Pension Freedoms Will Increase ‘Living Inheritance’

A study by the high street bank HSBC has shown that many older people are choosing to pass on some of their wealth to their family now rather than when they die.

The research has found that half of the people questioned said they were providing financial support to family members, with around 20% helping out their children and 10% their grandchildren.  bank notes

While many pensioners can afford to do this and it is an effective way to get around inheritance tax if a gift is made more than seven years before a person dies, but there are also a great number who are sacrificing their own retirement plans by helping out family.

The Future of Retirement study found that what it calls a ‘living inheritance’ is on the increase, it is at the detriment of many people’s standard of living in retirement.

More than half of the retirees said they had shelved some of their plans for retirement because they couldn’t afford it.  Regular bucket lists for retirement include living abroad or luxury travel, starting a new business or buying high value items such as a new kitchen or a new car.

However, not all pensioners were dissatisfied with their retirement plans, with many managing to achieve what they had set out to, travelling extensively, and spending more time with their families.  Many took up hobbies such as DIY and gardening in retirement as they had more time on their hands.

It is widely considered that the new pension freedom changes which came into effect on April 6th will mean more over-55s hand over large sums of cash to their nearest and dearest.

With sudden access to their pension pots, many will be tempted to help children and grandchildren with large financial commitments such as buying a house or going to university.

Industry experts are concerned that many may simply give too much of their pension pots away, and then have to scrimp and scrape to get by in later retirement because they have run out of money.

On the other side of the coin, the number of people who are able to leave an inheritance is dwindling.  The higher cost of living, coupled with longer life expectancies means that pension pots need to go much further than in previous generations.

Whilst 58% of over-55s expect to be able to leave their family something in their will, the reality is that only around 33% will be able to do so by the time they die.

 

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New Study Predicts Even Longer Life Expectancy, and Gap Between Men and Women’s Longevity Shortened

A recent study published by Imperial College London shows that the most recent predictions for life expectancy from the Office for National Statistics was too low.

Pensioners will need to ensure their retirement income will last longer than previously thought, which puts even more importance on making the correct decisions regarding pension freedoms and how best to handle finances in later life.  Changes to Pensions made by the Government, applicable as from April 2015

The Imperial College used death records from 1981 to 2012, basing their information on postcode, age and sex to come up with predictions for life expectancy for 375 different area in England and Wales, as well as national averages for both men and women.

The researchers also estimate that the gap between men and women’s longevity will reduce.  Currently the ONS thinks that by 2030 men will live for an average of 79.5 years and women to 83.3 years.  However, Imperial College predicts much lengthier life spans of 85.7 years for men and 87.6 for women.

This could have a dramatic effect on the way we need to think about pensions, both in terms of saving – earlier and much more than previously predicted, and how those with defined contribution pensions will choose to access and invest their pension pots.

Annuity products offer a guaranteed income for life and can protect the partner if the policy holder dies first.  They offer even better value for money if the holder has a medical complaint or has unhealthy habits such as smoking or heavy drinking.

A pension saver could use all or part of their pension pot to invest in an annuity, or they could choose to invest their money in other ways.

Invest and drawdown schemes are proving very popular in the wake of the pension reforms, whereby savers can take a yearly income from their pension pot whilst leaving the rest invested in the fund.

Many are choosing to take cash from their pension pots to invest in other ways such as buy-to-let properties or starting a new business.  However, taking large sums of cash from a pension pot could mean a hefty tax-bill.

Whatever savers choose to do, they need to realise that their money will probably need to stretch much further than they had anticipated, and they need to factor in the extra years before making any financial decisions about their retirement income to ensure they don’t run out of money and have to rely solely on the state pension in later life.

The average life expectancy can differ greatly depending on where you live in England or Wales, for instance in London alone there is a difference of between five to six years for those who live in Chelsea compared to those living in Tower Hamlets.  Northern urban areas have shorter life expectancies by around six to seven years compared to rural southern areas.

One of the biggest surprises from the study was the marked reduction in difference between men and women’s life expectancy.  This is largely due to a decrease in younger men dying in wars, violent assaults or in car accidents.  Also, men are now more likely to lead a healthier lifestyle with more exercising regularly and less smoking and heavy drinking than in previous years.

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Divorcees with Earmarking Orders Could Lose Out Following Pension Reforms

Divorcees may be in for a shock if they are expecting a share in their ex-partner’s pension thanks to the new pension freedom reforms.

