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Death of retirement: Can the UK afford the state pension?

BBC.co.uk

By Paul Lewis
Presenter, Money Box

On New Year’s Day 1909, more than half a million people aged 70 and more, who had worked all their lives, had passed a means test and were of good character queued up at their Post Offices for a State Pension of five shillings a week (25p) – around £20 in today’s money.
The pension paid more than a century later is very different. Today nearly 13 million people – men over the age of 65 and women currently over the age of 64 – receive the state pension. A full one is around £160 a week (£8,300 a year) and one in seven pensioners – close on two million people – survive on nothing else.
It costs more than £100bn a year but those costs will rise in the coming decades. The Office for National Statistics projects that the cost will double to £200bn by the mid-2030s and and double again to £400bn in the 2050s.
The reason is simple, according to Michael Johnson, a research fellow at the think tank the Centre for Policy Studies (CPS).
“From 1940 to 2010 the state pension age didn’t move at all. In 1940 it was 60 for women, 65 for men, as it was in 2010,” he says.
“But life expectancy over that 70-year period had increased by around 17 years, so we are faced with a fundamental problem that this is something we should have addressed a very long time ago and didn’t and therefore to address it now makes it much, much more challenging.”

Although the state pension is hard to live on alone, to buy an equivalent index-linked income from an insurance company would cost more than £250,000. Investment platform Hargreaves Lansdown estimates that to save that much would require £300 a month for 40 years.

Can we afford to give all workers a pension that generous?

The European Union collates the data on pension spending. On that measure, in 2020, the UK will spend 7.4% of its national income, or GDP, on state pensions. That puts us 25th out of 28 members, well below the average 11.2% of their GDP.

France, in the middle of the table, has compulsory pensions that replace 56.8% of earnings for someone on average pay. It will spend 14.6% of GDP on them, double what the UK spends. Internationally, we are misers not spendthrifts. Things look a bit better for the UK in another OECD table which counts all pensions, including occupational and personal ones too. Then we come 22nd out of 34 for those lucky enough to have a pension through their job. Auto-enrolment is now extending pensions at work to millions more. It counts as a compulsory pension so that will push us a few rungs up the first OECD table but not many. Ms Queisser says: “We’ve looked at what would happen if the UK had the auto-enrolment scheme as a mandatory scheme, and then indeed the UK would move up to 22nd or 23rd.”

Michael Johnson of the CPS – a centre-right think tank co-founded by Margaret Thatcher – is unimpressed by the international comparisons. He believes we cannot afford the state pension. GDP estimates, he says, are uncertain and countries that spend more than the UK may not be able to do so for long.
He points out that the National Insurance contributions paid into the National Insurance fund are not always sufficient to cover the cost of paying out pensions. As a result, in 2014-15, a Treasury grant of £4.6bn was required to plug the gap, so what was going out was larger than what was coming in. The following year, 2015-16, that grant had risen to £9.6bn.

He also believes a fixed pension age is an unfair lottery. Some would draw a pension for 10 years, others for 30, but all pay the same National Insurance contributions.
As an example, he says, imagine two 65-year-old men, one living in Chelsea in west London and the other living in Tottenham Green in north London.
“The life expectancy of the 65-year-old Chelsea man is around about 88. For Tottenham Green man it is about 71.
“So Chelsea man will enjoy the state pension for about 22 years and Tottenham Green man will enjoy it for approximately five. That seems extremely unjust to me.”
The growing cost of the state pension – albeit low by international standards – has led some to suggest that it should be means-tested once more.
This could be done either by limiting it to those with an income below the current limit to get means-tested help under the present system, or by taking it away from those who are better off – perhaps aligning it with Child Benefit which is progressively taken away from parents with an income above £50,000 a year.

5 Ways to check if you’re on track for retirement

Dailymail.co.uk

I pay into a pension at work and won’t retire for ages. Can I not think about it for a few years or is there something else I should be doing? What should I check on and how often?

Richard Parkin, head of pensions policy at Fidelity International, replies: Firstly, it’s great news that you joined your workplace pension and have stayed in.
Workplace pensions are almost always the right thing to do because of the employer contribution. Also, the earlier you start the better.
In terms of what you should be thinking about, there are a few basic steps that will help you stay on track.

