Author Archive

The Gender Pension Gap

Tuesday, March 16th, 2021

The gender pension gap is the percentage difference in pension income for female pensioners compared to male pensioners.

Latest research shows that it increased to 40.3% last year. This was more than twice the level of the gender pay gap that year (17.3%).

The gender pension gap is particularly detrimental because it starts to affect women when there is little they can do about it.

A huge barrier to tackling the gender pension gap is the government’s lack of attention to it. There is no government estimate of the gender pension gap or policies to address it.

Reports shows that the main causes of the gender pension gap are:

  • An imbalance in the level of occupational and private pension saving between men and women. This has occurred and continues to be the case for many reasons including:
    * The impact of women taking breaks from paid employment or reducing hours worked to look after family
    * The cumulative impact over time of women earning less on average than men (the gender pay gap).
  • The indirect gender discrimination that is built into the pension system itself, including the disproportionate exclusion of women from being automatically enrolled into a pension scheme.
  • Inequality in the average level of state pension awarded to men and women. This is not projected to be fully addressed until about 2041 (but only for people reaching State Pension Age from that year)

To tackle the gender pension gap:

  • A statutory requirement for the government to report to Parliament on the gender pension gap and its plans for tackling it
  • Reform of automatic enrollment from the earliest possible date
  • An inquiry by the Work and Pensions Committee on the gender pension gap
  • An additional state pension credit for those who are not working because they are looking after children under 12
  • Measures that make affordable childcare more widely available so that people who want to return to work can do so
  • An independent Commission to consider the appropriate level of contributions under automatic enrolment
  • A concerted campaign to encourage higher take-up of credits that can boost women’s pension income
  • Changes to the tax system to resolve the ‘net pay anomaly’ whereby low earners do not benefit from tax relief on their contributions.

Raiding Pension Pots Could Be Costly

Thursday, January 7th, 2021

Desperate savers are raiding their pension pots to plug holes in their finances caused by the pandemic.

But calculations today reveal that pulling out your tax-free lump sum will cost you dearly in retirement.

Pension savings are locked up until you reach 55 when you can get your hands on every penny – or a 25 per cent tax-free lump sum.

The pandemic and deepening recession has caused much financial hardship, pushing many to dip into their pension funds early.

The latest figures show a rise in the number of people doing just that over the past three months.

HMRC data shows a 2 per cent rise between July and September compared with the second quarter of 2020 and a 6 per cent increase compared with the same time last year.

Yet there are now fears many more could follow after a third lockdown.

Experts warn that you should only to take money from your pension early as a last resort because of the damage it does to the value of your fund when you come to retire.

Starting to take an income from your pension at age 55 rather than 65 means you lose out on some or all investment growth for ten years.

A pension pot worth £250,000 at the age of 55 could grow to £380,000 over another ten years, according to calculations by Aegon.

Using that £380,000 pot to buy an annuity at today’s rates would give you an annual income of nearly £18,000. By contrast, the £250,000 pot would buy an income of just £8,700 a year.

If the saver chose to take the 25 per cent lump sum from the £250,000 pot at the age of 55, this would reduce the pot by £62,500.

But it would also cut the value of their final retirement pot to £284,000. This would mean the retiree could get an annuity income of £13,000 a year, rather than £18,000.

Steven Cameron, pensions director at Aegon, says: ‘Those over 55 do have the option of starting to draw on their pension but this can cause lifelong damage to future income and for most it should be a last resort.’

Jon Gale, 55, from Manchester, decided to cash in his tax-free lump sum in August.

He says: ‘Everything is rather uncertain at the moment and if the Government starts tinkering with the pension rules, I didn’t want to lose out.

‘I have no plans to retire but I wanted to ensure I got my 25 per cent tax-free to pay off a loan and have a decent financial buffer.’

Jon, who works in financial services, took the lump sum from a self-invested personal pension (Sipp) with investment platform AJ Bell. The six-figure sum is a number of old and closed workplace schemes from previous jobs consolidated into one.

He has now placed the money into premium bonds and invested a smaller portion in a stocks and shares Isa.

He says: ‘I appreciate that this money will not have the same opportunity to grow as it would in my pension. But job security is a worry for all of us, and so easy-access cash provides an important safety net.

‘Once we get through this pandemic, I would like to consider my options and look to enhance my skill set and possibly take time out to travel. Life is short.’

Over-55s who have suffered a job loss recently – because of Covid or otherwise – may have resorted to using their pension as a replacement income until they can find more work.

Nearly four in ten over-55s are now more worried about job security, according to a study by Standard Life. A third said they would retire early if they were made redundant in the next 12 months.

The HMRC figures show that individual withdrawals in the last quarter were £500 lower per person compared with the value of withdrawals in the same period last year, at £6,700 per person.

Covid Impact on the Triple Lock

Saturday, December 12th, 2020

The state pension ‘triple lock’ will boost pensioner income by 2.5 per cent next April, after what looks set to be a grim winter dominated by Covid-19 and economic hardship.

The triple lock means annual state pension rises are decided by whatever is the highest of price inflation, average earnings growth or 2.5 per cent.

Confirmation today that September’s headline inflation rate was 0.5 per cent, while wages declined 1 per cent over the summer, means that third element will apply.

The Government has so far stuck to its popular state pension pledge to older voters.

However, as the working age population struggles with wage cuts and rising job losses it is likely to face mounting pressure to abandon the guarantee.

From April, pensioners are set to get an increase of £4.40 a week to £179.60 if they receive the full ‘new’ state pension introduced in 2016, or a rise of £3.40 a week to £137.65 if they are on the full ‘old’ basic rate.

That’s around £9,300 or £7,200 a year respectively.

Financial experts have already warned a big correction in pay levels after the Covid-19 crisis could mean a massive increase in the state pension in April 2022.

This could provoke even greater opposition to the triple lock if the nation hasn’t yet bounced back from the pandemic. Meanwhile, the outcome of Brexit remains an unknown until we see the shape of future trade deals with the EU and the US.

The Institute for Fiscal Studies points out that the latest increase means the basic state pension has risen 41 per cent over the past 11 years, compared to 25 per cent if it had been linked to inflation or 22 per cent to earnings growth.

It cites estimates putting the extra cost at £5.6billion if calculated up to the current year, plus a further £3.2billion if the policy remains unchanged by 2024–25.

Defenders of the triple lock insist it is a vital safeguard against pensioner poverty and that the state pension isn’t as generous as similar schemes in other countries.

And any move to axe it would cause a backlash among elderly voters, who paid contributions for their state pension throughout their working lives.

Pitfalls of Raiding Your Pension

Saturday, September 19th, 2020

Desperate savers are raiding their pension pots to plug holes in their finances caused by the pandemic.

But calculations today reveal that pulling out your tax-free lump sum will cost you dearly in retirement.

Pension savings are locked up until you reach 55 when you can get your hands on every penny – or a 25 per cent tax-free lump sum.

The pandemic and deepening recession has caused much financial hardship, pushing many to dip into their pension funds early.

The latest figures show a rise in the number of people doing just that over the past three months.

HMRC data shows a 2 per cent rise between July and September compared with the second quarter of 2020 and a 6 per cent increase compared with the same time last year.

Yet there are now fears many more could follow after a second lockdown.

Experts warn that you should only to take money from your pension early as a last resort because of the damage it does to the value of your fund when you come to retire.

Starting to take an income from your pension at age 55 rather than 65 means you lose out on some or all investment growth for ten years.

A pension pot worth £250,000 at the age of 55 could grow to £380,000 over another ten years, according to calculations by Aegon.

Using that £380,000 pot to buy an annuity at today’s rates would give you an annual income of nearly £18,000. By contrast, the £250,000 pot would buy an income of just £8,700 a year.

If the saver chose to take the 25 per cent lump sum from the £250,000 pot at the age of 55, this would reduce the pot by £62,500.

But it would also cut the value of their final retirement pot to £284,000. This would mean the retiree could get an annuity income of £13,000 a year, rather than £18,000.

Steven Cameron, pensions director at Aegon, says: ‘Those over 55 do have the option of starting to draw on their pension but this can cause lifelong damage to future income and for most it should be a last resort.’

Jonathan Fish, 55, from Manchester, decided to cash in his tax-free lump sum in August.

He says: ‘Everything is rather uncertain at the moment and if the Government starts tinkering with the pension rules, I didn’t want to lose out.

‘I have no plans to retire but I wanted to ensure I got my 25 per cent tax-free to pay off a loan and have a decent financial buffer.’

Jonathan, who works in financial services, took the lump sum from a self-invested personal pension (Sipp) with investment platform AJ Bell. The six-figure sum is a number of old and closed workplace schemes from previous jobs consolidated into one.

He has now placed the money into premium bonds and invested a smaller portion in a stocks and shares Isa.

He says: ‘I appreciate that this money will not have the same opportunity to grow as it would in my pension. But job security is a worry for all of us, and so easy-access cash provides an important safety net.

‘Once we get through this pandemic, I would like to consider my options and look to enhance my skill set and possibly take time out to travel. Life is short.’

Over-55s who have suffered a job loss recently – because of Covid or otherwise – may have resorted to using their pension as a replacement income until they can find more work.

Nearly four in ten over-55s are now more worried about job security, according to a study by Standard Life. A third said they would retire early if they were made redundant in the next 12 months.

