Showing posts with label pensioners. Show all posts
Showing posts with label pensioners. Show all posts

Wednesday 30 November 2011

Pensions apartheid: get ready to work until you are 75 as UK State Ponzi scheme unravels


By  Your Money Last updated: November 30th, 2011

Experts say the increase in State Pension Age announced by Chancellor George Osborne in his Autumn Statement yesterday will not be the last and millions of younger people should prepare to work until they are 70 or even 75.
No wonder public sector workers are striking today to protect taxpayer-subsidised schemes that enable many to retire two decades earlier than what looks like the new norm for those in the private sector. Mr Osborne's proposals yesterday to end national pay bargaining and cut jobs in the public sector can only have thrown petrol on the fire of their indignation.
Ed Wilson, a director at PricewaterhouseCoopers (PwC), said: “The Government brought forward the increase in the state pension age to age 67 by nearly 10 years so that it will be place by 2026. There is a clear direction of travel that means that many of today’s younger employees can expect to be working well into their 70s.
“People hoping to retire at a particular age are having to revise their plans and are facing a stark choice between working longer, saving more or retiring poorer. Based on the principle the Government had previously set out of increasing State Pension age in line with improvements in longevity, we calculate that the State Pension age could be set to rise to age 70 by 2050.”
That would catch everyone aged less than 31 today. The increase in State pension age to 67 will affect everyone born after 1960. None of these changes should come as a surprise, as increased pension ages have been predicted in this space and elsewhere many times over the years.
State pensions are a form of Ponzi scheme where the funds available are insufficient to honour promises issued and so new payments into the fund are urgently required to avoid collapse. National Insurance Contributions (NICs) collected this week are used to pay next week’s State pensions.
Never mind the actuarial complexities about rising life expectancy and falling investment returns. Outside the public sector bubble, savers face a stark but simple choice. Would you rather have an ill-defined share in an unfunded scheme or a pot of private property with your name on it? Do you want a DIY pension or to put your faith in politicians?
Joanne Segars, chief executive of the National Association of Pension Funds emphasised the inevitability of pension age increases: “Longer lives do mean more time at work, so it is understandable that the rise to 67 will start earlier. The Government has learned from its recent mistake and is giving people sufficient notice this time.”
John Richardson at independent financial advisers Towry urged people to save for themselves: “Ever increasing longevity mean this is unlikely to be the end of this upward trend. It is therefore essential that individuals ensure they make adequate private pension provision to meet their future retirement plans.”
Even so, there must be plenty of people aged 51 or less now that dutifully paid their NICs and other taxes for decades who now feel swizzed by a Government moving the goal posts against them; not to mention those aged 31 or less who will have to wait even longer.
This is pensions apartheid or the gap between a public sector clinging to contractual rights the country can no longer afford and private sector pensions in crisis. Today's strike will highlight these problems but perhaps not in a way the trade unions intend.

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Inflation robs savers, pushing gold and share prices higher

Inflation robs savers, pushing gold and share prices higher
By Ian Cowie
Your Money Last updated: November 16th, 2010


