Hard choices

In the style of Family Fortunes, if we asked 100 people to name something they don’t do – but should do – what would come top of the list?

  • the garden?
  • exercise more?
  • eat less?
  • read?
  • visit relatives more?
  • spend less?

We all have a long list like this. We can call them resolutions or regrets. But really they are just choices. We might say we have no time to read, but really we just prefer to watch East Enders. Or we might harbour a perpetual notion to exercise more but really we are choosing to put it off even though we know that will lead to health problems and the rest. An odd choice then, but still a choice. If we were prepared to face up to these things as choices we might, possibly, make better decisions.

Take spending. Granted, at low income levels there’s not much choice and at enormous income levels it doesn’t much matter. But for middle Britain, it’s all about choices.  The big choice is how much not to spend.  The really big choice is how much not to spend over the long term. By and large we make another odd choice here – we decide not to spend not very much.  Yet we know, surely, that this is going to end in tears. We know that if we keep not saving very much we will find ourselves tired of working or too old, lots of spare time and too little money.  So, back to choices – for middle Britain, whatever that is, the choice is between a good family holiday and a sensible retirement plan.  Or between a second car and a half decent pension. The detail is a matter for the individual.

The more uncomfortable sounding the choice – who would scrap the family holiday with indifference? –  the more real it’s likely to be.  So, in the style of those hard hitting anti smoking commercials which make it clear that in the eyes of a child the smoking parent is choosing death over the child, maybe we need to see the long term savings choice in similarly stark terms, (A) or (B):

(A)  Each year put 20% of your income into long term savings, or
(B) face an embarrassing retirement?

(A) Fund that 20% by eating out less, drinking less, scaling down the holidays, or
(B) carry on and accept that retirement will be grim?

Brendan Llewellyn

Good news for pensioners? Or more: “lies, damned lies, and statistics”?

The latest figures from the Office of National Statistics (ONS) made interesting headlines – the number of pensioners living below the breadline has decreased by a third in the past decade.  That sounds like healthy progress – but is it?

Not if you are one of the 2 million the ONS still estimate are living below the breadline (60% of median income less housing costs), or one of the million people aged 60 or over living in fuel poverty (spending more than 10% of income on heating).

The statistics are a bit opaque, so let’s do some simple maths.  According to ONS, the median pay of all full-time workers in 2009 was £489 a week, and housing costs are a fairly consistent one-fifth of income.  So on this basis the breadline would be roughly calculated as 60% of 80% of £489, which would be £235 a week – well over double the basic state pension (£95.25 a week) payable to those who qualified in 2009/10.  Yet by 2007, the state pension still accounted for 37% of all pension income, with a further 13% coming from other state benefits.

How is this relevant for you?  If you are thinking about your retirement plans you need to focus on what your own “right number” might be.  Presumably you don’t plan to be on the breadline or in fuel poverty – so what do you actually want, and how are you going to achieve it?

It’s pretty clear that relying on the state will leave you at high risk of retiring in poverty.  And given the number of occupational pension schemes which have either closed or converted from final salary to money purchase in the last few years, it would be unwise to rely on your employer.

What you can do?

For each individual the message is loud and clear – you need to be responsible for your own retirement. That means:

  • Paying close attention to any pensions you have and being prepared to take action on your funds.
  • An annual review of your retirement finances, to make sure you are on track towards your “right number”.  Now is an excellent time to do this as we are heading towards the end of this tax year.
  • Keeping your skills up-to-date and be prepared to invest in yourself so you continue to have the option of earning an income until whatever age you decide to retire.
  • Saving as much as you can towards retirement – whether in a pension plan or any other form of savings.

At a national level, this all gives increasing support to the idea that people are going to need to work longer and the government need to act now to facilitate that change.  The general consensus is that we need to abolish the mandatory retirement age of 65 or at least increase it significantly to 75. However, this is not going to be sufficient. It will also need the government to provide incentives to employers to retain older staff and incentives to older staff to keep their skills up-to-date or to retrain.