The HMRC figures show that individual withdrawals in the last quarter were £500 lower per person compared with the value of withdrawals in the same period last year, at £6,700 per person.

Tracking Your Pension

Friday, June 12th, 2020

Track down your old workplace pensions 

This could prove one of the most lucrative couple of hours you’ll ever have. Get a pen and paper, make a cup of tea and think through every job you have had. Try to get a value for every pension you accumulated.

If there are any unaccounted for, you have two options. If the pension is relatively recent – roughly from the last 20 years – you should be able to get in touch with your former employer to ask for details.

If you left them a while ago, you may have to use the Government’s Pension Tracing Service. This will tell you who controls old pension schemes and their contact details.

Now update your contact details 

Once you have found all your old pensions, make sure the providers know where to find you. Only one in 25 people remember to tell their pension provider they have moved home.

This, combined with name changes when people get married or divorced, means that pension pots worth around £19.4billion have gone unclaimed.

Look at all of your pensions together

Part of the appeal of the pensions dashboard is that it should give a snapshot of exactly what pensions you have. If you discover the amount you have won’t meet the lifestyle you hope for in retirement, you can devise a plan to make up the difference.

You can look at all of your pension savings in one place by creating a simple spreadsheet on a computer.

But there are lots of apps that allow you to link up your pensions. Some go a step further than a pensions dashboard would because they allow you to see all your savings, debts and investments in one place.

You could try to consolidate the pots

Once you’ve all of your pensions in one place, you could consider consolidating some – or all – of them. The advantage is that they will be easier to keep track of and you may be able to lower fees.

Angela Lloyd-Read, a chartered financial planner at Connor Broadley Wealth Management, says: ‘Consolidating your pensions could save you money as some providers may reduce charges when pension savings reach a certain level. Moving from a more expensive provider to a cheaper one could save a lot of money over the many years a pension will be invested for.’

Covid-19 – Support Scheme Announced

Thursday, March 26th, 2020

Rishi Sunak has confirmed a financial package for self-employed workers who have been impacted by the virus outbreak.

The Self-Employed Income Support Scheme means that self-employed workers are able to receive up to 80% of their monthly wages, up to a maximum of £2,500 per month.

A self employed person or sole trader means someone who works for themselves in business. This is not to be confused with the director/owner of a limited company. Directors are technically employees of the company.

The payments will be calculated using the average monthly profits over the last three financial years. Where three years isn’t feasible, such as for younger business for instances, HMRC will instead average the period they do have up to three years.

  • To qualify for the Self-Employed Income Support Scheme, applicants must have filed a return for 2019, and will be given four weeks to file this if it is still outstanding.
  • The scheme is also only available for businesses whose yearly profits do not exceed £50,000
  • The majority of your earnings must be from your self-employed work. Those who receive the majority of their earnings from regular employment will not be eligible.
  • Those who pay themselves a salary and dividends through their own company are not covered by the scheme, but will be covered for the salary element of their income through the job retention scheme if they operate PAYE.

The Chancellor announced that the scheme is expected to be up and running by the beginning of June, though they hope to be able to make it available online more quickly.

This means that when the scheme does roll out, eligible self-employed workers will receive three months of backdated pay in June, in one go.

HMRC will directly contact those who are eligible, and include the relevant form to be completed.

There are also other existing schemes which have been updated to make them more accessible at this time.

Universal Credit for self-employed workers affected by coronavirus COVID-19

Universal Credit is a type of monthly benefit payment which can be used towards living costs.

If you do need support, begin your claim as soon as possible. The sooner it starts, the less financial pressure. Sensibly, the face-to-face appointment part of the application process has been replaced with a telephone interview for those who are self-isolating. This won’t affect your ability to claim an advance payment upfront.

How much can a self-employed person get through Universal Credit?

How much Universal Credit you can get depends on your circumstances. The short version is that there is a standard allowance which might be topped up further; for instance, if you have children.

There are lots of variables, so it’s worth using a benefits calculator or table from a reliable website such as EntitleTo.

It’s worth noting that age, savings, and whether you are single or applying as a couple also affects how much you can receive.

The good news is that the Chancellor has announced the current standard allowance will be increased. For one year, beginning 6th April 2020, claimants will receive an additional £20 per week.

Reasons to Take Financial Advice

Wednesday, January 29th, 2020

There are life-changing moments when we feel expert advice can make all the difference. Here’s five moments where if you’re unsure you should seek advice: This article is not personal advice. If unsure, please seek advice.

1. Retirement

Your retirement is unique to you.

You’ve built your pensions and assets over the years. But have you thought about when you’ll retire and how best to use your assets to support this?

We always start with the end in mind. It’s important to understand your goals and aspirations so it’s crucial to sketch out your ‘dream’ retirement. After a lifetime of work, what do you want to do when you retire and what’s important to you?

We always start with three simple questions:

  • When do you want to retire?
  • Why is this date important to you?
  • What does your dream retirement look like?

Once we share your dream, we’ll look into the numbers and how much it will cost.

By making sensible assumptions on growth and income rates we can work out if you’re on track. If there’s a shortfall, we can help you work out how to plug the gap.

We work with people like this every day. With a bit of budgeting and prioritising they end up closer to their dream retirement.

All investments rise and fall in value, so you could get back less than you invest.

2. Inheriting money

It’s daunting deciding what to do with a cash lump sum.

Ultimately, it depends on your long-term objectives. But, one thing’s for sure, you want your money to work hard for you and be as tax-efficient as possible.

Tax rules change and benefits depend on your individual circumstances so a financial adviser will look at your personal situation and goals. They’ll make sure you’re making the most of your tax allowances and reliefs. After all, less tax means there’s more money left for you. They’ll also consider if you want an income from your portfolio, capital growth, or a bit of both.

3. Estate planning

Losing a loved one is difficult enough. Do you want to leave the people you love most to try to unravel your finances and wishes?

With the average IHT bill at £180,000 for those who are subject to it, planning now could save your loved ones thousands. And with so much political uncertainty, now could be the right time to act.

The first step is to work out whether you’ll actually be affected by IHT.

Generally you pay IHT on assets passed down generations. It’s currently 40% on the value of a person’s estate above £325,000, or £650,000 for a couple. This includes property, money, investments and other possessions.

The good news is there are ways to reduce IHT. Advice helps you navigate the rules safely and correctly. And you could leave more behind for the ones you love.

Do remember that tax rules change and any benefits will depend on your individual circumstances.

4. You are over the age of 50 and your pension is near (or over) £1m

The £1.055m lifetime allowance is a cap on the total you can hold in pensions before being subject to a tax. Above this and you could face up to 55% in tax on the excess, when you take benefits.

Alone, this might not seem too complicated. But coupled with income tax, IHT and taking benefits, it can be costly if not planned properly.

For those with more complex positions, there are lesser known tax-saving strategies available. These rules can and do change though. A financial adviser will stay up to date with rule changes and help you make the most of your individual benefits.

If you’re close to the limit you need to understand your options and make sure the solution fits your needs. If you’re not sure, talk to us today.

5. You have numerous and complicated pension plans

Having different pension pots can make it harder to plan ahead for retirement. It’s often easier and clearer consolidating your pensions and managing them together.

But you shouldn’t rush into it. It’s vital to know what you hold, where it’s invested, any hidden benefits you may give up by transferring, or any excessive exit charges that might be applied.

This can be time consuming. So leave it to an expert.

A financial adviser can review all your pensions and produce a tailored plan based on your retirement goals. They’ll also help you avoid the pitfalls, or make the most of any historic benefits you didn’t know about.

Auto-Enrolment Pensions

Friday, October 11th, 2019

Auto-enrolment was introduced in 2012 to ensure all employers offered a workplace pension. Starting with the largest firms, companies have rolled out schemes giving all employees earning more than £10,000 a workplace pension. If you earn £5,876 annually you can request to join the scheme. More than one million companies have now rolled out a pension scheme since auto-enrolment was introduced.

On launch, it was estimated that 11 million individuals would be auto-enrolled as a result of the initiative, resulting in £17 billion of extra saving a year in workplace pensions by 2020.

Auto-enrolment thus far has been deemed a success, with minimal opt-out rates. The Department for Work & Pensions found in a December 2017 review that the biggest increases in participation have been amongst younger people, those with lower earnings and those working for smaller employers. But this is anticipated to change once the minimum contribution rises.

“Auto-enrolment has so far boosted numbers saving, but two huge obstacles are looming in the form of contribution hikes in 2018 and 2019,” warned Nathan Long of Hargreaves Lansdown.

“The £18 that someone with full-time average earnings is currently required to spend on pensions each month will jump by £74 to £92 come 2019. All of a sudden this is no longer spare change.”

Elliott Silk, head of commercial at Sanlam UK agreed, saying auto-enrolment legislation was doing its job and getting more of the nation saving towards retirement, but a big hurdle was “just around the corner”.

“It is vital that with the first increase in contributions coming up in April that employers do all they can to avoid a drop-off in membership,” he said.

Pension Age Rethink

Friday, June 21st, 2019

A recent spike in deaths could prompt the government to rethink pension age and backtrack on previous plans to make people wait longer to access their state pension, experts are warning.

ONS data, released yesterday, revealed there were 153,717 deaths registered in England in the first quarter of 2018 – more than any other first quarter for the last five years and 18,145 deaths above the five-year average.