1) Make the most of your employer contributions.
While employers are required to make a minimum level of contribution on your behalf, many will do more.
Check with your employer and see if they offer a ‘contribution match’. This means that they match additional contributions you make into your pension up to a maximum. An example of this is where your contribution is matched up to a maximum of 8 per cent meaning that your pension would receive 16 per cent in total. A not inconsiderable amount!

2) Pay in as much as possible and use tools to help you.
The question of how much you need to save for retirement is full of uncertainty but there are tools that can help.
The provider of your employer pension will almost certainly have tools that allow you to input your salary, contributions from employer and yourself and other details to tell you what your pot could look like when you come to retire.
And if they don’t? Google ‘Pension Calculator’ and you get lots of options which you can utilise. Calculators are good as they give you a rough idea of where you will end up as well as allowing you to see where you could do better. Remember though that these calculators are only showing what could happen, not what will. The best way of using them is to regularly review how you’re getting on and adjusting your approach accordingly.

3) Check where your workplace pension is invested.
If you’ve been put in to your employer’s pension scheme automatically, then you will almost certainly be in something called the default fund. And unless you are an investment expert or feel very confident investing by yourself, I would suggest you stay in it. The default fund is designed for people who haven’t actively chosen where they want their contributions to go. Generally these funds are invested in higher risk, higher return assets such as company shares when you have a long time to go to retirement and so can tolerate the ups and downs of the market. Default funds are also subject to a cap on charges so that pension providers cannot charge more than 0.75 per cent of the fund each year. Many will charge significantly less than this but cheap doesn’t always mean better.
It may make sense to review your investment options closer to retirement when you have a clearer idea of what you need from your pension and getting advice to help you at this time is a great idea.

4) Look at whether your investments could do better.
For those who want to get more involved with choosing investments then there are a few things to think about. Firstly, remember that different funds will have different levels of risk. You generally have to take more risk to get more reward. When you are a long way from retirement you have more time to recover from any market falls so it can pay to invest in funds that hold riskier assets such as company shares (often called equities) with the aim of growing your savings.
Generally funds that focus in one sector or region can be riskier than funds that invest in larger companies and spread their investments globally so you should think carefully before putting large parts of your savings into these.
Fixed income funds will tend to be less risky than equity funds but will generally offer lower returns. But don’t think all fixed income funds are the same. Those that invest in high yield debt – loans to riskier companies or countries – or long-term debt can still be very volatile.
Multi asset funds will hold a mix of investments and the fund manager will usually change the mix based on their view of markets. These may be a better choice for those who are less confident making all the decisions.
Whatever fund you’re considering, check the fund fact sheet to get a better understanding of its risk profile. As always, don’t just invest in a fund because it has done well in the past. All too often it is those investments that have done well that are likely to struggle in the near future. Pension saving is for the long-term. Trying to time markets in the short-term may not deliver the best long-term returns.

5) Don’t feel you have to check your pension every day.
It’s important to know how much you have in your pension but it’s not a bank account so you don’t need to check it every day.
If you do, remember that investments will go up and down so don’t feel that you have to change things just because the markets aren’t doing so well today. Taking a long term approach is important.

Assured Retirement named as Moneyfacts finalists

Moneyfacts.co.uk

Investment Life & Pensions Moneyfacts Awards 2017

Assured Retirement are delighted to announce that we have been shortlisted as a finalist in the 2017 Investment Life & Pensions Moneyfacts Awards. We have been shortlisted in the Best Third Way Product Provider category alongside much larger and longer established providers such as Aegon, Legal and General, LV= and MetLife.

The Moneyfacts Awards are one of the highlights of the personal finance industry calendar. Rigorous product monitoring is carried out throughout the preceding year and the intermediary community is also consulted for their feedback.

The finalists and eventual winners of the Investment Life & Pensions Moneyfacts Awards are decided by a combination of methods. Two elements make up the product-specific categories: the first is a financial adviser voting process that takes place between 6 March 2017 and 19 May 2017, whereby advisers are asked to nominate their top three providers across the full range of protection, retirement and investment products. Advisers are free to nominate any providers they desire, rather than having to select from a pre-determined shortlist. These results are then given over to the analytical expertise of our research team, who will thoroughly examine each provider’s product pricing and features during the preceding 12-month period to come to the final decisions.