The wrong postcode can make your pension gap even worse!

If you live in a good area of London, you might have to pay 4% more for your pension than if you lived in Birmingham or Glasgow according to a recent article in the Times (you can read the full article here ).  This comes at a time when the cost of buying a pension is already at an all-time high.

The reason is that more and more insurance companies are now using your postcode to work out the price of your annuity – on the basis that people who are well-off tend to live longer than people who are not.  (This doesn’t affect any final salary pensions you have, because these don’t depend on annuity rates.)

While you can’t blame insurance companies for wanting to be more accurate in their pricing, the side effects are greater complexity and risk for the average person who is trying to plan for the future:

  • If you live in a “well-off” area, you might have a larger pension pot and more valuable house than average – but this advantage will be reduced because you will have to pay more for your pension.  And if you live in this type of area but don’t have much wealth, you still have to pay more!
  • It is much more difficult to find out who offers the best deal, because these ‘postcode’ annuity rates are not published on the FSA website.  You have to obtain a separate quotation directly from each company.

What can you do about this?  Here are some ideas:

  1. Even though it is now more difficult, shop around for the best annuity rate by using your “open market option”, which is your right to buy your annuity from the provider you choose.
  2. If you are in poor health or are a long-term smoker, see whether you can get better annuity rates that reflect your shorter life expectancy.
  3. Put off your retirement for as long as you can.  If you defer your retirement, you will start to benefit from the ‘turbocharger’ effect that increases your eventual pension by more than you might have thought.
  4. If you do have to retire, defer the purchase of an annuity for as long as you can by using a ‘drawdown’ option or flexible annuity.  These options are more complex than normal annuities and have their own risks, so you would need to obtain financial advice.

How the PBR has made the pension crisis worse

At probably their last opportunity to do anything substantial, the government have completely ignored the pensions crisis – and actually made it worse for many people by chipping away at existing pension rights.  We have written a longer ‘Opinion’ article about this – click here to read it .

All in all the real message, once again, is that it’s up to individuals to navigate their way out of the pensions crisis.

As usual, the Chancellor presented an upbeat speech but the full reality of what was being announced only became clear later from the detailed press releases.  In this update we will focus on the announcements that are likely to affect your pensions crisis.

First, the state pension will be increased by 2.5% from £95.25 to £97.65 per week for a single person in April 2010.  While this was paraded as a generous increase because inflation is lower, it was already established government practice to increase the basis state pension by a minimum of 2.5%.  And the sting in the tail is that earnings-related pensions (like SERPS) will not be increased by 2.5% – they will be frozen.

With immediate effect the threshold for tax relief on pension contributions for higher earners has been reduced from £150,000 to £130,000.  The threshold will now include employer pension contributions too – which means that a salary sacrifice in exchange for employer contributions, in order to stay below the threshold, will no longer work.

Public sector pensions received a warning shot when it was announced that government would no longer accept unlimited liability for the impact of the pensions crisis on the cost of funding them.  Full details have not yet been released, other than the fact that the government expects to save £1 billion next year.  If you are in a public sector pension scheme, this means that you can no longer bank on receiving the full (and generous) level of pension that you may have expected.

Finally, there were a number of small changes that will eventually reduce the amount of income you could use to invest in pensions.  If you are employed, Class 1 national insurance will rise from 11% to 12% in 2011 – and of course VAT, which affects everyone, will revert to 17.5% from the end of this year.

You can get more detail about all of these changes from the DWP website – and a useful summary of the whole of the PBR can be downloaded from Informed Choice

Over 20 million* give politicians the thumbs down on pensions

With a general election poised to take place next year, nearly half of the adult British public think that none of the political parties will be effective in dealing with pensions issues. The newly launched Beat the Pensions Crisis (www.thepensionscrisis.com), a book and free website which aims to help people take control and plan their pensions, commissioned the YouGov poll** as part of its research to understand the attitudes of consumers.