“These figures add further fuel to the idea that the increases in longevity we have seen for so many years are beginning to slow down and if this trend continues there will be major implications for policy around state pension age, for instance,” said Helen Morrissey, personal finance specialist at Royal London.

In light of the new figures, Morrissey added the government might want to “push back” plans to raise state pension age. The Department for Work and Pensions (DWP) last July proposed bringing forward the date for increasing the state pension age to 68 by seven years, from 2046 to 2039.

Charles Cotton, senior adviser for performance and reward at the CIPD, added that more work needed to be done to understand why recently witnessed improvements in longevity were slowing, while any proposals to increase pension age above 68 “may be put on the backburner”.

However, he said any changes the government made were not likely to be immediate at any rate. “Things have to be phased in anyway and you have to give people a long notice period,” he said.

It is not clear what caused the death rate rise, although the ONS noted a bout of influenza and cold snaps during February and March were likely to blame.

“However, if the figures repeatedly show that something has changed then policymakers need to do more to understand the underlying drivers and their implication for policy making going forward,” said Morrissey.

The government has been gradually increasing pension age since the modern state pension’s introduction in 1948. According to last year’s DWP Pension Age Review in the late 1940s, the average person could expect to live for 13 and a half years after the then pension age of 65. By 2007, people were expected to carry on living for another 21 years after reaching 65, prompting the government to introduce legislation to increase the state pension age.

Also yesterday, the government announced regulations to require pension trustees to publish a sustainability assessment of their investment choices, in the hope it will help pension schemes be held to account on issues like climate change and poor corporate governance.

DWP figures, released earlier this month, revealed those eligible for auto-enrolment stashed away £90bn in total into their retirement pots in 2017, an increase of £4.3bn compared with 2016.

The same statistics also showed a sharp rise in the number of younger savers. In the private sector, the proportion of employees aged between 22 and 29 saving into a workplace pension had risen from 24 per cent in 2012 to 77 per cent in 2016.

“As we see the younger generation who care more about where their money is going, they are also increasingly questioning that their pensions are invested in a way that aligns with their values,” said Esther McVey, work and pensions secretary. “This money can now be used to build a more sustainable, fairer and equal society for future generations.”

Tracey Crouch, minister for sport and civil society, added: “This is an exciting opportunity for social impact investment, giving pensions trustees a chance to have a resoundingly positive effect on the global issues that matter to savers.”

Pension Options and Protection

Friday, November 23rd, 2018

Gaping holes in pension protection at retirement: The Work and Pensions Select Committee has just released its latest Report looking at how the new pension freedoms are working. Its conclusions expose gaping holes in the protections for people at the point of retirement.

Customers left at the mercy of their provider: MPs highlight the lack of innovation, even three years after freedoms were announced, with customers having little choice of new products and too often being left at the mercy of their provider, who may not have good value, low cost options for their retirement income.

Many withdraw pension money and lose tax benefits of pensions: It is good news that fewer people are buying annuities as soon as they reach their late 50s or early 60s, when still relatively young. However, it is worrying that many just take their tax-free cash as soon as they can and withdraw the rest of their fund and put it into bank accounts of Cash ISAs, which means they lose the tax and capital growth benefits of pension products. This reinforces concerns that people are not getting the financial guidance and advice they need, to help them make suitable retirement income choices.

Free guidance can help, but take-up too low: Ensuring more people are automatically offered the free, impartial financial guidance from PensionWise before taking money out of their pensions would be a significant step forward to helping people make better use of their hard-earned pension savings. PensionWise has customer satisfaction ratings over 90%, but too few people are using it.

Independent financial advice can save people money and avoid costly mistakes: It is also important to help people understand the value of taking independent financial advice, once they have had their free guidance session. Using independent, properly qualified financial advisers can find the best value products and help manage investments wisely through later life, has been shown to increase retirement incomes, help people find the right products for their needs and avoid making poor choices.

Pension providers have failed to develop good new products: The WPSC Report criticises the industry for failing to innovate and highlights the lack of competitive pressure on providers. It is particularly worrying that customers who leave the remainder of their fund invested, after taking their tax-free cash, just take the drawdown policy offered by their existing provider, regardless of cost, whereas shopping around for lower cost options could give them better income.

Industry needs to develop good value standard drawdown options: Given the lack of competition, providers have not felt pressure to innovate at the withdrawal phase of pension saving. They have stuck to the old drawdown products, which are often expensive and require customers to choose their own investments. The Committee is right to recommend providers should design good value standardised options, for those who cannot or do not wish to choose for themselves. Of course, in an ideal world, one would want everyone to make their own choices, but investment and pensions are complicated concepts and having a recommended pathway can help people manage their money more effectively through their later years.

Government has focused only on accumulation phase, need Independent Governance Committees to oversee value for money in decumulation too: The Government has already introduced controls on the fees charged for the standard (so-called ‘default’ – not a good word!) options for the period when people are building up their pensions and also required pension providers to set up Independent Governance Committees. The maximum annual charge is capped at 0.75%. But there are no limits on the charges for the withdrawal products and no requirement for standard (‘default’) options. The Committee calls for these to be introduced within one year.

NEST should be allowed to compete in the drawdown market: Currently, the Government’s auto-enrolment pension provider – NEST – is not even allowed to offer products for its customers to use at retirement. Most of its five million savers just assume they can get their retirement income from NEST, but they are forced to move their funds to another firm if they want to withdraw only part of their money. This clearly reduces the competitive pressure on other providers, since they have a ready source of new customers and no competition in the withdrawal market. Allowing NEST to introduce its own standardised drawdown products by April 2019, with controls on the charges, would force more firms to innovate, or face losing customers to NEST’s better value options.

Market is crying out for good innovative decumulation options – e.g. 4% annual withdrawal: So far it’s the same old drawdown or annuity choice, or just take the cash, which does not serve everyone well. Ideally, people need a good financial adviser, but if they don’t have one then offering a standard ‘default’ option which has, say, an income target of 4% of capital each year, could provide a better decumulation profile. People in their late 50s or early 60s can still have an investment time horizon of 20 or 30+ years, so using equities as well as bond, or investing in high yield assets can allow people to draw income, while still leaving opportunities for capital gain. Yet many people are steered away from so-called ‘risky’ options or err on the side of reckless conservatism.

Drawdown options could also include insurance or funds to help with care: Some options might include opportunities for covering care needs, some may include advanced life deferred annuities – but they do need proper transparency on costs and simpler options should have charge caps, just as is the case in the accumulation stage.

Standardised forms, simplified wording, independent Pensions Dashboard are all vital: The Committee also rightly highlights the urgent need to simplify pension customer communications. The current ‘wake-up’ packs, with reams of paperwork, using complex jargon, are not fit for purpose. It is essential that Regulators require providers to give customers simplified information, on one piece of paper, to help them see what their pension savings are worth and what options they have, with clear explanations of charges and recommendations to take guidance or advice. Having a standardised form of wording will also help development of a single Pensions Dashboard, to ensure people can see all their pension savings in one place. The Dashboard must be provided by one independent source, rather than having a few providers each trying to produce their own version which would confuse customers and distort the market.

Digital Discrimination

Thursday, April 19th, 2018

3.8million older people in Britain today have never used the internet: Many of us are so used to online connections that we are in danger of forgetting how fast the technological developments have been.

Latest AgeUK research is a stark reminder that many older people face damaging discrimination: Government must make sure that those who have been left behind by online advances are not marginalised or unfairly penalised just because they grew up in an earlier age.

Government itself is digitally discriminating against older people in poverty: Most worryingly, AgeUK finds local Governments are denying benefits to those who have never learned to use computers leaving many of them in poverty.

Many elderly people cannot reasonably be expected to master online transactions at this stage of their lives: Having never learned to handle technology, often living alone and with a disability, they cannot complete online application forms and may never be able to claim. Yet receipt of Housing and Council Tax benefits can be a lifeline if they are struggling to make ends meet.

Many may live for another 20 or more years: This means proper and fair arrangements for claiming non-digitally – by post, on the phone or face to face – are urgently needed to allow them to receive their entitlements now and for the future.

Many elderly people have nobody to help them fill in online forms, or are too proud or embarrassed to ask for help: So they go without. Of course, Britain needs to be a modern technologically advanced society, but not at the expense of older generations.

Digital discrimination against older people extends well beyond local Government: In addition to being unable to claim benefits, millions of older people lose out in other ways, such as being denied the best interest rates on savings accounts, or being unable to shop around for more competitive insurance quotes available online.

Older people deserve to be treated with more respect and dignity, making some allowances for their life chances: Neither businesses, nor Government itself, should be allowed to take unfair advantage of older people’s lack of modern technology skills. Digital disadvantage is another form of age discrimination and a decent society should ensure its senior citizens are not marginalised or taken unfair advantage of in this way.

Consumer Protection for Pensions

Monday, March 26th, 2018

More pension customers will be at risk of scams and losses: I am really disappointed that the Government seems to have bowed to industry pressure and proposes to weaken consumer protection for pension customers. By removing a clause introduced in the House of Lords, designed to protect consumers’ pensions better, more people are at risk of losing their hard-earned savings in scams, frauds and unwise pension withdrawals.

Customers need help to understand complex pension choices: The new pension freedoms are a great step forward, but cannot work properly if customers do not understand the vital issues they need to know before deciding to take money out of their pensions or transfer to new schemes.