The public announcement of the shortlists was made on Thursday 22 June and the eventual winners will be announced at a dinner at the Royal Lancaster Hotel, London on 21st September 2017.

‘Help – my Mum’s asked me (aged 23) for pensions advice’


Telegraph.co.uk

For those facing retirement with modest pension pots, the cost of getting help and advice can be prohibitive, leaving many stranded to make potentially life-changing financial decisions alone.

Someone aged 65 can expect to live for 20 years, and the range of options available is constantly expanding.

This presents a frightening challenge for many.

Recent years have seen increased pension flexibility, in part from the launch of pension freedoms in 2015 that means there is no compulsion to buy an annuity and money can remain invested.

This has been matched by growing complexity and a greater risk of making mistakes.

Dismal annuity rates are also pushing many toward self-managing their funds in retirement.

Without any financial expertise, deciphering a course of action is daunting. Professional advice is the answer for many.

But it can easily cost thousands which makes it hard to stomach for those with smaller amounts.

Many instead turn to their friends and family for help – some even hand their cash over to be run for them.

This has created an army of unqualified “financial advisers” across Britain, with varying levels of success.

This is a situation I have found myself in.

My mother and stepfather are approaching retirement and, as someone who writes about money for a living, my mother has asked me for help.

Sheena Prenter, my mother, turns 52 this year and will be semi-retiring at 55.

She has been a nurse for the NHS since she was 18 and can claim a “defined benefit” pension at the age of 55 estimated to pay £15,000 a year, linked to inflation. She will also be able to claim a full state pension.

Her NHS pension comes with a sizeable lump sum upfront, which when combined with cash savings gives them a pot equivalent to two years’ of her current annual salary.

Ross Prenter, my stepfather, is 65 and already receiving his partial state pension. He has been self-employed in property maintenance for the past 20 years, but also receives a £90 monthly pension payment from his time working in a foundry.

When my mother hits 55 they plan to sell their mortgage-free two-bedroom property in Buckinghamshire and move to Ireland where she grew up – and where their money will go a lot further.

Mum will carry on working part-time and my stepfather will enjoy a well-deserved retirement.

Thanks to the defined benefit pension, their income is largely secure. But with my mother in particular facing the prospect of 30 years or more in retirement, making sure their cash savings and pension lump sum don’t get eaten by inflation is crucial.

“The cash is so we can enjoy a good standard of life in Ireland – we don’t need big holidays or anything like that, but want to be comfortable,” she said.

There are places I have been able to help, moving money out of a bank account paying a derisory rate and into the best possible fixed-rate Isas and bonds, and making sure my mother has had the numbers run on numerous pension scenarios.

But it has become apparent that I do not have many of the answers.

With a long time horizon, the stock market makes sense as a home for at least some of their savings – but it’s not something they’ve ever considered.

My first conversation with her about how investing works and the kind of investment funds that might be suitable appeared to go well.

She understood that ups and downs were to be expected, the need for a long-term view and the advantages over cash in the long run.

But a few days later I got a text that sends me into a minor panic, including the line: “There’s an awful lot of small investment firms out there promising high interest rates.”

After making sure she knows that most of these firms cannot be trusted, her response was that they would stick to cash accounts – back to square one.

If they are going to invest, it needs to be their choice.

Top pitfalls when you reach retirement and how to avoid them

Dailymail.co.uk

For many of us, retirement conjures images of rest and relaxation, more time to travel and get things done around the house and in the garden.
But a comfortable retirement requires an income, and it can be tricky to know how best to take your pension when you haven’t done it before.
There are some common pitfalls that could trip you up on the way but, the good news is, avoiding them isn’t as hard as you might imagine. And there is always help on hand from Pension Wise, the Government’s free and impartial guidance service.
Here are some of the top pension pitfalls and how to avoid them to get you started.

Leaving it late to start saving
This isn’t technically a pitfall when you reach retirement age but it’s important to bear in mind before you get there.
You may have just started working and retirement may be decades away, but the earlier in life you start saving into a pension, the less you have to save each month to build up a decent pot.
It’s never too early to put money into your pension.
Employees also contribute towards a workplace pension, sometimes matching your contributions, which means the more you put in, the more you get paid.
Once in your pension pot, your savings will be invested, meaning they have longer to grow over time. This is both because of time invested in the market but also because any income you earn from your investment is reinvested, allowing you to earn returns on a larger amount than you put in.

