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Retiring on less than the minimum wage ?

According to the recent (May 2012) Liverpool Victoria (LV=) State of Retirement Report, now in its fifth year, 6.25 million Britons aged over 50 (28%) have no pension plan in place and look set to rely on just the state pension in retirement – a huge increase on the 1.2 million people who live solely on the state pension today.

The basic state pension equates to an annual income of up to £5,587 and averages at £9,672 a year when you take into account additional benefit income (eg additional state pension, pensions credit). This is up to 51% lower than the income someone in the UK working full time on the minimum wage would earn, which is £11,477 per year.

Even with Government plans to introduce a Universal State Pension at £140 per week, this will still provide an annual income significantly below the minimum wage. When asked if they could live on the equivalent of the minimum wage in retirement, 43% said they couldn’t live on that alone and over a quarter (27%) said they would really struggle. The report findings are that for those who have private pension savings, the average income in retirement is currently £7,488 a year. When this is combined with the state pension, many people are still only living on marginally more than the minimum wage.

The LV= report also reveals that 15% of those already retired, or within five years of retirement have cut back on contributions to their long term savings over the last 12 months, with an average decrease of £296 a month or £3,552 per year. This equates to a total of £8.31 billion “lost” in retirement savings in the last year [6]. While these are significant cuts, a greater sum, £11 billion, was shaved off retirement savings by this group in 2011 (£343 per month). Savers into private pension plans have made the most significant cuts in 2012; an average of £523 per month over the last 12 months, compared to a £164 cut on average made by those with public sector pensions.

Over half (58%) of those set to retire within five years have become more concerned over the last year about their financial situation and their level of savings for retirement. The biggest worry is the rising cost of food and utilities (76%), followed by the general poor state of the UK economy and national debt (63%). The effect of low interest rates impacting savings (61%), high inflation (61%) and the recent reforms to UK pensions (44%) are all major causes of concern for pre-retirees.


Sources: www.lv.com

For more information on retirement planning – please see our guide ‘Planning for Retirement’ or contact us on 01737 225665 or email advice@conceptfp.com

Pensioner Poverty?

Against a background of political wrangling about pension reform, a growing number of UK individuals face an uncertain – and uncomfortable – retirement.

According to a survey conducted by Prudential, 35% of UK individuals who plan to retire in 2011 will have an income below the poverty line. The Joseph Roundtree Foundation estimates a single UK individual needs at least £14,000 a year to live; however, 35% of people aiming to retire in 2011 will have an income below this level.

Meanwhile 19% will retire on a meagre income of less than £10,000 a year. Women appear more likely to find themselves in straitened circumstances: 40% of women will find themselves below the poverty line, compared with 30% of men, while 26% of women will retire with less than £10,000 a year, compared with only 12% of men.

Unsurprisingly, relatively low earners are more likely to struggle with poverty in retirement, as they are less able to build up a nest egg to augment the state pension. The Office for National Statistics (ONS) says only 27% of women and 16% of men in full-time employment and earning less than £300 per week are in a pension scheme.

The ONS also warned that membership of private sector pension schemes has fallen. In 2010, 39% of male employees and 28% of female employees were in a private sector pension scheme, compared with 52% and 37% in 1997. However, participation by public sector employees remained unchanged for men over the same period, and actually increased for women.

A study undertaken by the Institute for Fiscal Studies found that pensioners – particularly pensioners who depend on state benefits – experience higher rates of inflation than non-pensioners. Rising costs for food and fuel are putting pensioners under pressure – meanwhile, an environment of low interest rates is squeezing many older people, who are more likely to be savers than borrowers.

The government has proposed a flat-rate pension of approximately £140 a week, to be paid to all pensioners; however, this has yet to be introduced and will not benefit those already in retirement. Meanwhile, according to a survey carried out by YouGov for the National Association of Pension Funds, approximately three million people aim to finance their eventual retirement with a lottery win. However, rather than gambling on your future, it is important to consider how you intend to finance your retirement as early as possible.

Take a look at our retirement guide here

Or if you are looking to maximise your retirement income – take a look at our guide for your retirement options here

Building your NEST egg?

Britain’s population is ageing, yet many individuals are not saving enough to provide themselves with a comfortable retirement. Recognising that this situation was unlikely to improve on its own, the government introduced the Personal Account, a simple low-cost pension scheme that will begin enrolment in 2012.

What is NEST?
More recently, the scheme has been rebranded as National Employment Savings Trust (NEST). NEST is an independent pension scheme run by a trustee body, NEST Corporation, for the benefit of its members. It is intended to help individuals boost their savings for retirement and is likely to be delivered online.

NEST for employers
At present, 750,000 private-sector employers do not offer a workplace pension scheme. Under the new rules, employers will have to enrol all eligible employees into a qualifying pension scheme and then contribute to that scheme. Employers of all sizes and in all industries can use NEST, which can be used on its own or alongside other workplace schemes. Employers are not obliged to use NEST, but they do have to offer a scheme that is at least as good as NEST if they decide not to take up the option.