Those who had an ‘earmarking order’ drawn up as part of their divorce may find that it is no longer valid under the new rules.

Financial experts are urging anyone who thinks they may be affected to seek financial advice as soon as possible.

An earmarking order should pay out a fixed percentage of an ex-partner’s pension once they start to draw on it as income.  However, because this is a fairly old regime in theory a person could draw some or all of the cash from their pension, leaving their ex-partner in the cold with either a smaller than expected pension income, or in the worst case scenario – none at all.

As of this April, anyone who has a defined contribution pension now has the freedom to access it and use the money as they see fit once they reach the age of 55.

Previously a pension saver would have needed to buy an annuity – which would give them a guaranteed income for the rest of their retirement and protection for their partners if they were to die first – or take out a drawdown product where a yearly amount could be withdrawn and the rest left to continue investing in the fund.

Divorcees need to ensure that the wording on their earmarking order specifies that their entitlement remains intact if their ex-partner takes some or all of their pension pot as cash or find out whether they can make an amendment which safeguards their share.

Only those who were divorced more than 15 years ago are likely to be affected by the recent changes.  Anyone divorcing after December 2000 usually agreed upon a cash transfer of a percentage of the pension, called a ‘pension sharing order’ so the break up was less complicated and drawn out.  Anyone with a pension sharing order will not be affected as they will have already received the amount agreed and put the money into their own pension scheme.

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Withdrawing Your Pension as a Lump Sum vs Investing into Property – The Risks?

With investors eager to access and release pension capital, Simon Morris, a property advisor to investment funds and bonds, explains the risks of this strategy and the calculations investors need to make before investing a lump sum pension in property.

London, UK

On 6th April reforms came into effect that allow people who are 55 or older with a defined-contribution pension to remove their money as a lump sum instead of buying an annuity. Retirees are allowed to remove 25% of their pension fund tax-free, whilst the remainder will be taxed at the same rate as income.

Research indicates that a third of people between 45 and 64 may cash in their pension pots to invest in the buy-to-let market. Statistics show that every £1,000 invested in the buy-to-let sector in 1996 is now worth £13,048. With interest rates remaining low, property seems like a relatively risk-free investment opportunity.

Simon Morris explained why this isn’t always the case: “Investment is a risk vs reward game. You may be able to withdraw 25% of your pension tax free, but the rest will be taxed at a considerable rate. Will you regain your investment or will you lose your pension fund? And how long will it take to make a profit?

“There’s a lot of risk involved in taking out a pension as a lump sum to invest in buy-to-let. The three key risks of investing into buy-to-let are:

  1. Tenants can be unreliable and property could remain empty for periods of time – this results in an investor covering the mortgage and bills when the property is unoccupied.
  2. Property prices do increase, but they can also plummet. Your original investment is not secure or guaranteed. London has seen significant house price rises in the last few years, but these increases are not UK-wide, so do your research in terms of location and history of property prices.
  3. Interest rates are currently low, so if you are using a pension lump sum as a deposit and buying the property with a mortgage, it’s likely that interest rates will increase and so too will your repayments.”

Morris also suggested that potential investors need to take several measures before they cash in their pension as a lump sum to invest in property. “Ideally, you should reserve taking out a lump sum as a last resort and be wary of cold calling companies who are selling products to you. Decide on your own, then research companies and use an Independent Financial Advisor (IFA) to choose the best product for you.

“An experienced IFA will weigh up your appetite for risk against your expectations regarding yield, to point you in the direction of the right financial product for your circumstances.”

Morris also advised retirees to look at alternative property investment vehicles. He says:

“You don’t need to invest in bricks and mortar stock to capitalise on UK property. You could consider property bonds and funds. They can provide you with tax advantages when they’re used within an ISA wrapper and some products guarantee your initial investment. I would always suggest that a potential investor seeks as much independent advice as they can and opt for a regulated investment product if they want to generate healthy returns.

“I’d also suggest that investors take some time to look at the free guide to property investing in 2015 before they commit to any investment option. This guide was written to give private and commercial investors the information they need to ensure they are asking sensible questions prior to taking out any financial product.”