This is known as compounding and over time it can dramatically grow your savings and could make a big difference to the amount you have to retire with.
Don’t despair if you have left it later to start saving however.
It’s never too late to start: you can work out exactly how much you’ll need to put away to fund the retirement you envisage using This is Money’s pension pot calculator.
When you reach your state pension age, you also don’t have to stop saving into your personal pension. As long as you’re resident in the UK, you’re entitled to save into your pension and get tax relief up to the annual and lifetime limits set by Government up until the age of 75.

Leaving your investment strategy unchanged throughout your lifetime
Saving into a pension usually means leaving your money invested for the long term. This is because there are onerous penalties for withdrawing your money from a pension early – it’s not like a savings account that lets you access your savings whenever you like.
If you start saving into a pension early, this means that your money stays locked away for longer and therefore has more time to grow.
In general, the earlier you start saving the more risk you can afford to take on your investments.
This is because while there might be volatility over the short and medium term, this should smooth out over a longer period of time, and in general stock markets have risen overall over the long term.
So you should be able to invest in higher risk, higher return investments earlier in life as they have longer to grow, smoothing out this volatility.
As you get closer to your retirement age, you might want to transfer your investments out of higher risk investments and into lower risk ones.
For example – in your 20s, your pension might be more heavily invested in equities (or equity funds) while in your 60s, more of your pension might be transferred into lower risk assets.
A financial adviser can help you to balance your investments in a way that suits your appetite for risk as well as how long your pension will remain invested.
As your priorities change over the course of your life, it’s a good idea to review this balance.

Accepting what your pension provider tells you without shopping around
The pension provider you have saved with will not always offer all types of pension products for when you retire. Some also focus their specialism on providing one type – an annuity or drawdown for example.
This may mean they offer competitive products in one category but not in another.
When you reach your ‘selected retirement age’ – the age you agreed to retire – your provider will usually send you a ‘wake-up’ pack.
This will probably contain information on only the products they offer, although many providers do include information suggesting you could get a better deal by shopping around other providers.
They won’t go into detail on this, though it’s likely that new rules will mean you can compare rates more easily after September this year.

Going it alone – get guidance
Working out what to do with your pension savings can be daunting when there are so many options. But you don’t have to go it alone and there is free help available.
Whatever you decide to do with your pension savings, it’s a good idea to take advantage of the Government’s free guidance by making an appointment with Pension Wise.
You can go online, book an appointment to speak to someone over the phone or see someone in person at one of hundreds of sites around the UK by calling 0800 138 1583.
This service is designed to help you understand your options but it won’t make a recommendation for what you should or shouldn’t do. That decision remains yours.
If you want more specific financial advice on what to do with your pension savings, it may be a good idea to see a financial adviser who will be able to provide you with a retirement plan and help choosing the best value products for you.

Annual pension allowance: how to avoid getting caught this year

There has been a startling rise in the number of people who breach the annual pension allowance and who now risk HMRC clawing back tax perks, new figures show.

Telegraph.co.uk

Between the tax years 2012‑13 and 2014‑15, the most recent for which data is available, there was a 79pc increase in the number of people who saved more in a pension in a single year than the pension allowance rules allow.

This is more evidence that the pension system has become so complicated that the rules are having the perverse effect of discouraging prudent saving for later life.

Pension company Royal London extracted the data on the “annual allowance” from the taxman using a Freedom of Information request.

It found that in 2012‑13, when the annual pension allowance was £50,000, 3,900 people reported that they had saved more than the limit. This rose to 5,800 in 2013‑14 and 7,000 in 2014‑15 – an increase of 79pc.

The true figure for breaches is likely to be far higher as HMRC’s statistics only show people who reported how much they had contributed to a pension.

Many others, particularly those in “defined benefit” pension schemes, will be unaware, because of employers’ contributions and the complicated methods used to calculate the total.

Since 2014‑15 the annual pension allowance has been £40,000 for most people, down from a high of £255,000 as recently as 2010‑11. Ministers have steadily cut the allowance in a bid to save billions of pounds on pension tax incentives.

