retirement income options, as were 85% of those aged 55-64 years old.

Only one in five over 55s told the survey that they were confident about how their annuity would pay them in retirement.

It’s the last few shopping days before Christmas and Britons across the land will be rushing out buying presents and food for the big occasion. However, a survey undertaken by YouGov on behalf of the payment technology firm Intelligent Environment, has found that over a third of us will go into debt to pay for the festivities.   

One in three Britons will either use their overdraft to cover their extra spending or put the balance on their credit cards.  Others will take out personal loans or borrow money from their family or friends.

With approximately 44% of the UK already struggling with debts other than their mortgages, these findings are sure to increase that figure.

The survey also revealed that 31% of Britons will spend much more than they can afford over the Christmas period, many of these will already be in arrears with credit card payments and personal loans.

Last week an adviser to the Prime Minister urged parents to resist coming under pester-power from their children and spending large amounts of money on expensive gifts, and to keep within a reasonable budget.

Chief Executive of the charity The Mothers’ Union, Reg Bailey, said:  ‘This is a stressful time of the year. There’s pressure to buy expensive things.

‘Children admit they pester their parents. But it’s terribly sad that we end up leaving parents feeling utterly guilty after Christmas, having desperately tried to make ends meet.’

Bailey then went on to criticise the Littlewood’s television advert that has already come under fire from parents who are annoyed that the commercial infers that it’s Mothers, not Father Christmas, who bring the presents for children.

Mr Bailey fears that commercials such as this give the impression that we need to buy our children expensive gifts and he worries that too many people will plunge further into debt: ‘Let’s reduce the anxiety and stress for parents, because this is a time when people are in difficult financial straits,’ he said. ‘We don’t want everyone getting into debt.’

Ministers are worried that many Britons who have been refused credit by their banks will turn to Payday Loan companies to fund Christmas, plunging them further into debt and repaying their loans at astronomical interest rates.

New figures from the Halifax suggest that British house prices have remained stable throughout 2011 and will remain stable through 2012 as well.

Over the last 12 months, the average price of a house has fallen just 0.7% to a cost of £161,731. Through the last quarter, prices have fallen 0.6%, and in November alone they fell 0.9%.

On average, prices are 1% lower than in the same period in 2010, a figure which almost matches an estimate from the Land Registry who reported a fall of 0.9%. The Land Regisry data is taken from real transactions rather than house prices.
However, the Halifax’s measurement is a direct opposite reading of the market to Nationwide who found that prices had actually risen by 1.9%. However, the Nationwide compare figures month-on-month, whereas the Halifax compare a broader three-month window between years, giving a seasonally-adjusted figure.

Throughout 2011, according to quarterly figures, the market has remained static or moved up or down very slightly from month to month. Low interest rates are thought to be a factor in this lack of movement in prices, and the current record low level of interest rates is expected to continue through next year.

Housing economist at the Halifax, Martin Ellis, described the stability in prices as “remarkable” given the economic pressures in the UK this year. He added that 2012 was likely to offer the same set of challenges and difficult conditions for house buyers, but the market had recently shown signs of slight recovery. Both the Halifax and Nationwide generally voiced cautious optimism about their findings.

In October this year, the Bank of England found that 3% more mortgages were being approved than previously, amounting to a seasonally-adjusted total of 52,700 new borrowers. This figure represents a peak for the whole of 2011 and the highest number of new mortgages approved since December 2009.

However, some experts still warn that the housing market could nosedive further if unemployment continues to rise, with losses in the price of housing of up to 5% predicted.

Analysts say that the dismal economic outlook could counteract any improvement from a fall in inflation.

Tracey Kellett, director of BDI Homefinders, said the number of sales in was still “paltry” and that house prices are “stagnant”, adding that Halifax had presented a “decidedly downbeat snapshot of the market… but good properties that are priced sensibly are selling well.”

Earlier this week, the UK government announced that it was considering increasing the waiting time for the Support for Mortgage Interest scheme from 13 to 29 weeks. SMI is a type of benefit which pays the mortgage interest of people who have been made unemployed.

The minister for welfare reform Lord Freud said that SMI is unaffordable and does not put the onus on unemployed people to deal with their own financial affairs. Instead, the homeowner could have to accept a charge on their property in exchange for financial help.

Saving for retirement may not seem important throughout most of your life, but the truth is starting to save sooner makes your later years more financially secure – and few people complain of having too much money in their later years.

Thinking about retirement is a major shift in thinking for most people and requires discussion with your partner.

Shockingly, nearly one in five (17 per cent) say that they don’t feel comfortable talking about finances with their partners, according to research by financial firm Prudential.

Around 20% have never discussed how much money they will need in retirement with their partner, while most have discussed their pension in the last year, a third (34 per cent) could not manage a conversation of more than 30 minutes.

When the man from the Pru asked couple show much money they would need to lead a comfortable retirement, more than half (56%) had no idea.