Although the Conservative Party (20 percent) fare better than their political rivals, when asked which party would best deal with the UK’s pensions issues, an overwhelming majority (44 percent) said they didn’t believe any party would be effective at ironing out Britain’s pensions issues.  Only 15 percent thought Labour would be best, followed by the Liberal Democrats with 8 percent.

Brian Wood, co-author of Beat the Pensions Crisis, said:

“Pensions planning is arguably one of Britain’s biggest economic and political challenges. It is certainly one that will be discussed on the doorstep in the run up to a general election.  Currently seven million people are not saving enough*** to fund their retirement and this certainly isn’t being helped by a constantly shifting pension policy. There’s a continual to and fro over the age of retirement and yet another system of personal pension accounts being introduced in 2012.”

“People are concerned about what their retirements hold, they want help and they want answers. But, it’s clear that most people have lost faith in the ability of politicians. Therefore, people must start to find their own answers and take control of their own financial futures – we can no longer rely on the government to do this for us.”

“At Beat the Pensions Crisis, we aim to build a community of people united by a real desire to take control of their own retirements and improve them.  We recognise that the sheer volume of information, shifting policy and a financial services industry dominated by jargon has put people off engaging with this important issue.  We have launched a book and free to use website to cut through this jargon and give them the tools to properly plan for their retirement.”

Beat the Pensions Crisis’s authors will present their findings at a launch event this evening in London (30 November 2009).

Notes to Editors

* This figure was calculated as 43.61 percent of 46,920,100, the number of adults aged 18+ in Great Britain (ONS: Mid-2008 UK, England and Wales, Scotland and Northern Ireland: 27/08/09).

** All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2021 adults. Fieldwork was undertaken between 24th – 26th November.  The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

*** This figure was taken from the Personal Accounts Delivery Authority, Key Facts document.

Women should be thinking of Pensions – not Prada – this Christmas

Women tend to fare badly on the pensions front – not surprising when you realise that the whole pensions system was developed in our male-dominated past.  Only one third of women who are currently at retirement age qualify for a full state pension, so most are financially dependent on their husbands.

The differences continue in today’s society – women are more likely than men to work part time and have career breaks to care for children and, these days, ageing parents.   Women are still paid less than men in many professions and so any pension funds will be correspondingly smaller.

There is an argument that the increasing number of well qualified women who work full time will filter through and the pension numbers will look better. There is also the view that the recent changes in the rules for qualifying for a full state pension will make a big difference. I don’t think it will – 30 years full contributions strikes me as unlikely for many women who still bear the brunt of child care responsibilities.

I would argue that there are a series of social changes happening that are likely to make the situation even worse if women don’t take action. They are:

  • The growing number of lone parent families in the UK. Currently a quarter of all dependent children live with just one parent – and 90% of these parents are women.
  • The divorce rate in the UK is high and has been growing in the 60+ age category, so there is no guarantee that your marriage will survive.

Women need to start prioritising their pension savings to protect themselves from a miserable retirement.  As the TV Ad says: “You’re worth it!”.  Today would be a good day to start.

Claire Brinn

Claire Brinn talks to Bonsu and Juju on Colourful Radio

Claire Brinn, one of the authors of the ‘Beat The Pensions Crisis’ book , discussed the pensions crisis with Bonsu and Juju this morning at Colourful Radio.

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here . You also need to have JavaScript enabled in your browser.

(www.iamcolourful.com/radio/)

Can you trust pensions?

Pensions are getting a bad press at the moment as the impact of the pensions crisis begins to filter through into negative news about company pensions and personal pensions.

Does this mean that pensions products, whether company or personal, can’t be trusted?  Not at all, it actually means that we need them more than ever, and we need to take care to get the most out of them.  As we have said elsewhere, the pensions crisis has been caused mainly by longer life expectancy and lower investment returns, not by something inherently wrong with pension plans.