NEST for employees
Under the new rules, all qualifying employees will be enrolled automatically into their default workplace pension scheme and then contribute to that scheme, although individuals are able to opt out if they wish. Once enrolled, they are likely to be able to choose how their money is invested from a range of investment funds and if they leave their job or move to one where the employer does not use NEST, they can opt to continue saving in that scheme. Self-employed individuals are also able to join NEST.

Contributions
The maximum annual contribution into NEST is £3,600 (index linked from 2005), so there is scope for employers and employees to make additional contributions if they wish to top up the minimum contributions. With a few exceptions, transfers in and out of NEST are not permitted, although this will be reviewed in 2017.

A relatively positive reaction so far
So far, NEST appears to have been relatively well received by financial advisers and consumer groups. In particular, Which? personal finance campaigner Doug Taylor has commented, “This is another important milestone… consumers want a brand they can trust working for them and the best return they can get for their contributions. We believe that NEST will deliver that.”

Will NEST deliver the intended result? only time will tell ……

Pension Planning – Concept Financial Planning

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What’s so wrong with an Annuity?

The continued unwillingness of people to make provision for their retirement continues to be a source of concern to policy makers. Much of the debate as to how to encourage retirement saving has centred on tax breaks and product design and the obligation to purchase an annuity is frequently cited as one of the reasons people do not contribute to registered pension schemes. Indeed the Tories have now promised to end compulsory annuity purchase if they get into power and presumably, should this happen, pension providers will be flooded with new applications. But are annuities really that bad?

The main objections to annuities are that they are inflexible, poor value if you die prematurely, and rates are poor. True, they are inflexible in that once you select the features of your annuity you cannot change them. Yes they are poor value if you are short lived but conversely they are good value if you are long lived. But are rates really poor? And if so, what are they poor in comparison to?

Certainly annuity rates have fallen significantly since their peak in 1990 so are they poor value on a historic basis? No not really. In 1990 interest rates hit 14% and inflation was running at around 7% per annum. While this was very bad news for borrowers it was good news for savers. Today savers are lucky to get a 3% return on their cash. Furthermore, in the last 20 years we have seen life expectancy increase further.

A 60 year old man in good health can currently expect to receive an annuity rate of just over 6%. This is for a level annuity with a 10 year guarantee. When considering equity based investments an assumed rate of growth of 7% is generally used. This might lead one to conclude that annuities are poor value since the annuitant only receives what might reasonably be expected as an investment return, while the capital itself is sacrificed.

The key point though is that an annuity carries no investment risk. Buying a level annuity involves exposure to inflationary risk, life company solvency risk and mortality risk, but not investment risk.

To assess whether paying into a pension and then buying an annuity, is worthwhile we need to look at a similar risk alternative.

Case Study

Let us consider the case of Owen Michaels who is nearing retirement. Owen is aged 50, earns a salary of £40,000 and is in good health.
Let us assume that rather than invest into a pension fund Owen chooses to use Cash ISAs as his retirement funding vehicle. This means he is free to draw money out without restriction and without tax liability.

ISA contributions of £400 per month are made from net salary for the next 10 years. After 10 years, the value of his ISA portfolio (assuming a 3% growth rate net of charges) stands at £55,896.

If contributions of £400 a month had been made to a personal pension fund, tax relief of 20% would have been received and at the end of 10 years (again assuming a 3% net growth rate) Owen’s pension fund would be worth £69,870. From this amount, he could take tax free cash of £17,467 and a net income of £2,527 would be generated via the annuity. From the tax free cash let us assume that £631 a year were withdrawn (25% of the net annuity rate) giving a total annual income of £3,158.

If Owen were to draw £3,158 each year from his ISA portfolio, and assuming a continued net growth rate of 3% per annum, the ISA portfolio would be exhausted after 23 years. Coincidentally, the average life expectancy for a 60 year old male is now just over 23 years.

Clearly if Owen does not survive the 23 years the decision to save via ISAs would have been vindicated but, if he had gone down the pension route and taken tax free cash his beneficiaries would still have access to the residual tax free cash and remember, the annuity rate used had a 10 year guarantee so the minimum return would be £25,270 (£2,527 for 10 years). After 10 years Owen’s ISA is worth £35,642 but the pension residual tax free cash would be worth £15,339, so the worst case scenario is a loss of £20,303 when compared to the ISA route.

So when viewed against a similar risk alternative, annuity purchase continues to stack up reasonably well. The real benefit it offers is as an insurance against longevity and if it were viewed as insurance rather than investment it might get a better press. Like any insurance it is good value if you claim (live beyond average life expectancy) and poor value if you don’t claim (die prematurely).

Pensions are intended as a vehicle to providing income in retirement. As a mechanism for turning capital into an income stream which is guaranteed for life, annuities are perfect. Certainly there are more flexible alternatives and it is possible that in future these alternatives will be available beyond age 75 but for those unwilling to accept investment risk annuity purchase continues to be the most appropriate option and still has much going for it.