Free, unbiased, expert guidance is available but many don’t get it: The Government rightly established the new free guidance service to provide just such independent, unbiased free help to the public. The new ‘PensionWise’ guidance service has helped people avoid poor decisions, such as falling for scams, buying over-priced products, over-paying tax, or taking money out and losing the advantages of pensions. However, take-up has been dreadfully low.

Auto-enrolment into free guidance will improve take-up and protect many more customers: That is why a cross-party Group of Peers introduced an amendment to the Financial Guidance and Claims Bill designed to ensure pension customers would automatically receive a free guidance appointment if they were thinking of transferring money out of their pension. As with auto-enrolment into pension saving, they could opt-out or change the appointment. Such behavioural nudges would ensure much higher take-up and improve consumer protection. Currently, many customers do not bother or do not realise what the service can do for them and then lose out.

Government is now trying to remove the automatic guidance clause: As the Commons debates the Bill, the Government wants to water down the consumer protection and just require providers to tell people about the guidance, rather than make an appointment for them. Providers already have a duty to ‘signpost’ people to PensionWise, however this is clearly not working as take-up is so low. Unfortunately, providers too often direct their customers to their own telephone ‘helplines’ which cannot and do not provide independent, unbiased help. So most customers, without an Independent Financial Adviser, end up relying on their provider or have no help at all. This is not appropriate.

A shame pension providers have not supported this much-needed change: Unless take-up of the free guidance increases, more people will lose out. For example, PensionWise has stopped people falling for scam schemes, especially after they were caught by cold callers, and has helped customers avoid buying expensive products or paying tax unnecessarily. Providers clearly have a vested interest in selling only their own products – even if they are more expensive or less suitable than others in the market.

It is in the interests of the industry, as well as consumers, that people have proper help: Of course it might be bothersome for providers to have to automatically make an appointment for customers who want to transfer money out of their pension, and maybe they are concerned that the costs of the free national guidance service (which they fund) would increase as more people take advantage of it, but surely that is a small price to pay for better customer protection. They will have a chance to speak to an unbiased expert who can alert them to avoid scams and free, independent help to understand the costs and risks of pension decisions.

State Pension Age Rising to 70

Thursday, February 22nd, 2018

The Government Actuary says the UK State Pension is not sustainable, even though it is the lowest in the developed world, according to latest OECD figures.

UK bottom of the global pensions league table: No other country has a less generous State Pension than ours for average earners. Even Chile, Poland and Mexico pay better State Pensions than the UK for middle income groups. With our aging population, and a decline in traditional final salary-type pension schemes, the UK faces rising risks of old-age poverty.

Net pension replacement rates for average earners (state pension as a % of earnings):

Netherlands 100.6
Portugal 94.9
Italy 93.2
Austria 91.8
Spain 81.8
Denmark 80.2
France 74.5
Belgium 66.1
Finland 65.0
Czech Republic 60.0
Sweden 54.9
Canada 53.4
Germany 50.5
USA 49.1
Norway 48.8
Switzerland 44.9
New Zealand 43.2
Australia 42.6
Ireland 42.3
Chile 40.1
Japan 40.0
Poland 38.6
Mexico 29.6
UK 29.0

OECD average 62.9

Source: OECD ‘Pensions at a Glance’ Table 4.8 December 2017

State Pension has already been reduced, but will have to be cut further: In April 2016, major reforms to the UK State Pension were supposed to have made the system affordable for the future, reducing its generosity. Beyond the 2030s, the new State Pension will be lower than the old system for most people and the lowest paid, predominantly women, will generally lose significantly from the new system. Despite this, the Government has been advised, by its own actuaries, that the costs of paying State Pensions will soar so much over the next 20 years and beyond, that further cuts could be required.

Even though UK State Pension is lowest in the world, it needs to be cut to avoid massive tax rises – perhaps dropping triple lock: The Government Actuary believes that just funding the UK’s exceptionally low State Pension will require reducing payments in future or dramatic tax rises. The options would include dropping the triple lock (which increases the new State Pension in line with the highest of earnings inflation, price inflation or 2.5%) and increasing State Pensions in line with average earnings instead, or possibly doubling National Insurance rates for average workers. Policymakers face difficult decisions and are also likely to need to increase State Pension age further.

Everyone aged 30 or below will get no State Pension till their 70s: State Pension age has been rising since 2010 and will reach 66 by 2020, increasing further to 67 and then to 68 under existing legislation. However, the Government Actuary assumes state pension age will be 70 in the 2050s and 71 in the 2060s. This means anyone aged 30 or below, will not get their state pension until they are age 70. And those aged 20 or younger will have to wait until they are 71.

More to do to address UK pensions crisis – including making private pensions more attractive: We are one of the world’s leading economies, but our support for the oldest in society is not fit for purpose. Even though most people will receive the lowest State Pension in the developed world, the costs of providing for our aging population have not yet been brought under control. To avoid burdening younger generations with significant tax rises, it is vital that more is done to boost private pension saving. Auto-enrolment is a good start but the pensions industry needs to attract more customers to pay more into their pensions.

Call for Consumer Protection

Monday, January 15th, 2018

The Work and Pensions Select Committee is calling on the Government to urgently improve protection for people’s pensions. This is absolutely right.

Too many people are losing their pensions as a result of fraudulent cold-callers who entice them to transfer their hard-earned savings into scam schemes.

The Committee is calling for a proper ban on cold-calls to be introduced urgently in the Financial Guidance and Claims Bill which is going through Parliament at the moment. It is also calling for everyone to be automatically offered an appointment with the Government’s free financial guidance service before they transfer money out of their pension. These measures would significantly improve consumer protection.

Thanks to the hard work of the House of Lords, the Government was defeated, by a cross-party group of Peers, and forced to include measures which the Work and Pensions Select Committee is calling for. Members from all sides of the House joined together to add these important amendments to the Bill. Requirements to ban cold-calling and to ensure everyone automatically receives free help to discuss their pension before deciding to transfer have been added. Now the House of Commons can build on them to strengthen the legislation even further.

All customers wishing to transfer or withdraw pension savings need to be ‘automatically-enrolled’ into free financial guidance, unless they have an IFA. The free PensionWise service has satisfaction rates around 90% but uptake is woefully low – less than 10% have a guidance session.

Ensuring everyone is auto-enrolled into guidance should help them make better-informed decisions and protect more people against scams. It can also help them understand the tax advantages of keeping money in their pensions for longer, to avoid losing some of the savings unnecessarily.

Most scams originate from a cold-call and banning cold calling is really important. The Government has already said it wants to do this but it must act urgently and also implement a ban in the most effective manner.

Making the FCA responsible for banning both cold-calling and also the use of leads obtained from unsolicited approaches would best protect people. FCA implementation could strip firms of their licence if they benefit from cold-calling, thereby undermining the business models of cold-callers most effectively. Cold-calling for mortgages was banned long ago, now we must do this for pensions too.

We must give the public a clear message – if anyone contacts you out of the blue about your pension, they are breaking the law. If you get an unsolicited phone call, just hang up. If you get a text, just delete it. Currently, the public do not realise the dangers of someone offering them a ‘free pension review’ or an exciting new pension investment scheme with great returns.

The sooner these measures are passed and implemented, the safer our pensions will be.

Rise in Pension Poverty

Friday, December 8th, 2017

Recent reductions in pensioner poverty are going into reverse: Figures released today by the Joseph Rowntree Trust point to a worrying rise in poverty among both children and pensioners. Pensioner poverty has reduced significantly in recent years, but this trend seems to have gone into reverse. Poverty is a particularly pernicious problem for pensioners, since once they are in poverty, they have little prospect of future improvements. Working age poverty is often temporary, as people move back into work and improve their incomes. But the oldest pensioners do not have that option.

Triple lock is not enough to address pensioner poverty: Policymakers have often suggested that the much-vaunted ‘triple lock’ on state pensions, which promises an increase each year in line with earnings, prices or 2.5%, whichever is highest, ensures proper protection for pensioners. This is simply not the case. In fact, the ‘triple lock’ only protects the Basic State Pension (around £122 a week) and the full new State Pension (around £160 a week, but only available to the youngest pensioners). It does not apply to Pension Credit, so it does not protect the poorest pensioners at all.

Pension Credit only increases in line with average earnings, it is not triple locked: Pension Credit is crucial for the oldest and poorest pensioners, but this means-tested benefit is only linked to the rise in average earnings. As earnings have lagged behind the rise in inflation, the poorest pensioners have become relatively poorer.

Pensioner poverty rising again as oldest and poorest pensioners are left out of the triple lock: Before the new State Pension system was introduced, the triple lock was a helpful means of alleviating pensioner poverty, by boosting the Basic State Pension. And even though the Pension Credit is officially only tied to the rise in average earnings, the Government increased Pension Credit by more than this. However, as average earnings have fallen behind rising prices, Pension Credit is now falling behind. In fact, the State Earnings Related Pension and State Second Pension increase in line with prices, so those elements of the state pension are also protected, however the poorest pensioners are only protected by average earnings.

Oldest and poorest pensioners are more likely to be women and those who don’t own their home: The most particular problem of pensioner poverty tends to be for older single women, many of whom lost out in both state and private pensions when they were young and are now losing out on the triple lock in their old age. In addition, the sharp rise in housing costs, such as rents, may be causing problems for those pensioners who do not own their own home.