pension
Another month, another missed inflation target for the Bank of England. Readers of a certain age who can remember double digit inflation in the 1970s may be tempted to think that today’s problem is pretty small beer. But the stealthy erosion of the real value of money – its purchasing power – is an insidious enemy of millions of savers.
Some of the most vulnerable are older people. It would take just 16 years – or less time than most people can expect to spend in retirement – for inflation to cut the real value of money in half if it continues to rise at 4.5 per cent; the annual rate of increase in the Retail Prices Index (RPI) during the year to October. Bear in mind that RPI was actually shrinking by 1.4 per cent last year and you can see how sound money is deteriorating.
You can see why the Government proposes to measure inflation by the Consumer Prices Index (CPI), which consistently produces lower figures – including its current annual rate of 3.2 per cent. CPI will produce much lower costs for the Government and employers when they calculate how much pensions should rise in future.
Unfortunately, as far as many pensioners’ daily experience of the rising cost of living is concerned, the CPI might as well be the Chinese Prices Index, as I have pointed out in this space before. It bears little or no resemblance to the bills they must pay because, among other factors, CPI does not include housing or heating costs.
Falling prices for electronic goods such as iPads and iPods may be good news for the young but largely irrelevant to older people who may spend more of their income on food and keeping warm. For example, gas and electricity absorb twice as much of many pensioners’ income than these fuel bills do for younger people, who earn more and spend less time at home, according to calculations by Alliance Trust.
However, for the first time in 30 years, from next April pay rises will be taken into account when the basic state pension is uprated in line with inflation. At present, indexation of pensions is calculated in line with the annual rate of increase in the retail prices index (RPI) in September or 2.5pc; whichever is greater.
In his Emergency Budget, the Chancellor introduced a ‘triple lock’ to index 11m people’s pensions plus State benefits and tax credits received by millions of others. These will rise in line with the bigger of earnings or price inflation or 2.5pc per annum.
Most people welcomed the change because earnings have tended to rise faster than prices in the past – although whether that remains true in ‘austerity Britain’ remains to be seen. Pay cuts are more likely for many than pay rises in the years ahead.
But a less obvious and potentially bigger problem to bear in mind is that next April will be the last time RPI is used to measure price inflation for the indexation of State and company pensions, benefits and tax credits. After that, the CPI will be used. It’s just a pity that in the real world most pensioners will have to buy food and fuel at British prices rather than the knock-down rates available in Kowloon or Shanghai.
Here and now, inflation is the spur that is turning many savers into investors. Supposedly risk-free bank and building society deposits are a waste of time and money when inflation is eroding its purchasing power at six or eight times the gross rate of interest being paid. By contrast, many shares and share-based funds look attractive – despite the absence of any capital guarantee – when the FTSE 100 index is yielding more than 3 per cent net of basic rate tax. No wonder share prices are rising, despite fears about the collapse of the euro and a double dip recession.
For those who require no immediate income but whose priority is the preservation of capital, whatever happens to paper money or fiat currencies, gold continues to shine. When RPI hit 5.3 per cent in May this year, Adrian Ash of the gold dealers Bullion Vault told me: “With the widest gap between RPI and Bank of England base rate since 1977 it is little wonder the gold price in Sterling jumped to a fresh all time high. When cash-in-the-bank pays less than zero, there is no such thing as a risk-free investment.”
Six months later, the slow-motion great bank robbery continues and gold has soared through $1,400 an ounce. Rising numbers of savers and investors are taking the plunge into precious metals and shares – despite fears that current prices look toppy – because, by contrast, inflaton means deposits are merely a slow and certain way to lose money.

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Tuesday 29 November 2011

Pensions in UK devastated by low interest rates

Pensions devastated by low interest rates, warns Saga
Record low interest rates and rising inflation are damaging pensions and will push more pensioners into poverty, a leading expert has warned.

Pensions 'decimated' by low interest rates
Pensions 'decimated' by low interest rates Photo: Getty Images
Myra Butterworth
By , Personal Finance Correspondent
5:40PM GMT 15 Nov 2010
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Speaking at the Bank of England today, Ros Altmann, director-general of the Saga Group, warned that historically low interest rates could lead to another financial crash that would leave pension pots “decimated”.
She explained poor returns were prompting savers to take greater risks with their pensions as they approached retirement.
Savers have seen their rate of returns hit rock bottom as the Bank of England has maintained interest rates at just 0.5 per cent since March 2009.
Dr Altmann said: “Very low interest rates are having a damaging effect on pensions and pensioners.”
She warned of the dangers of rising inflation if interest rates stay too low for too long.
“Pension investors and people buying annuities are being hit by low long-term rates and pensioners suffer from low short-term rates as well, as their savings income having fallen and they cannot make that up.
“In addition, they have been hit by high inflation, so they can no longer protect the value of their capital.
“We already see signs of rising inflation and this has damaged pensioners significantly already. Their savings income has not kept up with inflation, most annuities are being purchased without any inflation protection and a continued increase in inflation will plunge more pensioners into poverty in future.”
An ageing population, with less money to spend, could depress consumption and economic growth, she added.
She called on the Government to take action, suggesting it issues special pensioner bonds that help provide additional income to pensioners caught by the loss of their savings income.
She said the Government could also consider inflation-protection products for pensioners, such as reviving the National Savings products that were recently withdrawn.
Two of the most popular state-backed investment products were withdrawn from the market earlier this year amid the Government’s austerity drive.
National Savings & Investments pulled its inflation beating and fixed interest savings certificates and cut rates on other products.
The group feared demand from consumers could place too high a burden on the taxpayer, at a time when the public finances are under unprecedented strain.
Andrew Hagger, a savings expert at personal finance website at Moneynet, said: “There seems to be no light of the tunnel, with many people having already used up a large proportion of their savings. They are going to get to a stage where there is no where else to turn.”
Robert Bullivant, chief executive of pensions broker Annuity Direct, said: “The only saving grace is the performance of the stockmarket and so anyone who has stayed in equities will see a larger fund than they did a year ago. But if they have switched to cash, they have not seen much growth. People now need to switch to cash to lock in the stockmarket gains. If you lose those gains and suffer with low interest rates, it’s a double whammy for pensioners.”