In fact, pension plans of whatever nature have a lot going for them.  You still get tax relief on contributions and the growth in the fund, and these can accelerate your retirement savings quite significantly.  And pensions are probably one of the most secure of financial products.  Company pension schemes are kept separate from your employer so that if they go bust the scheme doesn’t go down with them (and there is a government-backed Pension Protection Fund as backup).  Personal pensions usually come from insurance companies, whose regulation is so tight that we don’t know of any examples where a pension has yet failed to pay out.

That doesn’t mean you can completely drop your guard though – as someone once said “there is no free lunch”.  Investment returns can vary enormously depending on the investment strategy adopted and the expense charges deducted by your pension company – so you do need to pay attention.  That’s why we keep mentioning the importance of getting good professional advice when you are making big decisions about your retirement and pension.

How much should I be saving for my retirement?

You’ve read enough about the pensions crisis to be curious about your own … so how  much do you need to be saving to make sure you have a decent retirement?

There are several  different  approaches you may come across.  There are many on-line pension calculators that you can use.  These all have underlying assumptions about what investment returns are likely to be, levels of inflation and how long the average person might live.  Lots of people are put off by this and find it too complicated.  Our motto is always to err on the side of keeping it simple.  Why?  Well, that way you are more likely to do the calculation and take some action – which is what we are all about.

So let us suggest three simple approaches:

1. The 10% rule.

The recently launched pensions quality mark from the association of pension funds will be awarded to companies where at least 10% of employees gross earnings are going into a pension fund (with 6%+ being provided by the employer).   This is certainly a good starting point especially if you are in your 20s. Clearly if your employer has such a scheme it is in your interests to join and contribute enough to get the maximum employer  contribution.  Obviously the closer you are to retirement age , the more you will need to save, so in your 50s 10% is not going to be enough.

2. Half your age

A second option which we’ve spoken about in the book is to put aside half your age as a percentage each year.  So 10% if you are 20, or 20% if you are 40, and 25% if you are 50.  This is likely to be a better reflection of what you need at different stages. It also reflects the power of compound interest on your investments in that the longer your money is set aside the more it is going to earn.

3. 5%  interest

The final method is to estimate the annual income you will need in retirement and multiply it by 20 to determine the amount you need in your pension fund to retire.  For example, if you need an income of £50,000 then your fund needs to be £1,000,000.  The logic here is 5% (which is the same as 1/20th) is the rate of interest many financial advisers would recommend taking as income from your fund if you are looking to keep the capital intact for as long as possible.

So, three simple rules of thumb to give you a rough idea.  The next step is to run your own numbers and decide if you are on track.

Personal Finance Society supports “Beat”

The Personal Finance Society (PFS) has announced its partnership with Beat the Pensions Crisis.

Fay Goddard, chief executive of the PFS, said:
“We are delighted to be able to support the Beat the Pensions Crisis campaign. Consumers are understandably confused as to how best to prepare for their retirement and this can manifest itself in putting off key decisions until it is too late. It is important that the industry as a whole seeks new ways to engage consumers and I believe this partnership with the PFS will be highly beneficial in helping people take control of their financial futures.

The campaign is about getting consumers to take action and seeking professional financial advice will be essential for many. The advisers listed on www.findanadviser.org are not only qualified, but adhere to a respected code of ethics and commit to an ongoing programme of professional development. Consumers can also select a Chartered Financial Planner, an adviser who demonstrates the highest level of professional achievement and who is associated with the highest levels of trust by consumers.”

Brian Wood, co-author of Beat the Pension Crisis, said:
“We’re huge advocates of professional financial advice and see a great deal of synergy between consumers using Beat the Pension Crisis to find out which questions to ask and PFS members for high quality advice. Beat the Pensions Crisis aims to build a community of people united by a real desire to take control of their own retirements and improve them. In building a catalyst for consumer activity it makes absolute sense to give consumers access to the PFS’s highly qualified advisers to help them tackle their own pensions crisis.”

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