Government should ensure that the Pension Credit does not fall behind the rest of the economy: The rise in pensioner poverty is a real cause for concern and it is important that the Government does not lull itself into a false sense of security that the triple lock is all that pensioners need. Providing the best protection to the youngest pensioners, while leaving the oldest and poorest unprotected by the triple lock, is surely the wrong way round. A re-evaluation is urgently required as surely civilised countries must protect the poorest and most vulnerable properly.

Government Pension Legislation

Tuesday, November 14th, 2017

Government says it won’t legislate for years: The Government has so far resisted all calls for these measures to be included in the Bill. Indeed, it has indicated that any legislation may have to wait until 2020. By that time, millions more people will have been plagued by nuisance calls, will be at risk of scams, and may lose their pensions. If the Government is serious about protecting consumers, then it has the ideal opportunity to act now.

Amendments to the Bill will be debated tomorrow with wide support across the Lords: A group of cross-party Peers has worked hard with the Parliamentary authorities to find ways to include these measures in the Bill. We are all concerned about doing more to protect consumers. The amendments would make a significant difference to the public and would pave the way for the Government to actually fulfil its commitments to ban cold-calling, help vulnerable customers and to allow those with big debts to have more time to receive help to sort out their financial affairs.

Ban Cold calling and use of data obtained by cold calling: One of the amendments will introduce legislation that enables the Government to ban cold-calling for pensions. Currently, it is illegal to cold-call about mortgages, but not about pensions. The proposed measures will make it an offence for anyone to make unsolicited approaches to the public about their pensions and will also ensure that the financial regulators have powers to remove the licence to operate from firms who do the cold-calling, or use data obtained from cold-calls.

Mandatory guidance before transferring money out of pensions: The Amendments will also try to ensure further consumer protection by requiring anyone who wants to transfer money from their pensions to have either independent financial advice or to speak to the free national guidance service. This helps to protect people against scam schemes in which they may be enticed into transferring to, as well as ensuring they understand the risks and implications of transferring money out of their pensions. Currently, the take-up of PensionWise is woefully low and people are moving money out of their pensions without realising the tax penalties they will pay.

Customer protection clause and breathing space: We are also calling for a special duty of care for vulnerable customers who need help with their financial affairs, including a breathing space for people with unmanageable debts, so when they approach the Financial Guidance body for help, their interest payments can be suspended for a short period, giving time to reschedule, rather than risking bankruptcy. Especially as interest rates seem set to rise, such protection is vital.

Policy on Final Salary Schemes

Monday, October 9th, 2017

No room for complacency as closed schemes will need better ways to manage liabilities: Britain’s Defined Benefit (DB) final-salary type pension schemes are under unprecedented pressure. So far, the Government has been rather complacent about the risks, but with the ongoing ultra-low interest rate environment and rising economic and political uncertainty, new thinking is urgently needed.

Millions of members at risk: The PPF estimates 3 million people have no more than a 50% chance of getting their promised benefits, while three quarters of sponsors are facing significant challenges in running their schemes.

Deficits have stuck at £400bn for past ten years, despite £120bn employer contributions: Despite ploughing £120billion into DB schemes to improve funding, the aggregate DB deficits have stayed around £400billion for the past ten years. Employers have been running to stand still and the hoped-for funding improvements have generally remained elusive.

As most schemes are closed, sponsors will soon be desperate to get rid of legacy liabilities: With the majority of schemes now closed, within the next 5-10 years, these sponsors will have no interest in or worker connection with the scheme. 90% of FTSE350 schemes are expected to become cash-flow negative in the next 5 years. Sponsors will look for ways to get rid of this legacy risk, or will go bust, especially if the economy weakens. The Government must plan ahead for this now.

Not enough flexibility – making the best the enemy of the good: Many companies would like to honour their obligations, but in an affordable way. However, the options for employers and members are binary. Employers who can continue in business, must purchase annuities for full benefits before severing links to the scheme. This is prohibitively expensive, especially in the current interest rate environment and it is questionable whether excessively expensive annuitisation is a sensible use of corporate resources.

Pensions can’t be reduced unless sponsor going bust: Quite rightly, employers cannot walk away from their schemes. But once employers are facing inevitable insolvency, benefits are reduced by around 10-20% in the PPF. There is no flexibility for companies which struggle on in business.

Pension age and social care

Monday, September 11th, 2017

The Government has just announced that the UK State Pension age will increase faster than previously expected. By 2039, nobody will be able to start their state pension before the age of 68. This affects people born between 1970 and 1978 who would be eligible to receive their state pension at age 67 under the current planned timetable.

This rise was recommended by John Cridland’s recent official review of State Pension age and is based on forecasts of average longevity. As ‘average’ life expectancy is rising, and the Government needs to control State Pension costs, the state pension age keeps rising. This will save around £75billion to future taxpayers.

However, it does not take any account of the significant differences in life expectancy across the country, between social classes and also between occupations. The current national insurance system makes no allowance for people who will not live long enough to reach state pension age, or who will die soon afterwards.

National insurance amounts to over 25% of salary for most people, yet some will get little or no pension even if they have contributed for the full 35 years. Of course, as life expectancy and health improve, most people should be able to wait longer for their state pension. But what about those who cannot?

I would like to see more flexibility in state pension age: perhaps with a flexible band of ages at which the pension could start, or perhaps allowing people to take their state pension at a lower age, either because they are seriously ill or because they have worked for more than 50 years.

People might be allowed to start their pension between the ages of 65 and 70 – perhaps even with the rate they receive being adjusted for early access. This would be much fairer to more disadvantaged people, allowing them a choice they are currently denied. There might also be earlier receipt for people who have, say, 50 years worth of National Insurance contributions. For example, if they had left school at 16 and contributed for 50 years, perhaps they could get their pension at age 66.

At the moment, the state pension is flexible only for those who are healthy and wealthy enough not to need to take it at state pension age. If they can afford to wait longer, they can get a higher state pension; but if they cannot manage until that age, it is just too bad. They cannot get a lower pension, they will get not a penny earlier. Is this the best we can do?

It is true, as John Cridland says, that there would be some difficulties in this approach, but just because a policy is challenging does not mean it is wrong. The central issue here is whether the state pension should be run on a one-size-fits-all approach, based purely on estimates of the “average”, or whether it should have some flexibility to account for people’s increasingly flexible lives.

Yes, it is great news that more people are living longer. And most people can work longer – but surely we can find ways to include those who are unable to do so, and who have much lower-than-average lifespans.

I would like to stress, though, that I do not agree that the state pension age should never rise above age 66, as proposed by the Labour party. And the cost of allowing everyone to get a full pension at 66 for decades to come would be too much of a burden on younger generations in our pay-as-you-go national insurance system.

Clearly, many people will want to work longer, and can wait for their state pension. However, it would be fairer to allow some to choose to take a pension sooner, if they really need to.

We need to move away from the idea of just one “magic” age at which people should aim to stop working and live on a state pension. A band of ages would take us from this one-age notion and would accommodate the reality of 21st-century retirement, which is that people will increasingly move from full-time work, to part-time work, before stopping altogether.

The more we can encourage this kind of “pretirement” phase, the better it will be for our ageing population. Individuals who can work flexibly in later life can achieve higher lifetime incomes, can boost overall economic activity, and could have more money to spend in their advanced older age.

Finally, the current state pension system offers no help for social care. If William Beveridge was designing our national insurance arrangements now, he would surely make provision for care needs in advanced old age, rather than assuming that the only income for retirement the state needs to pay is a state pension.

Incorporating social care into national insurance would offer an opportunity for the government to rethink state pension age and overall retirement provision, and take account of individual needs. Leaving out those who have been hard manual labourers for all their working lives, or who have a much shorter life expectancy, may need to change.

Future reviews of social care and state pension age would provide a chance to reconsider these issues. A fairer level of social support in retirement would be a major improvement on the current situation. Just promising a ‘triple lock’ on parts of the state pension is not enough for pensioners. It’s time to think again on how we help older people.

Women’s state pension age

Monday, August 7th, 2017

Government is right to look to control the costs of state pensions: Clearly, in an ageing population, with rising longevity and pay-as-you-go pensions, younger generations need to be protected against excessive burdens of old-age support. Equalising men and women’s pension ages makes sense, especially as women tend to live longer than men.

Failure to adequately warn women about rise from age 60: Ideally, though, any policy changes would be communicated well in advance and those affected would be given sufficient time to prepare for delays in starting pension receipt. Unfortunately, as the WASPI campaign highlights, the failure to communicate clearly and effectively is causing real problems for many of the women affected by the sharp pension age increases which started in 2010.

IFS shows significant cost savings: Research released today show the scale of the impact of rising State Pension age on those older people affected and on the public finances. The rise in women’s State Pension age between 2010 and 2016 has saved over £5billion in public spending and has benefited the Government in three ways. Firstly, the money saved by not paying pensioner benefits. Secondly, higher tax and national insurance receipts as women have continued working while waiting for their State Pension. Thirdly, the additional work these older women are doing should have boosted the economy.

But delayed pensions also caused increased poverty: Many of the women waiting longer for their state pension have been pushed into poverty. The IFS suggests one in five women aged 60-62 were in income poverty when their state pension age was increased to 63. It is clear from this new research that as long as women can keep working, they can mitigate the impact of delayed State Pension receipt, but those who cannot work either through illness, caring duties, unemployment or workplace age discrimination are left struggling.