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Clock ticks down on pension dreams in UK


Only a quarter of fiftysomethings are financially prepared for retirement, but there are steps you can take to catch up.

Cartoon of couple planning pension
Photo: IAN WHADCOCK


7:01AM GMT 13 Nov 2010
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Millions of baby boomers now have just a 10-year period in which they can either make or break their retirement plans.
According to new research, seen exclusively by The Sunday Telegraph, only one in four fiftysomethings is financially prepared for retirement and one third have no retirement savings at all. But it is the steps you take in the final countdown to retirement that can have the most significant effect on the size of your eventual pension.
Pension planning has always been particularly important for those in their fifties, but today's fiftysomethings face a series of challenges that no other generation has faced. The research, by US-based insurer MetLife, points out that those in this group have benefited from huge improvements in health and longevity: men retiring at 65 can now expect to live to 82, while women of the same age can expect to celebrate their 85th birthday.
Less positively though, many have seen their pensions and savings squeezed from all sides: company pension schemes have cut back while the value of the state pension has fallen.
But it is private savings that have been hardest hit: those in this age group have suffered a toxic mix of poor investment returns, rock-bottom interest rates and ever-declining annuity rates, so even those who manage to build a decent pension fund find that it secures a smaller income in retirement. MetLife's survey showed that those in their fifties were on average hoping to retire on an income of £18,100 a year.
But six out of 10 of those surveyed said their pension plans had been affected by the recent financial crisis. This problem was particularly acute for those on middle incomes (of between £50,000 and £70,000) and the nearer you were to retirement the more detrimental the effect on a person's retirement plans. Women were also particularly ill prepared for retirement, having on average half the pension savings of men.
Despite these financial problems the majority of those surveyed (60pc) said they had taken no action to change their investment strategy, alter their retirement plans or protect their pension funds.
But there are steps that people can take to improve their pension prospects. Ignoring the problem completely is likely to make it significantly worse.
Peter Carter of MetLife said: "Sadly, the experience of the last two years shows that even those who have done all the right things have still been left struggling. Planning for retirement is one of the biggest financial challenges people face, and the one you can least afford to get wrong."
Below is our countdown to retirement, which, whether you are 10 years or five years away, should help you get your pension planning back on track.

10 YEARS TO GO

– Find out what you are worth
Before you can draw up financial plans for the future, you need a clear view of your current position. Ian Price of St James's Place, the fund manager, said that as a starting point people should establish what their likely state pension entitlement would be. This can be done by completing a form BR19, available at www.direct.gov.uk You should also contact the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans.
– How much money will you need?
Gavin Haynes of Whitechurch Securities said you needed to look at how much income you would need in retirement. Be realistic – you may spend less if you are not commuting to work, for example – but don't forget to factor in holidays, travel and any debts you may still have.
– Seek advice on how to bridge the gap
The chances are that what you are currently on target to receive is less than you'd ideally like. Seek advice about how you can bridge this gap. You need to maximise savings during this 10-year period – not only into pensions but into other investments such as Isas. You will need to consider whether options such as retiring later or working part-time beyond your retirement date may be a more realistic way of meeting your retirement goals.
– Review your investment strategy
It is not only how much you save but where it is invested that can make a difference.
A spokesman for Origen, the pensions specialist, said: "Use this opportunity to carry out an audit of existing pension plans; look at where they are invested, how they have performed and what charges are levied on them. Don't forget to ask whether there are guarantees on any plans."
Get advice about whether it makes sense to consolidate existing pension plans – perhaps via a Sipp (self-invested personal pension) – or take steps to protect capital values. There are a number of guaranteed products that can help you achieve this, but seek advice as many come with higher charges.
As part of your review, look at the diversification of your assets, as this can help protect against sudden market movements. With a 10-year time frame investors need to weigh up the risks of equity investments against safer cash-based products.
Generally, the nearer to drawing your pension you are, the less investment risk you should take. But over this period it is reasonable to include equities within a mixed portfolio, particularly given the very low returns currently available on cash.
Bonds, gilts and some structured products may provide a halfway house between cash and equities – but seek advice about costs and risks.