To read more about Simon Morris please visit his blog:

http://www.simonmorrisuk.com

The Guide to Property Investment 2015 can be downloaded below:

http://www.simonmorrisuk.com/guide-to-property-investment-2015/

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January and March Data Shows More Money was Withdraw From High Street Banks than Deposited, Largely Due to Pensioner Bonds

It has been estimated that approximately £800 million has been withdrawn from bank and building society savings accounts with much of it being used to buy the new Government Pensioner Bonds in March.

The vast amount of money moved shows that thousands of pensioners have taken advantage of the deal offered to them by the Government run National Savings and Investments (NS&I).

The bonds became available to savers over the age of 65 in January, and the first month saw £1.4 billion moved out of regular accounts in high street establishments.   flexible drawdown

The British Bankers Association (BBA) calculated that much of this money has been withdrawn to buy the lucrative pensioner bonds.

The Bonds are available in two formats which offer high street busting interest rates.  The first is a one year bond that offers a 2.8% interest rate payable at the end of the term, the second is a three year bond which offers 4% interest at the end of the term.

A saver is allowed to invest up to £10,000 in each type of bond, allowing them to invest a total of £20,000 each.  In addition, if a couple both buy bonds and one dies before the bonds mature, the bonds can be transferred into their partner’s name even if they also have some bonds which would take them over the £20,000 limit.

 

The bonds proved so popular that the Chancellor announced an extension so that more savers would be able to invest.  The bonds will still be available to buy up until the 15th of May.

 

January and March have been the only two months since May 2011 that more cash was withdrawn from savings and current accounts than was deposited.

Industry experts hope the enthusiasm for the products will help to increase competitiveness when it comes to interest rates for savers, with banks wanting to claw back customers with more attractive savings accounts.

 

Pensioners have suffered from six years of ultra-low interest rates, along with high cost of living and inflation.  The bonds are seen as a repayment from the Government for their suffering in the savings market since the start of the economic crisis.

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Younger Workers Estimate They Will Have Pension Pots of Around £95,000

A recent survey by NOW: Pensions has found that younger workers expect to retire with a pension pot worth around £95,000.  However, the study also discovered that almost two-thirds of those questioned hadn’t actually started saving into a pension fund yet.

Men aged between 18 and 35 were the most confident of their saving levels, with the average pension pot expected to be around £111,000.  Women of the same age expected to have saved around £82,000 by the time they retired.

It seems that many young workers could be over-estimating their pension pots, particularly as more than half of 26-35 year-olds were not in a workplace pension.  The number workers aged between 18 and 25 who were not yet paying into a pension was higher still at 65%.   pension

With many younger workers prioritising saving to get on the housing market, it is unsurprising that the majority have yet to start saving for their retirement, but the money they do expect to save is also quite low considering inflation and the length of retirement which should span two decades for most.

Currently a pension pot of £100,000 will buy an annuity which will guarantee a retirement income of between £5,000 and £6,000 a year, but to build this pot up you would need to be paying contributions of around £120 a month for 30 years, or £70 a month for 40 years, calculated with an investment growth rate of around 5% each year.

The average amount paid into pension pots for workers aged between 18 and 35 is just £22 a month, falling well short of the target amount, and the same rate of savings over their career would only yield a pension pot of £18,000 over 30 years or £56,500 over 40 years.

The new single tier pension will offer a further £8,000 a year if the person qualifies for the full amount, having paid at least 35 years’ worth of National Insurance contributions, but many young workers will feel the pinch in retirement unless they take steps to start or increase their pension savings now.

The Government’s auto enrolment workplace pension scheme has gone a long way into getting more people saving for their retirement.   Currently the scheme has around a 90% take up level, although this is expected to drop as more medium and smaller sized companies join the scheme.

Employees will be able to save between 0.8% and 4% of their salary into the pension scheme with their employers contributing between 1% and 3%.

 

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Professionals Could Face  a Tax Time Bomb on Pension Savings

Many professionals are unaware that they may find themselves facing a large tax bill when it comes to drawing their pension.

Middle class workers in professions such as management, head teachers and doctors could unknowingly be saving too much in their pension pots.

If a pension pot exceeds £1million, then anything over this threshold will be subject to a 55% tax bill.   pension

Financial advisors are concerned that not enough professionals are aware of the recent changes to the limit on pension savings and could be in for a nasty shock when they choose to retire.   They are doing their best to save money for a decent and comfortable retirement, but if they save too much they could be gifting the taxman a large chunk of their nest egg.