When you save into a pension, your contribution is topped up by the Government in line with your rate of income tax. So a higher-rate (40pc) taxpayer has to pay in only £60 to make a £100 pension contribution.

But this tax perk is subject to the £40,000 annual contributions allowance and the £1m lifetime limit on pension fund value. If HMRC discovers savings beyond these levels it will reclaim the tax relief it paid out.

Steve Webb, a director at Royal London and former pensions minister, warned that more people would break the limits next year.

Unmarried woman wins right to claim her late long-term partner’s pension

A woman who was denied payments from her long-term partner’s pension because they were not married has won a landmark appeal. Her victory at the Supreme Court could improve the rights of millions of other cohabitees across the UK.

Dailymail.co.uk

Denise Brewster, 42, challenged a ruling that she was not automatically entitled to a ‘partner’s pension’ as she would have been, were she married to her partner when he died.

Ms Brewster, a lifeguard from Coleraine, Northern Ireland, and her partner Lenny McMullan had lived together for ten years and owned their own home. They had got engaged just two days before Mr McMullan died.

Five Supreme Court justices unanimously ruled she is entitled to receive payments under the pension scheme.

Ms Brewster’s solicitor, Gareth Mitchell of public law firm Deighton Pierce Glynn, said the ruling could affect millions of cohabitees. He said: ‘Denying bereaved cohabitees access to survivor pensions causes huge distress and financial hardship’.

‘Now that around one in six families in the UK are cohabiting families, reform is long overdue.
The decision has significant implications for millions of cohabitees in relation to partner’s pension benefits.
It also lays down the approach to be adopted when considering complaints of discrimination on the grounds of marital status in other areas. This was a decision of the Supreme Court of the UK and it affects the whole of the UK.’

Steve Webb, Director of Policy at Royal London, and ex-pensions minister said: ‘This is a very welcome ruling. It is totally unacceptable for cohabiting couples to be treated as second class citizens.’

‘With more than six million people living together as couples and the numbers rising every year, this is an issue that needs to be addressed as a matter of urgency. We need pension scheme rules which reflect the world we live in today, and not the world of fifty years ago.’

Ms Brewster and Mr McMullan lived together for ten years and got engaged on Christmas Eve 2009, but he died suddenly between Christmas night and the early hours of Boxing Day morning.

He had 15 years’ service with Translink, which delivers Northern Ireland’s public transport services, and had been paying into Northern Ireland’s local government pension scheme.

The scheme automatically allows married partners to obtain a survivor’s pension, but unmarried partners only receive it if they opt in to the scheme.

This involves filling out a form, to be signed by both partners. Ms Brewster had met all the other criteria, but because she and her partner had not completed the form, the scheme (the Northern Ireland Local Government Officers’ Superannuation Committee) refused her the pension.

The High Court in Northern Ireland then allowed her legal challenge against the refusal, after which the Northern Ireland Court of Appeal overturned the decision.

Today, the Supreme Court overturned that decision and ruled in Ms Brewster’s favour.
Helen Mountfield QC, representing Ms Brewster, had asked the Supreme Court to declare that the opt-in nomination rule breached the European Convention on Human Rights.

Younger generations are likely to inherit much more wealth than their predecessors

Younger generations are likely to inherit much more wealth than their predecessors did, both in absolute terms and relative to their other sources of wealth. But within each generation, those who are already well off tend to inherit the most – with implications for inequality and social mobility.
Ranking current pensioners by total lifetime income (excluding inheritance), those in the top 20% have inherited four times as much as the bottom 20% on average. Among younger generations, those with higher incomes are significantly more likely to expect an inheritance than those with lower incomes.
These are among the main findings of new IFS research published today, which looks at the impact of inheritances on inequality across and within different generations.

Inheritances are going to be more important for younger generations …

Between 2002–03 and 2012–13, the wealth of elderly households (those in which all members are 80 or older) increased by 45%, mostly as a result of higher homeownership and rising house prices. 72% of these households now expect to leave an inheritance, up from 60% a decade ago, with a particularly sharp increase in the proportion expecting to leave a large inheritance.
Younger generations look much more likely to inherit than their predecessors. Of those born in the 1970s, 75% have received or expect to receive an inheritance, compared with 61% of those born in the 1950s and less than 40% of those born in the 1930s.