FIVE YEARS TO GO

– Review retirement goals
Get up-to-date pension forecasts and review your retirement plans. Is retiring at the age you planned still realistic and achievable?
– Take the safer option
Consider moving stock market-based investments into safer options such as cash, bonds or gilts. If there is a sudden market correction now, you may have insufficient time to make good any losses.
– Trace 'lost' pensions and other investments
If you've lost details of a pension scheme and need help contacting the provider, the Pension Tracing Service (0845 6002 537) may be able to help. It has access to information on over 200,000 schemes.
The tracing service will use this database, free of charge, to search for your scheme and may be able to provide you with current contact details. Use this information to contact the pension provider and find out if you have any pension entitlement.
– Maximise savings
You now have just 60 pay packets left until you retire. Save what you can via pensions, Isas and other investments. This, with your current pension pot, will have to produce enough for you to live off for 20 years.
Mr Price said: "Don't forget to consider a spouse's pension. If you have maximised your pension contributions it is also possible to contribute into a partner's pension plan."
He pointed out that higher earners and those in final salary schemes should ensure any additional pension savings didn't breach the lifetime allowance (£1.5m from April 2012) as this could land them with a tax bill. Those with outstanding debts, such as a mortgage or credit cards, should use spare cash to reduce them.
– Consider your retirement options
Don't leave it until the last minute to decide what you will do with your pension plan. Many people fail to consider their options properly and simply buy the annuity offered by their pension provider. This can significantly reduce their income in retirement and there is no second chance to make a better decision.
There are now many more retirement alternatives, from investment-linked and flexible annuities to phased retirement options, as well as the conventional annuities and income drawdown plans. It is worth investigating which is most likely to suit your circumstances.

SIX MONTHS TO GO

– Seek annuity advice
Talk to an adviser about your options; if you are buying an annuity, make sure you shop around for the best rate. Remember that those who smoke or have health problems, even minor ones, should inform the annuity provider as they are likely to get a better rate to reflect their reduced life expectancy.
– Consider deferring retirement
You may qualify for a bigger pension if you defer taking it. If you opt to do this you need to contact the Pensions Service. Those who work beyond their retirement age do not have to make National Insurance contributions. Any additional money earned can still be saved in a pension plan.
– Contact pension providers
Ask how your pension will be paid – and how much it is worth. If you are deferring retirement they will need to be informed.

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Value of UK private sector pensions plummet by 16.7pc this year


When it comes to pensions, public sector workers are much better off than their private sector counterparts, a leading pensions expert says.



The value of private sector pensions have fallen by 16.7pc this year amid falling gilt yields and volatile stock markets. Photo: Howard McWilliam
2:57PM GMT 28 Nov 2011
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Many private sector workers retiring today will be 16pc worse off in retirement than private sector workers who retired a year ago because of falling annuity rates and volatile stock markets.
Someone with £100,000 at the beginning of the year would have been able to buy an income of £6,474. Today, that pension fund would be worth just £91,163 - this would only be able to secure an annual income of £5,387 - a drop of £1,087.
Unlike public sector pensions, private sector pensions in so-called defined contribution schemes are affected by stock markets and annuity rates, which dictate your pension income. Since the beginning of the year, the average balanced managed fund has lost around 8.8pc. At the same time, annuity rates have fallen from 6.74pc for a 65 year old man to 5.91pc (level single life annuity). The combined effect of these market movements has been to drive down the pensions purchasing power of someone in a typical private sector money purchase pension by 16.7pc.
Tom McPhail, pensions expert at Hargreaves Lansdown said that when it comes to pensions, public sector workers are very much better off than their private sector counterparts. They also earn on average 7.8pc more than private sector workers (source ONS).
He added: "Life expectancy in retirement has increased substantially in recent years, from around 14 years at age 65 in 1980 to around 21 years in 2010; to date this has not been offset by commensurate increases in member contributions from public sector workers. Members are receiving larger pensions simply by virtue of their longer life expectancy so for the unions to argue that their members are having to pay more to get less ignores the fact that they will be getting their incomes paid for several more years.
"We have a lot of sympathy with public sector workers who are being asked to pay more and work longer, especially as this is coming from politicians who haven’t had the good sense to reform their own pension first. However the uncomfortable reality for most of us is that we are going to have to work longer, save more, spend less and even then we may get smaller pensions than we’d hoped for."
Most private sector companies have closed final salary schemes or defined benefit schemes because of crippling deficits, rising life expectancy and poor investment returns. Just two FTSE 100 companies, Amec and Shell, still offer defined benefit schemes to new staff, according to Lane Clark & Peacock LLP, the consultants. Instead, workers in the private sector are now encouraged to join DC schemes, which are fundamentally different and inferior to defined benefit schemes.

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Friday 17 December 2010

UK: Investors told forget savings accounts, think of shares

Investors told forget savings accounts, think of shares

Britain's 38 million savers have been urged to invest their money in the stock market after being warned that for many of them it is now a "waste of time" putting their cash into a savings account.