Pension transfers

Monday, July 17th, 2017

FCA recognises case against DB transfers has radically changed: The FCA has just launched a consultation which could change the way people wanting to transfer out of a final salary-type (DB) pension schemes are treated. Two years after the pension freedoms were introduced, making Defined Contribution (DC) pension schemes far more user-friendly, the Regulator is rightly recognising that the case against transferring out of guaranteed employer schemes has radically changed. Each case should be considered individually to assess the benefits and risks for that person.

Can be strong reasons to transfer out but must understand risks first: In the new pensions world, there are some compelling arguments in favour of DB transfers but the decision must not be taken lightly, particularly because it is irrevocable. Anyone whose transfer is worth over £30,000 must get independent financial advice.

Advisers have been under regulatory pressure to assume transferring out is wrong: In the old regime, the regulators rightly warned strongly against advising anyone to transfer. Indeed, financial advisers often refused to do the transfer for clients still wanting to after being advised against it. But the pension freedom reforms mean this attitude is outdated.

DC much more attractive now: Defined Contribution pensions, which build up your own individual pot of money for your retirement, are much more user-friendly now.

End of mandatory mass-annuitisation: In the past, someone who wanted to take their tax-free cash from a DC pension would usually have to buy an annuity with the rest, unless it was a very large fund. These annuities were inflexible and might not suit their needs. Now you can take out some money if you want to and leave the rest invested for later life. Some people can even get more tax free cash from a DC scheme than from DB.

No 55% death tax, can pass on IHT-free: People can now pass their pensions on in full to loved ones free of inheritance tax, whereas in the past they would face a 55% death tax charge on their unused fund. A DB scheme will only provide a fraction of the pension income for a partner and perhaps nothing for other relatives.

Pension freedoms

Monday, June 19th, 2017

The pensions industry needs to wake up to the tremendous new opportunities offered by pension freedoms and auto enrolment. This is the time to show real, innovative thinking in the customer interest but sadly the industry has so far failed.

Where are the new products or default options? And why are they called ‘default options’ anyway? The word ‘default’ is hardly attractive to non-pensions people!

Customers may be taking money out of brilliant pensions products without realising the benefits they are giving up – and possibly paying unnecessary tax too.

New thinking might include, for example, a concept of ‘Lifetime Pension Accounts’ which stay invested until you really need some income or capital. ‎These could seamlessly run from a ‘growth phase’ to an ‘income phase’ when the customer wants to, without the huge extra charges involved in drawdown. Taking money out of pensions too early is detrimental to your financial well being.

The Government’s free guidance service could also help customers understand the benefits of staying invested for longer especially if still working. So perhaps we should make PensionWise free guidance mandatory or at least the default option. Ideally people need advice but at least PensionWise can steer them away from dangerous decisions

This FCA study is another wakeup call‎ for the pensions industry to up its game and look after customers.

DWP’s Pension Green Paper

Friday, May 26th, 2017

  1. The Green Paper seems too complacent about the affordability and sustainability of DB pensions. UK DB pensions are the most expensive in the world and most private sector schemes are now closed as the costs have soared beyond any previous expectations. Potential post-Brexit economic uncertainty makes contingency planning for such huge asset pools even more urgent.
  2. Quantitative Easing has undermined DB schemes. It has inflated estimated liabilities, increased annuity buyout costs and driven excessive investment in lower-return bonds.
  3. UK DB pension schemes are currently misallocating resources, to the detriment of the economy and future generations.
  4. DB scheme advisers are too focussed on minimising risk, rather than ‘managing’ risk. Optimising returns rather than maximising returns is required, allowing for upside to outperform liabilities when schemes are in deficit. Just focussing on matching liabilities is not enough, schemes need to outperform if they are in deficit with a weak sponsor.
  5. DB pension assets would be better used to invest in growth-enhancing investments, rather than just chasing low-return ‘safer’ fixed income.
  6. The Regulator needs more powers to oversee consolidation or merger of smaller and medium sized schemes, to achieve economies of scale, improved cost-effectiveness and efficiency of investment management and better governance standards.
  7. Pooling assets can help ensure better standards of investment management, access to more diversified asset classes, better quality advice and professional risk management.
  8. Current annuity buyout requirements are too draconian. Using BHS example, the Regulator should devise a new self-sufficiency measure (perhaps technical provisions plus a margin) to allow employers to sever ties without having to meet full annuity buyout costs.
  9. A regime is needed for the future of closed schemes, to ensure the assets and liabilities can be managed effectively over the long-term.
  10. Open schemes are in a very different position from closed schemes. As most private sector schemes are now closed, their sponsors will have no economic interest in their liabilities in a few years’ time, as no staff will be accruing benefits.

Lifetime ISA Launch

Friday, May 12th, 2017

The new Lifetime ISA launches tomorrow. Thankfully, most providers have steered clear of it, they can see the dangers. Don’t be misled.

If you want to buy a first home and are saving for a deposit, then the 25% Government bonus is a great deal. But using this as a pension has significant dangers you may not be aware of. Most providers are shunning Lifetime ISAs due to fears of mis-selling. They are right. This is a complex product which could leave millions of young people poorer in retirement. It has mis-buying and mis-selling risks written all over it! There is already much confusion and the Pensions and Lifetime Savings Association (PLSA) suggests many young people are considering opting out of their workplace pension to save in a LISA instead. That could undermine their future prosperity, so it is important to clarify some of the biggest issues.

  1. LISA gives you much less than workplace pensions: The 25% Government bonus is exactly the same as 20% pensions tax relief so you will not get any more money in a Lifetime ISA than you would in a pension. However, you will lose out on other money if you opt out of pensions and choose LISAs instead and you need to understand this before you decide.
  2. Pensions give you much more than just a 25% bonus: Workplace pensions can give you extra money from employer contributions, higher rate tax relief and National Insurance relief. This could be more than 100% bonus on your money, so pensions will usually give you far more than the Lifetime ISA on day one. It’s just that this is not properly explained when you get your pension statement, so most people don’t realise it.
  3. The 25% withdrawal charge is NOT just clawing back the 25% bonus. Many people do not realise how the LISA works and will believe they just lose the Government bonus. It’s much more than that.
  4. The LISA charges more than 6% penalty if you want your money back: If you put £4000 into a LISA and get the £1000 Government bonus but then want to take your money out again, the 25% withdrawal charge will be £1250 (and you will have to also pay charges for your LISA account too of course). That means you will get less than £3750. You will be charged more than £250 just to get your own money back – a large extra penalty.
  5. Mis-selling and mis-buying risks are clear – customers need advice: LISA providers may not clearly explain the risks of the large withdrawal penalties, and how much money young people will lose if they opt out of employer pensions. The FCA is trying to ensure risk warnings are given, but in reality the provider should check that customers have not opted out of workplace pensions, or have taken financial advice, so they have made efforts to check if a LISA is suitable for them.
  6. Saving for a house deposit in cash is fine, but cash is not suitable when investing for retirement over several decades: It is dangerous and misguided to conflate saving for a deposit on a first home, with investing over several decades for retirement. House purchase saving can be in cash, but long-term investing should be in growth assets and a broader spread of risks, including overseas investment, which would not really be suitable for a house deposit, but which can give better returns over time. Most ISAs are held in cash and, if pensions are turned into ISAs that are just put into cash accounts, young people are likely to be much poorer in later life.
  7. Serious risk of undermining the success of auto-enrolment: Pension coverage has spread to millions of new workers as employers have to put all staff earning above £10,000 a year into a pension scheme at work. But worrying PLSA research suggests many young people may opt out of their workplace pension, without realising how much they’d lose by doing so. Just as auto-enrolment is proving a success, along comes a new product to confuse things. It is not true that people don’t like pensions, auto-enrolment opt-out rates are really low, especially among the young. I am pleased that so few providers are offering this product because most young people will be better off in retirement if they use a pension.
  8. Behavioural nudges of Lifetime ISA are not suitable for retirement saving: The Lifetime ISA has behavioural features that make it far less suitable for retirement saving than a pension. Pensions are designed to fit with the principles of behavioural economics, while ISAs have perverse incentives.
  9. Pensions ensure more money goes in on day one. Auto-enrolment takes advantage of inertia as well as ensuring employers have to contribute too, so people have more money to begin with in pensions than in LISAs.
  10. Pensions are locked in until later life, while LISA does allow withdrawals. However, withdrawals face the stiff penalty of over 6%, leaving people with much less in their fund along the way.
  11. Pensions are taxable on withdrawals beyond the 25% tax-free lump sum in later life. This deters people from spending the money too soon, which is the right behavioural incentive. The incentive with a LISA will be to take all the money out around age 60, and have nothing left for your 80s – in other words, the features of the Lifetime ISA mean it is designed NOT to last a Lifetime.
  12. Pensions could even help pay for later life care. Pensions encourage people not to spend their money too quickly and, because they pass on free of inheritance tax, there is no need to worry about keeping it till much later life – so it could even help fund care needs if necessary.
  13. Young people will have much poorer retirement prospects with LISAs than pensions.
  14. Lifetime ISAs are great for the wealthy but will cost taxpayers an extra £1billion – is that money well spent? At a time when bereavement and child benefits are being cut, the LISA is going to cost an extra £1billion to the Treasury in the next few years. Two groups of people will most benefit from using a LISA for retirement saving. Firstly, wealthy under-40s who have already filled their pension allowances (perhaps they already have £1million of pensions or have contributed up to the £40,000 maximum into pensions). Secondly, non-earning relatives of wealthy people who have already put the maximum £3600 into a pension for them to get the tax relief and will now get a further taxpayer top-up for an extra £4000 for them. Is this a sensible use of taxpayer resources?