… and are likely to benefit those who are already well off the most.

Future inheritances are likely to be highly unequal. Even excluding the super-rich (for whom we do not have reliable data), Institute for Fiscal Studies and the richest 10% hold 40% of the wealth. Hence a ‘lucky half’ of younger generations look likely to get the vast majority of inherited wealth.

The largest inheritances tend to go to those who are already well off. Among current pensioners, more than half of those with families well enough off to leave them more than £250,000 in inheritance have lifetime incomes (excluding inheritances) in the top 20% of the population.

Among younger generations, higher-income individuals are more likely to expect an inheritance. Looking at those born in the 1970s, 9 in 10 of the top-income fifth have received or expect to receive an inheritance, compared with 6 in 10 of the lowest-income fifth.

But both low- and high-income households in younger generations are more likely to inherit something than their predecessors. In fact, the lowest-income fifth of those born in the 1970s are more likely to have received or expect to receive an inheritance than the highest-income fifth of those born in the 1930s.

Andrew Hood, an author of the briefing note and a Senior Research Economist at IFS, said:
“The wealth of younger generations looks set to depend more on who their parents are than was the case for older generations. Today’s elderly have much more wealth to leave to their children than their predecessors did, primarily as the result of higher homeownership rates and rising house prices. At the same time, today’s young adults will find it harder to accumulate wealth of their own than previous generations did, due to the sharp fall in homeownership for that group, the dramatic decline of defined benefit pensions in the private sector and the stagnation in their incomes.”

Over £9.2bn accessed through pension freedoms

Moneymarketing.co.uk

Savers have accessed a total of £9.2bn through pension freedoms since the reforms were announced, with around £1.6bn taken from pension pots in the last three months.

Figures published by HM Revenue & Customs show a total of 516,000 payments were made from pension pots between April 2015 and March 2016, and over one million payments were made between April 2016 and the end of last year.

The number of individuals accessing their pension on a quarterly basis has almost doubled from 84,000 in the three months to June 2015 to 162,000 as at the end of 2016.

The data from HMRC covers “flexible payments” from pensions, which include full or partial withdrawals, flexible drawdown and buying a flexible annuity.

The Treasury says guidance service Pension Wise has had over 3.7 million visits to the website and carried out over 100,000 appointments since pension freedoms was introduced in April 2015.

Treasury economic secretary Simon Kirby says: “Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do.

Grandparents miss out on pension perk for childcare help

Dailymail.co.uk

The state pension perk worth £4.5k in retirement: 100,000 grandparents helping to raise children are urged to claim benefit
Only 1,300 or 1% of eligible grandparents are using little-known pension perk
This is costing them 1/35th of the full state pension or £231 per year
Over a 20-year retirement this amounts to a loss of more than £4,500
Ex-Pensions Minister Steve Webb uncovered poor take-up via an FOI request
He is urging the Government and HMRC to do more to alert parents and grandparents about the scheme

Around 100,000 grandparents taking on childcare duties could be unwittingly losing credits towards a state pension worth thousands of pounds, new research reveals.
Just over 1 per cent of working age grandparents who are eligible for the little-known pension perk are currently taking advantage of it, according to new estimates.
Ex-Pensions Minister Steve Webb is urging the Government and HMRC to do more to alert parents and grandparents of under-12s who qualify and encourage them to apply for the scheme. Webb, now policy director at Royal London, recently uncovered the poor take-up levels via a Freedom Of Information request to HMRC.

The recipient must still be of working age, but otherwise the process involves the parent filling in and submitting a form.
‘A grandparent who gives up work to look after the grandchild would otherwise be losing out on valuable state pension rights,’ said Webb.

‘If a working age grandparent misses out on one year of state pension rights because they are spending time with a grandchild instead of doing paid work, this would cost them 1/35th of the full rate of the state pension or £231 per year. Over a 20-year retirement this would be a loss of over £4,500.’

But Webb discovered from his FOI request that this perk, officially called the ‘Specified Adult Childcare Credit’, is so obscure that just 1,298 grandparents or other qualifying family members signed up in the year to September 2016.