The Pru’s Vince Smith-Hughes said: “There is no hiding from the fact that sometimes our finances are a tough topic to talk about. It is all too tempting to put off conversations about the money we’ll need in the future.

“There can be tangible financial benefits for couples who bite the bullet and have a frank conversation about their plans for the future. Agreeing on a joint approach to pension provision could boost their overall incomes when the time comes to retire.”

The Pru is not the only pensions firm looking at attitudes in a bid to understand the mindset of those approaching retirement.

Aviva is tracking almost 12,000 over-55s to build a picture of their lives and opinions. The latest report focuses on finances immediately before retirement and comes to four big conclusions for retirement saving:
• It’s never too early to start saving – Most people do not start thinking about retiring until they are 48 years old and sprint to the finish line with no savings or financial plan

• Pay down debts – Saving is important, but repaying debts before retirement lowers the need for income and takes away financial uncertainty

• Do the maths – You must work out how much income you think you will need in retirement and gear your finances to meet the goal

• Organise your life – Discuss how long you want to keep working with your employer and partner. Set a retirement countdown that suits you and your finances

The findings show most over 55s actively think about their retirement income at 48 years old, but delay any action for another four years (age 52).

The excuses vary from no money (47%), family commitments (19%), and being too busy to think about retirement (8%).
No wonder the biggest regret of two-thirds of 65-74 year-olds is failing to prepare financially for retirement.

Another problem facing short-term savers is inflation and the volatility of the money markets.

Conventional wisdom suggests that retirement savers trying to put together a financial strategy in times of economic downturn are less likely to succeed as inflation and poor returns hampers their efforts.

Saving over a longer term smoothes out these rough patches and leaves savings more time to recover from the ravages of low interest rates, tax changes and falling fund values.

The average savings pot has plunged by 27% over the past 12 months – from £15,262 to £11,153, while average incomes for the over-55s have fallen 4% from £1,335 to £1,285.

Dealing with debt can make a big difference to retirement spending power. Excluding mortgage debt, over-55s owe an average £21,901 on credit cards and loans, up from £19,878 in March.

Total debt of those with mortgages is £80,849, slightly down from in £84,985 in March, but still a significant financial burden in the years running up to retirement.

The decision is whether to pay down loans or save the cash – and this is a decision that can only be made when working out your retirement finances.

The retirement countdown may have started for the over-55s who still work – but 37% have no idea about how much their assets are worth, how to invest them for the best return or the likely pension income they will receive.
Social and legal changes are forcing more over 55s to reconsider their retirement options. The biggest shake up comes from scrapping the default retirement age that lets workers set their own deadline for giving up work rather than stopping at their 65th birthday.

Better health, job opportunities and the need for more money means 26% of over 55s will keep working if they can, with 18% staying in their current job if flexible/part-time work is available, while 13% would carry on with the same job if asked.
Aviva’s Clive Bolton said: “Everyone’s financial circumstances have been affected by the recent economic downturn, but it is crucial that people still plan for the long term. Clearly there are certain psychological barriers to saving we must take into account when meeting this challenge. Simply telling people to save more is no longer enough.”

Dr David Lewis, author of Life Unlimited! Peak Performance Past Forty, explains the psychology behind the way people think about retirement.

“There are three main reasons why even the most sensible and intelligent men and women fail to prepare properly for the day they retire,” said the psychologist.

“First is the prospect of saying goodbye to a way of life that has interested and rewarded them for decades, proves highly stressful. Powerful negative emotions trigger the psychological defence mechanisms of avoidance – ‘it won’t happen if I don’t think about it’ or denial – ‘it’s never going to happen to me!’”

These reactions are most likely to cloud the thinking of those approaching retirement, he says.

“Ask most people what they do and most will tell you what he or she does at work. This close association between self-identity, self-worth and the job done, means retirement is often seen as psychological death,” he goes on to explain.

“With any bereavement this can result in anger directed at others – ‘how dare my company throw me on the scrap heap!’ – or anger turned against oneself as guilt – ‘why didn’t I prepare better for retirement!” As before, powerful emotions that can get in the way of practical planning. These responses are most likely to occur as people retire. Lastly comes regret and, since it is usually too late to do anything to improve one’s situation, reluctant acceptance.

“Besides these two psychological factors we also need to consider a third barrier to effective financial planning describing how many people react to anything involving numbers. Finding figures tricky to understand or even to think about, they put their pension plans on hold until they are in the mood to deal with them. Sadly they never feel ‘in the mood,’ so nothing gets done.”

Insurance giants Aviva have carried out their quarterly survey of 11,600 people over the age of 55, and its findings show that the financial crisis is continuing to have a devastating effect on the country’s elderly, in particularly those who are on a fixed income.

The report reveals that 10% of pensioners aged 75 and over are still paying a mortgage; the average size of the mortgage is £52,500 which equates to double the average yearly wage.  

The survey also showed that one in five of the UK’s over 55s has just £24 (or less!) to live on each day.  The average monthly income for the over 55s is £1,285, but 20% are scraping by on less than £750 a month.