CONCLUSION: Lifetime ISAs should be abandoned. Stop confusing young people between retirement investment and saving for a house deposit – just reform the Help To Buy ISA and build on the success of auto-enrolment for pensions. The product is too complicated, will confuse customers and the last thing we need is another mis-selling scandal.

State Pension Age Review

Monday, April 10th, 2017

Brexit makes later working even more important: We should not force people to stay on and should recognise the wide variations in life expectancy across occupations and UK regions, but as we leave the EU and immigration falls, it makes sense to use older workers’ talents and lifelong experience more. This can boost the economy and their own future income.

But many people genuinely cannot keep working and State Pension currently doesn’t make allowance for this: Cridland highlights the vast differences in life expectancy across the UK – more than 15 years differential. Just as the Review recommends more flexibility is required by employers to facilitate part-time work for older people and help for the increasing numbers of workers who will need to care for elderly relatives, I believe more flexibility is also needed in the State Pension system.

Disappointing that Review decides against early access: People with shorter than average life expectancy generally still pay around a quarter of their salary in National Insurance. They may have worked for 50 years or more but may die before being eligible for any state pension – or may receive very little. This seems inequitable and their lower life expectancy is not recognised by our National Insurance rules. Normal insurance would usually charge lower premiums to such people but that does not happen. Therefore allowing early access could compensate for this even if for a reduced pension.

Current system only helps those who are healthy and wealthy enough to work longer: If someone can work beyond state pension age, they can get a much larger pension but there is no help for people to get their state pension earlier if, for example, they started work exceptionally young, perhaps in tough industrial jobs, and genuinely cannot keep going till nearly 70. Cridland recommends some means-tested help just one year before State Pension age but I think moving away from just one ever-increasing age, would be more socially equitable. A band of starting ages, such as between 65 and 69 with adjusted payments would be fairer.

Spurious accuracy of ensuring receipt of State Pension for ‘up to one third of adult life’: The aim of the Review was meant to ensure people spent ‘up to one third of adult life’ receiving State Pension. The Government Actuary’s Department figures vividly highlight the difficulties of such a vague target. Tiny changes in average life expectancy are shown to imply vast differences in timing of state pension age increases. Between 2012 and 2014, life expectancy fell a little, but that implied a 5-year change in the state pension age timetable. It does seem that targeting 33.3% of ‘adult life’ or 32% of ‘adult life’ is misleading, given the sensitivity to tiny changes in mortality and huge differences in life expectancy across the population. A range of ages would surely better cater for individual differences and allow some flexibility.

Problems for WASPI women show dangers of raising state pension age – lessons need to be learned: The Government also needs to learn from the women’s state pension age fiasco that it is essential to ensure people know about any state pension age changes in good time to prepare. Many older women are facing serious hardship as a result of Government failure to communicate with them and there has been no recognition of the damage this has caused so far.

Triple lock should be scrapped – it is a political construct that is increasingly unfair and leaves out oldest and poorest pensioners: I agree with Cridland that the triple lock should be abandoned after 2020. The triple lock is a political construct which purports to offer great protection while increasingly disadvantaging the oldest and poorest pensioners. The lock protects around £160 a week for the newest pensioners but only around £120 a week for older ones and it does not protect the Pension Credit at all which the poorest pensioners must rely on. The arbitrary 2.5% figure has no economic or social rationale. Cridland suggests linking the State Pension just to earnings but I would like to see some protection against inflation too if that is rising faster. There is a clear tradeoff between more generous pension increases and raising state pension age. Having the triple lock in place also puts more upward pressure on the state pension age which itself disadvantages poorer areas of the country and those in heavy manual occupations. So the unfairness and extra cost of the triple lock make it ripe for reform.

Pension Gender Divide

Thursday, March 9th, 2017

Older women have achieved improved equality, pay and maternity rights for today’s younger women: As we celebrate International Women’s Day on March 8th, spare a thought for current cohorts of women coming up to or just reaching retirement. Throughout their lives, they have paved the way for younger women, as they fought for maternity rights and equal pay, as well as battling gender discrimination in other areas of the workplace. Female employment conditions are vastly better nowadays than when the babyboomer women were starting out.

But women still losing out in both State and Private pensions: There remains a significant – albeit narrowing – gender pay gap especially for older women, and one area where all women still lose out relative to men – and always have done – is in pensions. Women are still very much the poor relations when it comes to pensions. Both for state pensions and private pensions, women’s prospects are worse than men’s.

Mums are supposed to get credit for State Pension when looking after young children: Mothers who stay at home to look after their young children are supposed to be eligible for credit towards their State Pension, so they do not lose out while bringing up their family.

But new unfairness in National Insurance denies State Pension rights to many women: In fact, brand new unfairness has recently been introduced into our National Insurance system that will penalise many younger women. The recent decision to deny Child Benefit to families where one partner earns more than £60,000 has a little-known side-effect of stripping many middle class women of their State Pension entitlements.

Mothers have to claim Child Benefit even though they know they’re not entitled to it: The credit for State Pension is only automatically added to their National Insurance record when they claim Child Benefit. Those mothers who know they are not eligible for Child Benefit because their family income is above the limit are actually supposed to apply for the benefit anyway, in order to get homecare credit for their State Pension.

If they don’t claim the Child Benefit they’re not entitled to, they can’t backdate it: Firstly, it seems ludicrous to expect women to apply for a benefit they know they are not entitled to. But more importantly, if these women discover that they have lost their State Pension credit, they cannot claim it later. The new rules mean women can only backdate a claim for three months, otherwise that pension year is lost for ever. If they have not claimed within the three month window and find out about this later, the Government does not allow them the credit.

Pensions Update

Monday, February 6th, 2017

Treasury sees pensions as a cost, but they are a real benefit to millions of people: During my time as Pensions Minister, there was clearly a difference of view between Treasury and DWP about private pensions. The Treasury sees them as a cost to the Exchequer. DWP sees them as a benefit for people to give them a better later life standard of living. That is how most people see them and why they are so important.

Treasury trying to promote ISAs but who is promoting pensions?: Having battled against the Lifetime ISA, it is deeply troubling to see the latest public information from the Government, talking about ‘ISAs and other savings options’ which omits to mention pensions when saving for retirement. The huge advantages of pensions are totally ignored.

Anyone using a Lifetime ISA, instead of a pension, is likely to end up with less in later life: Private pensions are far better than ISAs in terms of their behavioural design. Using a pension, instead of a Lifetime ISA, should ensure you have more money in later life. Future Governments will have to deal with the consequences of more poor pensioners, and greater strains will fall again on younger generations.

Pensions have many advantages over ISAs: Pensions can give you free money from your employer, more Government contribution to your savings, controls on the charges, better investment options for long-term growth and behavioural nudges to stop you spending the money too soon. The pension can pass on tax-free to your loved ones, or can keep growing as you get older and provide a fund to help pay for care if you need it as you get older.

Using ISAs will mean less money in later life: ISAs are more likely to be held in cash (giving lower long-term returns), have no controls on charges and encourage you to take all the money as soon as you can, unlike pensions which have incentives to stop you spending the money too quickly.

The big problem with pensions is that many people do not appreciate their huge benefits: It is time for the pensions industry to start promoting the advantages of using pensions to provide for later life. We need an advertising and marketing campaign to tell people why pensions are so valuable, we can’t assume everyone knows. Just saving in cash in an ISA is not a good way to provide for later life.

If you care about private pensions and believe they are worth fighting for, now is the time to stand up and shout about their benefits: Before it’s too late and they are supplanted by an inferior product because of short-sighted policymaking that will leave long-term dangers.

Saving for Social Care

Sunday, January 15th, 2017

Jeremy Hunt is right – people will need private savings to help fund later life care: Politicians have talked about social care for years, but have ducked the difficult decisions required to address this time and again. Despite knowing that numbers needing care will rise inexorably, policymakers have not set aside public money, or encouraged private provision to pay for care. The quality of care has suffered, many companies cannot afford to deliver decent care within the council budgets, and the screaming headlines from recent days continue to highlight that this crisis is just getting worse.

There is no money set aside for care: There is almost no money earmarked to pay for the care people will require – not at public or private level. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Problem is worse for older women than for men: The CII Report released yesterday on Risks in women’s lives found that this is a much worse problem for women. The median man over age 65 will need to spend around £37,000 on later life care, but the median woman will need around £70,000. Where will this money come from? It either has to come from councils on a draconian means-tested basis, or the NHS (when early intervention or prevention is not funded), or individuals and their families who suddenly find themselves faced with huge spending they had not prepared for. And of course older women are less able to save for their future needs because they are more likely to have to cut down or stop working to provide care for loved ones – society takes this free female caring for granted.

Families will need to prepare for some costs, but they need help: Local authority care funding is subject to one of the strictest means-tests. Most people will receive no help from the state until they have used up the bulk of their assets (down to £23,250) and until their needs are considered ‘substantial’, causing significant distress to many families and leaving the majority of families without the care their loved ones or they need. Many suddenly have to find significant sums at short notice. Ideally, money is needed for prevention and early intervention, so that people can have a little help or pay for measures that will ensure they are safer and less likely to fall. But they need to know what to do.