From next April, the cap on pension savings will be reduced from the current £1.25 million to £1 million.  Any amount over this will incur punitive tax charges at 55%.

Since 2011 there has been several cuts to the lifetime allowance a person can save in their pension fund, going from a high of £1.8 million to £1 million next year.

The latest cut is said to raise around £1.9 billion for the treasury will affect around 72,000 pension savers until 2017.

Whilst many can only dream of having a pension pot worth more than £1million, many middle-class professionals, particularly those who work in the public sector and have paid into generous final salary pensions, could find the fall foul of the tax man unless they act quickly.

It is estimated that those earning more than £74,000 a year could find themselves in a position where they may be saving too much into their pension fund.

Many people with final salary pensions are unsure of the size of their pot, compared to those who have a defined contributions pension which builds up a pot of cash that can easily be tracked.

Final salary pensions are calculated on the salary that a person retires on, along with years of service.   It is slightly more complicated to work out how much a pot will be worth, they would need to find out how much their pot was worth by consulting with their employers and then times that amount by 20 to see if they will breach the cap on pension savings.

If a person has more than one pension pot then this further compounds the complications as they will need to contact each pension provider for information.

Whilst the situation is more likely to affect those with final salary pensions, those with defined contributions pensions could also be at risk if they tend to save a lot of money into their funds and the pensions performed well.

To counter any discouragement from younger pension savers, the Government has promised to increase the £1 million threshold in line with inflation every year.

However, if pension savers act quickly they may be able to apply for special protection to safeguard against the punitive tax.

Anyone who currently has a pension pot worth between £1 and £1.25 million or those who will surpass the £1million threshold in the next two years will be able to apply for protection against the 55% tax and keep the £1.25 million threshold in place.

Those who won’t be able to apply for the extension will need to be savvier about checking their pension balance and reduce their savings accordingly.   Savers over the age of 55 will be able to draw down their 25% tax-free lump sum to reduce the size of their pension to avoid any taxes if there pot exceeds the cap.

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SKIPTON LAUNCHES GROUNDBREAKING NEW ONLINE COMMUNITY TO HELP PEOPLE NAVIGATE RETIREMENT MAZE

  • Unique venture provides a place for people to come together and share ideas, experiences and support – the Society’s latest way of ‘giving something back’ to its communities
  • Insights from real people, independent contributors and industry experts, to inspire and inform current and future retirees
  • “…I survive on £10,000 a year”; “…my skills are my ticket to travelling the world”; “…I’ll  be providing free childcare to my grandchildren” – a taster of retirement realities being shared on retiresavvy.co.uk.

Skipton Building Society is launching a unique online community, retiresavvy.co.uk, to encourage and empower people to take control of their own financial futures.

With the new pension rules introduced on 6 April 2015, people are facing more confusion and uncertainty than ever about what will become of their pensions and the options available to them once they retire.

Recognising that consumers need more help, Skipton has created this resource for people who are approaching and in retirement. It will help people prepare for the retirement they want by offering information, real-life case studies and peer to peer support and discussion via a live forum.

Originating in Skipton’s commitment to Community & Corporate Responsibility, retiresavvy.co.uk is just one of the ways that the Society is giving something back to the communities in which its members live and work. Skipton was established 162 years ago to solve a major social issue of the time by helping ordinary people to build their own homes. Now it is tackling one of today’s most pressing issues – retirement readiness.

Through a combination of blogger insight, journalist pieces and expert tips, we are addressing some of the top concerns of the nation, asking pressing retirement questions, including ‘How much do I need to retire?’ ‘What age can I retire?’ ‘How much should I be paying into my pension?’  ‘What can I do with my time in retirement?’ ‘I want to retire early, what do I need to consider?’ ‘How can I make connections in retirement?’ and ‘How can I make sure my loved ones are taken care of after I’m gone?’ – 

Retiresavvy will help to demystify retirement through:

  • A live forum, where users can ask questions and join in debates to get better informed and have a say on any issues that matter to them;
  • Real stories from people preparing for and living in retirement;
  • A team of varied  contributors, including respected bloggers and award-winning journalists, with diverse views and perspectives about all aspects of retirement;
  • Regular polls to gain real-time insight into what really matters to users;
  • Useful, bite-sized hints and tips from industry experts;
  • Insights into and analysis of the latest retirement news;
  • Downloadable guides and links to trusted sources of other help and information;
  • A dedicated, in-house editorial team.