Women in this age group are twice as likely to be amongst the poorest, with 30% of women finding themselves in this category compared to 14% of men.

The study also reveals that many pensioners have had to turn to their savings in order pay for their everyday living costs. The average savings nest egg is now worth almost 30% less than a year ago as many simply have had no choice but to dip into their savings to stay afloat.  In December 2010, the average savings for pensioners was £15,262, now they have just £11,153—a difference of more than £4,000.

In addition to nest eggs being reduced, the amount of debt that older people are now finding themselves in is increasing. The average person over 55 had debts worth approximately £20,000 at the beginning of 2012, this latest survey shows that this figure has now risen to £22,000.  This figure includes credit cards, personal loans, HPs, overdrafts etc. but does not include their mortgages.

One of Aviva’s directors, Clive Bolton, said: ‘With income levels falling and inflation rising, it is going to make it difficult for some to maintain their standard of living, and to secure a comfortable retirement income for themselves.’

The findings of the report showed that the average age that a person started to think about their financial security in retirement wasn’t until they reached 48, although many did not actually do anything proactive about it.

Along with increasing debts, the survey also discovered that the number of pensioners aged over 75 who were still paying off mortgages had risen from 5% in June, to 7% in September and again to 10% in December.

However, three quarters of people surveyed who were homeowners had paid their mortgages off.

HSBC Bank has been fined a record £10.5 million for mis-selling investments to customers in their later years to fund long-term care.

Almost 2,500 customers will pick up £30 million in compensation, said the Financial Services Authority announcing the fine.

The penalty is the largest penalty imposed on a retail financial services business.

The fine arises from advice given to customers between 2005 and 2010 about funding long term care costs with investment bonds. The advice was from an HSBC subsidiary NHFA – the Nursing Homes Fees Agency.

An investigation revealed 90% of NHFA customers were mis-sold – the average age of customers was 83 years old. In some cases. Customers were sold investments that would mature in five years, even though their life expectancy was shorter.

The FSA ruled that this advice was unsuitable and a combination of capital withdrawal and high charges reduced investments quicker than alternative investments that the NHFA could have recommended, like a high-interest fixed-rate account or ISA.

Tracey McDermott, acting director of enforcement and financial crime said: “NHFA was trusted by vulnerable and elderly customers, It breached that trust to sell the unsuitable products. This type of behaviour undermines confidence in the financial services sector.

“This penalty should serve as a warning to firms that they must have the right systems and controls in place to manage and identify risks when they acquire new businesses. A failure to do so can lead not only to detriment to their customers but to significant reputational and regulatory cost.”

Brian Robertson, HSBC’s chief executive, said:”I fully accept that NHFA failed to give suitable financial advice to some of their customers. This should not have happened and I am profoundly sorry that it did.

“We have high values here at HSBC and this runs contrary to everything that we stand for. That is why when we suspected something was not right at NHFA, we took action. We advised the FSA of our findings and closed NHFA to new business in July.

“We are undertaking a full review of the advice given to impacted customers and I can guarantee that every customer who is found to have not been treated fairly will not be disadvantaged.”

The Government announced in the Autumn Statement that they are going to delay the auto-enrolment scheme by a year for small businesses, in a bid to relieve financial pressure on smaller firms.  

The original plan was for all employees working for small firms with staff of less than 50, to be auto-enrolled into a pension scheme, beginning in April 2014.  The new date announced means a delay of 12 months and moves the start date until after the next general election in May 2015.

Larger companies who employ more than 50 people will still have to roll out the new scheme in October 2012, but the change will potentially leave at least 4 million workers out of pocket by an average of £214 a year in their pensions.

Julian Webb, the Head of Workplace Saving Business for Fidelity, a fund management group, said: “The impact of just one year’s delay is very significant because of compound interest on investments made. This will have a long-term and lasting impact,”

The delay is likely to hit the people it was set up to help the most, as people employed by small companies are the least likely to set up a pension scheme.

The delay will also have a knock-on effect on employees of larger companies too, as any contribution increases applied in the future will also be delayed, meaning less money for all employees in their final pension pots.

“The increase in contributions can take place only once all employers have been subject to auto-enrolment, so by delaying it for small businesses, it delays everyone,” says Mr Webb.

Employees near to retirement age will be hit the most by the delay, as they will have less time to make up the difference.  Fidelity have calculated that this delay will cost an employee on average wages £214 a year, whilst only saving the employer £663 over seven years.  A 50 year old man who is due to retire at 65 would lose 10% of his pension income.

Older workers, in particular, need to build up their pension pots following the Government announcement to raise the retirement age to 67 in 2026, eight years sooner than originally decided.

Under the new auto-enrolment scheme, company bosses will be required to offer their workers a pension and contribute a minimum of 3% towards it.  Employees can opt out of the scheme but the Government hope that the majority will remain with the scheme and make a positive change towards saving for their retirements.