Products for care funding are inadequate: There are some products already on the market to help people pay for care but they are expensive and will not help with prevention. These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans, but each has advantages and disadvantages and they only help at the point of need, rather than allowing people to make plans in advance.

Pension or Property?

Thursday, December 22nd, 2016

Pensions have many advantages: Pensions allow you to spread the risk and also offer you many other benefits as well. It seems a real shame that so many people, apparently even those who have the most valuable type of pensions of all, fail to understand how much they are worth. I would like to explain just how valuable pensions are and why they would normally be the best way to save for retirement – even better than property.

You can more than double your money with a pension: The first thing to say is that, if you are in a workplace pension and you opt out of it to rely on property, you will lose free money from your employer. Many employers will match your own pension contributions. So, if you earn £25,000 a year and you put 8% of your salary into a pension, that amounts to £2,000 each year. £400 of this, however, will come from basic rate tax relief, so your own actual investment in your pension will be £1,600. And, if your employer offers a matching 8%, then you have another £2,000 going into your pension fund too.

You put in £1600 and it can become £4000 straight away: In other words, £1600 of your money has gone into the pension fund and you have received an extra £400 from taxpayers and another £2000 from your employer. So, on day one, your £1600 is worth £4000. That is more than double your money.

Even if property prices double and pension investments make no return, you could do better in pensions: If you pay £1600 a year into a pension you will have £4000 more each year in your fund. By contrast, if you put that £1600 into a property and even if the property price doubles, you will still only have an investment worth £3200 (and that is ignoring the costs of buying, selling and managing the property). So even if your pension investments do not perform brilliantly, you will have extra money you would not have had when buying a property. If your pension fund makes no returns and your property investment doubles in value, you could still be better off in the pension.

Property gains are magnified by borrowing: The big difference, of course, is that you will usually put more money into a property in the first place and also borrow a huge amount extra with a mortgage. So, if the price of the property increases, your gains can be magnified because the amount you have invested is much larger. That works well when property prices rise, but there is no guarantee they will keep on going up and there is also no guarantee that the interest on your borrowings will stay low.

Pension funds can invest in property as well as other assets: It’s also important to remember that a pension can invest in many different assets — including property funds and commercial property. So if you think property will do well, you can include property investments in your pension fund but you can also invest in other assets as well.

Don’t put all your eggs in one basket: When investing for the long-term, it’s not usually sensible to put all your eggs in one basket. Unless you are an expert in one particular area and have ‘exceptional’ knowledge, that you believe is not available to the rest of the market, then relying only on one type of investing means you run huge risks. A more broadly spread portfolio can reduce these risks for you. If you already own a home, its value depends on the movement in property prices. If you then buy another property, you are doubling up. That’s fine when the property market is strong, but there are periods when property doesn’t do well.

Property market may be in a bubble which could burst: Quite frankly, property does have some of the characteristics of a bubble right now – the housing market has been stoked by the Bank of England pushing down interest rates to encourage people to borrow more cheaply, and there aren’t enough homes being built. If borrowing is artificially cheap and there is a shortage of supply, then property prices are bound to rise, but this cannot last for ever.

Investing in property is very expensive: Keep in mind, too, that the costs of buying and managing property can be quite high. You have to pay stamp duty, and you will usually have solicitor, surveyor and estate agent’s fees too. If you let the property, your tenants may not look after it, you will have costs of repairs, you may have periods when it is empty and you could even face court fees if your tenants prove difficult.

Pensions are the most tax efficient way to save for the long-term for most people: You can get tax relief on your pension contributions at your highest marginal rate but you invest in property from taxed income. Any rental income and capital gains from property are taxed, whereas pension investments are tax free. Your pension investments pass to the next generation free of inheritance tax and there is no income tax until the money is taken out (and if you die before age 75 there will be no tax to pay at all). With property, all income and capital gains are taxable and when you pass away your property goes into your estate and is subject to inheritance tax (although there are exemptions for your own private residence).

Annuities & Drawdown

Sunday, October 16th, 2016

Major disappointment for thousands of people: The Government’s decision not to proceed with its proposals to allow people to sell back their annuity income will come as a major disappointment to thousands of people. Many have been waiting anxiously for the opportunity to undo the annuity they were forced to buy and will feel let down by today’s announcement that the secondary annuity market is being scrapped.

Many will be stuck for the rest of their life with an annuity they never wanted: This was never likely to be a huge market, but for some individuals it would have been a potential lifesaver. Those who bought an annuity because they were forced to do so, but would not have purchased one unless the law required it, have been waiting desperately for an opportunity to sell it but that opportunity is now being taken away from them.

Consumer protection is, of course, vital but the Government announcement of another overhaul of financial guidance has meant PensionWise cannot now help people before April 2017: Of course it is vital that consumer protection is put in place to help people understand the value for money they would be offered, but that was going to be offered by financial advisers and PensionWise. The Government’s most recently announced overhaul of financial guidance has made the Pension Wise route impossible because the whole guidance landscape is now up in the air. PensionWise Guiders were waiting to be trained to give the guidance for people before the secondary annuity market started in April 2017, but the latest announcement of further rethinking of the Government’s free help for customers has resulted in today’s decision.

Consequences of Quantitative Easing

Thursday, September 1st, 2016

Bank of England rate reduction makes pensions more expensive: The level of funds required to pay promised pensions in future decades depends on how much return one is expected to earn on the money set aside for pensions right now. The lower the future expected returns, the more money must be put in today. The cost of pensions, whether Defined Benefit or Defined Contributions, ultimately depends on the returns on gilts. As gilt yields fall following QE, annuity rates fall and pensions become more expensive. –

Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen: The sensitivity analysis shows that every one percentage point fall in long gilt yields will increase the average pension fund’s liabilities by 20%, while its asset values will only increase by around 7-10%. Therefore, as gilt yields decline, pension deficits increase and any rise in asset prices is less than the rise in the liabilities or annuity costs.

Deficits are approaching £1trillion: Hymans Robertson estimated that deficits of UK final salary-type schemes post-Brexit had risen to £935billion. A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trillion mark. The value of liabilities, as measured at today’s interest rates, is well over £2trillion.

State Pension Triple Lock

Friday, August 5th, 2016

Since 2010, pensioner incomes have been boosted significantly: Leaving pensioners in poverty is unacceptable, yet until a few years ago that was the fate of too many or our country’s elderly people. In 2008, the Basic State Pension had sunk to the lowest level relative to average earnings for decades. However, since 2010 the incomes of the UK’s 13 million pensioners are now more than £10 a week higher than they would have been if the state pension had only been linked to average earnings. Indeed pensioner households are no more likely to be poor than other age groups in today’s Britain.

Triple lock will have fulfilled its purpose: I believe the triple lock will have fulfilled its purpose by 2020. As Pensions Minister, I suggested that the next Parliament should secure those gains, but a triple lock is not optimal for that any more. In fact, in some ways, having the triple lock has been used as an easy symbol for politicians to point at to claim they are looking after pensioners. This can sometimes mean politicians do not believe they need to engage in more serious and in-depth policymaking for the aging population. Such totemic symbols may be politically convenient, but are not a sound substitute for carefully considered policy reform.

Pension Protection

Monday, July 18th, 2016

No justification for further Government delays to Regulations for loyal, long-serving pensioners: It is very disappointing that the DWP has failed to lay the Regulations that will allow pensioners to receive higher payments from the Pension Protection Fund. A minority of workers in failed firms have lost more than half their pension payments and are waiting for increased compensation that had been delayed for years.

The Regulations are ready to be laid this week – further delays are simply unfair: Having pushed DWP officials to get the required Regulations ready to increase the PPF cap, they should be laid immediately. All the necessary work has been completed and we planned to announce the regulations this week. It is so disappointing that the DWP has failed to act, causing further unfair delays to those affected.

Compensation won’t be backdated so any delay adds to the injustice: Those workers entitled to fairer compensation from the PPF have already been waiting for years. It is true that the PPF offers good compensation to most people whose employer fails, however the PPF cap hits some pensioners’ payments significantly. In many cases they lose more than half their pension and this was recognised as unfair a few years ago. These higher pension payments will only begin from the date the regulations are actually laid, they will not be backdated. So each week of delay can mean the pensioners losing hundreds of pounds which they can never recover.

BHS Pension Scheme

Monday, June 27th, 2016

What has happened to BHS workers’ pensions? Workers need to know that their pensions have not disappeared. The Pension Protection Fund is there to ensure that most of their promised pension will be paid. This insurance is not funded by taxpayers, but by employers sponsoring all other Defined Benefit pension schemes, who pay a levy each year to contribute to this compensation. Many years ago, when an employer collapsed, workers could lose their entire pension, but those days are now gone.

What is the Pensions Regulator’s role? The Pensions Regulator must protect the PPF insurance arrangement from unfair claims and ensure that employers fund their schemes appropriately. It oversees Defined Benefit pension funds, to make sure trustees and employers are looking after members’ interests and working towards paying the promised pensions.

Why did the Regulator allow the company to be sold when it had such a large pension deficit? The Regulator does not have the power to prevent a sale, but it does have the power to force a seller to pay more money into the scheme after the sale, if the employer has not supported the scheme. Our pensions regulatory system is deliberately designed to allow companies to be sold, rather than standing in the way, since this can often be the best way to safeguard workers’ jobs and the long-term future of the business.