David Cutter, Skipton Building Society’s Group CEO, said: “Retirement is a major social issue of today. In a landscape characterised by uncertainty, changing government legislation and increasing life expectancy, today’s 50-plus generation could be forgiven for not knowing where to turn.

“We’re already doing something about this, with our Retirement Review Service, to help people to picture and plan towards their futures, but we want to do even more.

“Now we’re proud to add retiresavvy.co.uk to our range of tools that help people planning their retirements.  We aim to help plug the huge gap in retirement information that exists in today’s society, despite the growing complexity and urgency of this issue.”

Dr Ros Altmann CBE, the UK Government’s Business Champion for Older Workers, and an independent expert on consumer finance, pensions and retirement, said:  “I’m really pleased to see Skipton has taken the time and trouble to develop this resource. Helping people plan ahead is so important, and I welcome the fact that retiresavvy is not just about financial planning, but much more.”

“There is certainly a need for this, as too many people fail to plan their future life and don’t make the most of their later life opportunities,” she said.

“Retirement is not just about money – it is something that has a major impact on people’s lives and their families – and you really need to be prepared for it.”

“The best way to do that is to learn from others and chat to people about new opportunities and ideas that are opening up for later life in the 21st Century.  Retirement is changing, with a more gradual end to working life, but not everyone can do that so easily.  Therefore learning from the experiences of others can be invaluable.”

The Society realised there was an urgent need for a resource like retiresavvy.co.uk after research it conducted showed that 39% of people were not confident in their own financial plans for retirement. Two in five said they are underprepared for their retirement.

In 2014, the Society launched its Retirement Review Service in direct response to this feedback.  It aims to understand customers’ individual future aspirations and provide them with a holistic, personalised financial roadmap to help achieve them. Where appropriate we can arrange an appointment with a qualified Financial Planning manager from our wholly owned subsidiary Skipton Financial Services Limited, who can provide investment and pension advice.

While benefitting from the backing of Skipton as a respected mutual financial services brand, retiresavvy.co.uk is a community in its own right. It has its own ethos and purpose centred around giving those planning for and in retirement a powerful voice through its rich and varied content and its live forum.

After testing the site with the help of a group of around 300 volunteer users, retiresavvy.co.uk will launch on 21 April, complete with a forum.

Its dedicated editorial team is calling out for more people to join in this rich conversation and share their stories.

Retiresavvy Senior Manager Clare Mahood said: “Our retiresavvy editorial team is absolutely dedicated to providing irresistible, helpful content that will help to demystify retirement by encouraging people to look afresh at their plans for later life and consider taking positive action to improve their positions.

“We welcome involvement from anyone who would like to add to the richness of the discussion, either as a contributor or as a user.”

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Early Encashment Penalties Could Affect 500,000 Over-55s

Up to half a million pension savers could suffer high costs if they want to access their pension fund.

It’s been estimated that around 500,000 defined pension funds have early encashment penalties, with some pension providers charging up to 10% of the pot to cash in the pension.   nest egg

Hundreds of thousands of over-55s will be looking to cash in some or all of their pension pot following the new pension freedom reforms which came into effect on 6th April.

Now anyone with a defined contribution pension fund can access their pot to withdraw the entire lot or use as a bank to take as little or as much as they want when they want.   Previously a saver would have had to take out an annuity or a drawdown policy.

However, many pension funds have clauses attached to them meaning that if a person wishes to cash in some or part of their pension before their stated ‘retirement date’, they will have to pay a heavy penalty.

Retirement ages were usually agreed on between the saver and the provider when the pension fund was started and are usually at 60 or 65 years, but could be as high as 70 or 75.

According to the Telegraph, many of the major pension providers have refused to tell how many pension funds are affected by early encashment penalties.  Aviva, Aegon, Canada Life and Legal and General have all refused to give out details.

Zurich has said that around 20% of its pension funds have early encashment penalties or around 50,000 and that the average penalty was around 5% of the pot.  Standard Life said 156,000 of its policies would be affected, but the average penalty was less than 1%.  Old Mutual has around 6,900 affected policies and its average charge is 7%.

Not only is it worth checking the small print of your pension policy to ensure there are no early encashment penalties, many savers may find that they have guaranteed annuities rates attached to their pensions which offer annuities at a much higher rate than currently available and could potentially lose thousands of pounds by cashing in their pension instead of taking out an annuity.

 

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