The FTSE 100 is yielding a better rate of return than most savings accounts Photo: AFP

By Harry Wallop, Consumer Affairs Editor, and Garry White 10:00PM GMT 14 Dec 2010

The warning came after official figures indicated that the cost of living had increased once again in November, making it nearly impossible to earn a real rate of return on any bank or building society savings product.

As the London stock market closed at a two-and-a-half-year high, experts said that for many savers taking the risk of abandoning a deposit account and placing it in a high-yielding collection of shares was a more sensible option.

The dearth of decent savings products was laid bare by figures from the personal finance website Moneyfacts which showed that there were just three accounts – out of a total of 2,203 on the market – that paid a real rate of return, and only one for higher-rate taxpayers.

Darius McDermott, the managing director of Chelsea Financial Services, an independent financial adviser, said: "The simple fact is if you have £1 and you invest in cash, you will lose out once you take into account tax and inflation. Most savings accounts are just a waste of time.

"But if you put that £1 into to a good high-yielding fund you will make a return. Of course your capital could increase or it could fall. That's the risk, but I would put my £1 into equities every single time."

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The Consumer Prices Index climbed from 3.2 per cent to 3.3 per cent, the Office for National Statistics said, while inflation, as measured by the Retail Prices Index jumped from 4.5 per cent in March to 4.7 per cent in November. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.

A sharp jump in the price of clothing and food was blamed, taking economists by surprise, many of whom expected many retailers to cut prices in the run up to Christmas. There are fears inflation will carry on climbing next year because of the incresase in VAT from 17.5 per cent to 20 per cent and higher gas and electricity bills.

Just one account, an Independent Savings Account from Santander, can beat the RPI level of 4.7 per cent, offering a return of 5.5 per cent, but this is only for customers prepared to adhere to strict conditions.

Just two further bonds – a type of fixed-term savings product – offered by the Yorkshire Building Society and Barnsley Building Society offered a real rate of return for basic rate taxpayers, with a rate of 6 per cent.

Two months ago Which?, the consumer watchdog, calculated that the average saver in Britain is missing out on as much as £322 a year because of "pitiful interest" paid by the majority of accounts.

For any investor prepared to take a risk on their capital, the stock market looked a far better option, many experts said.

Mark Dampier, head of research at stockbroker Hargreaves Lansdowne, said: “You need to keep emergency money in the bank, but it’s self-evident that UK income funds are yielding more than bank accounts and these funds look good value at the moment. I am upbeat on prospects for the stock market.”
The yield on the FTSE 100 index of leading shares – the annual rate of return that investors can receive in the form of dividend payments – is 2.9 per cent, with many individual blue chips paying a far higher rate. For example, shares in oil giant Royal Dutch Shell are currently providing a yield of 5.1 per cent, with insurance giant Aviva yielding 6.2 per cent.

If the shares are held in an Individual Savings Account, the income is almost entirely tax-free.

Mr McDermott said: "Savers have to face the truth at the moment. If they have built up a pool of capital over their lifetime and they want to live off the income, putting it cash is the wrong decision."

Last night the FTSE 100 index closed up 30.36 at 5,891.21, the highest level for two and half years, as investors good economic data from America, raising hopes the world's largest economy might avoid a double-dip recession.

Many experts, however, warned that the rising levels of inflation would eat into consumers' disposable income making it far harder to put money aside as savings, be it a bank account or in shares.

The average family will be more than £300 worse off next year, even after receiving a pay rise, because of the impact of rising inflation, a surge in energy bills and a jump in VAT, according to the Centre for Economics and Business Research (CEBR), a think tank.

However, even allowing for a 2.4 per cent pay rise, they will have only £176 to spare each week from January 2011 due to the rising cost of living, the CEBR says, down from £182 at the start of this year. The difference equates to shortfall of £312 a year.

This means that over the course of the year families will be £312 a year worse off, even though the recession has ended and experts forecast the economy to grow steadily.

Official data from the Bank of England has already indicated that savers are putting less money aside each month. The so-called savings ratio – a measure of what proportion of a family's monthly income they save – has fallen from 7.7 per cent a year ago to just 3.2 per cent.

Victoria Mayo, spokesperson for Moneyfacts, said: "Inflation continues to antagonise prudent savers who are already struggling to achieve a competitive return on their money.

"Those who rely on their savings to supplement their income have been hardest hit, many of whom are pensioners."

http://www.telegraph.co.uk/finance/personalfinance/investing/8202251/Investors-told-forget-savings-accounts-think-of-shares.html
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