Category: Pensions

The UK’s state pension crunch will hit in the 2020s

According to Gordon Dryden Gilling-Smith’s 1967 Guide to Pensions and Superannuation, the first recorded pensioner was someone called Martin Horsham. Horsham retired on 10 March 1684 on a pension of £40 a year.

That may not sound much today but, at that time, average yearly earnings in skilled trades were between £30 and £36 a year, while in unskilled trades and agriculture they were between £9 and £20. Horsham’s pension was paid to him by his successor in the workplace, a Mr G Scroope, from his own earnings of £80 a year.

Irrelevant to pensions today? Not really. The principle established – that of the pensions of those in retirement being funded by a levy on those at work, something we today refer to as a pay-as-you-go system – is the structure on which our state pension system and most other similar systems around the world are based.

That said, the state pension in the UK today is not so generous as to provide a pension of double average earnings. It will not make us anywhere near as wealthy as Horsham was relative to others when he retired all those centuries ago. The maximum state pension anyone can get nowadays is around 30 per cent of average earnings.

For pay-as-you-go state pension schemes to work across the generations as people join and leave the workforce they need to take account of the ever-changing demographic and economic realities. Clearly, if we were ever to have an increasing number of young taxpayers in the workforce and a relatively small number of people retiring then it could be expected we could afford to pay a generous level of state pension.

Equally, the worst outcome would be if we were to have a high number of people retiring at a time when we have a relatively low number of younger taxpayers. If that were to happen then you would expect lower state pension outcomes as a result.

State pension costs can only really be controlled in two ways. The amount paid can be varied or the length of time the pension is paid can be varied. Recent changes to the state pension in the UK have seen a popular higher pension promise but with an unpopular later attainment age at the same time: a neutral approach in my view. But what of the future following the likely economic and demographic uncertainties caused by last week’s vote to leave the EU?

The effects of that will begin to be felt during the 2020s as our terms for disengagement with the EU are finalised. The 2020s is also the decade when the UK’s so-called baby boomers reach retirement age. While the post-war baby boom in the US lasted through the 1950s, the same was not the case in the UK. Our post-war baby boom was over by the end of the 1940s. Our real baby boom happened in the 1960s.

Our pay-as-you-go state pension system in those soon-to-be days will need to react to the realities of a sharply increasing number of pensioners in light of the current demographic and economic landscape.

Source: Money Marketing written by Steve Bee 4th July 2016 1:15 pm

Advisers welcome Govt auto-enrol simplification plans

Advisers have welcomed Government efforts to simplify automatic enrolment regulations for small businesses although concerns remain about the cost and complexity of complying with the rules.

Last week, the Department for Work and Pensions proposed a series of changes to auto-enrolment regulations designed to make the reforms less burdensome for small and medium-sized firms.

Firstly, the DWP says it wants to make it easier for employers to use existing payroll processes to check whether a worker is eligible for auto-enrolment.

It has proposed adding a new way of determining a “pay reference period” – the period of time an employer uses to check whether an employee is eligible for auto-enrolment – to make it simpler for firms to use their existing payroll systems to assess workers’ earnings.

Syndaxi Chartered Financial Planners managing director Robert Reid says: “It is good the DWP is trying to simplify payroll processes but this by no means solves the problem.

“A lot of small firms still have very basic payroll systems and this will not do anything for them.

“There could also be an issue when two companies with different payroll systems merge. When this happens there will inevitably be a period of transition and mistakes will be made.”

The DWP is also looking to simplify the rules for companies that have not reached their auto-enrolment staging date but already automatically enrol their workers into a pension scheme which meets minimum standards set by Government.

At the moment if an employee chooses to opt out of such a scheme the employer would be required to re-enrol them when their auto-enrolment staging date arrives.

The DWP has proposed introducing an exclusion from auto-enrolment in respect of workers who have voluntarily left one of these schemes within 12 months of the employer’s staging date. Under this proposal the employer would still be required to re-enrol the employee after three years.

In addition, policymakers are considering extending the “joining window” – the period of time after an employer’s staging date during which they must ensure all eligible workers are enrolled and issued with enrolment information – from one month to six weeks.

AWD Chase de Vere head of communications Patrick Connolly says: “It is positive the Government wants to make auto-enrolment less onerous for small employers. It would be farcical to force an employer which already starts auto-enrolment before their staging date to re-enrol employees who had opted out a couple of months earlier.

“Increasing the joining window will also give small businesses a little more breathing space and should reduce the risk of non-compliance and fines.”

The Government is also considering excluding workers with enhanced or fixed protection from auto-enrolment altogether. If these people were auto-enrolled and made a pension contribution they would lose their protection and could be hit with a tax charge from HMRC.

Hargreaves Lansdown pension investment manager Laith Khalaf says: “This would be a sensible carve out which would avoid the pitfall of people facing a huge tax bill as a result of being automatically enrolled by their employer.

“I think broadly it is good that the DWP is making auto-enrolment easier but it is still very complicated and employers will still need advice and help with communications.”

Pensions minister Steve Webb says: “These proposals are to make sure that parts of the legislation work better and are more user-friendly. We are also asking for suggestions on how we could recognise the best employers.

“Employers and our partners in the pensions and payroll industry have made a major contribution in delivering these landmark reforms. We want to build on this as medium-sized employers prepare to automatically enrol their staff into a workplace pension.”

Source: Money Marketing Tom Selby 4th April 2013

HMRC eases pension drawdown transfer rules

HMRC has eased pension drawdown rules to prevent people who transfer their fund suffering a drop in income as a result of low GAD rates.

The change has been made after experts raised concerns existing rules would put people off switching providers.
At present a drawdown review is triggered on the drawdown anniversary after someone decides to transfer, even if they had locked into a five year review prior to April 2011.

When a drawdown review is triggered the GAD rate upon which an investor’s income is based reverts to the prevailing rate at the time of the review.

Gilt yields have plummeted in recent years, leading to falling GAD rates. Suffolk Life says this meant investors could have ended up with a lower income if they decided to transfer their pension, despite the Government’s decision to raise the GAD maximum from 100 per cent to 120 per cent.

As a result, HMRC has decided from 26 March a pension transfer will not automatically trigger a drawdown review.

Suffolk Life pensions technical manager Claire Trott says: “People have not transferred because there was a danger they were on a GAD rate which is higher than they would get now. That is the big issue. This change means drawdown investors can now transfer without that concern.”
Source: Money Marketing Tom Selby 12th March 2013

Pension funds hold more bonds than shares for first time since 1975

Last year funds held an average of 35pc of their assets in shares, compared with 39pc in bonds and other fixed-interest investments. In 2011 they still held more in shares – 42pc against 33pc in bonds, according to the annual survey of company pensions by the National Association of Pension Funds (NAPF).

The last time pension funds held more in bonds than shares was in 1975, the NAPF said.

In 2007 pension funds held almost twice as much money in shares as in bonds, at 55pc against 29pc, with 16pc in other assets. The remaining investments consist of property, private equity and other “alternative” assets.

Shares in British companies are particularly out of favour with pension funds. They held just under 10pc of their total assets in UK-listed companies last year, a fall from 12.2pc in 2011.

As a result of their reduced exposure to equities, pension funds have failed to benefit fully from the stock market’s spectacular new year rally, which saw the FTSE 100 pass the 6300 mark today.

Other figures in the NAPF’s report show the disparity between “gold plated” final salary pensions and newer “defined contribution” schemes.

Final salary pension funds held an average of £88,500 per member – £531bn in assets for 6 million members – while defined contribution schemes were worth just £20,150 per member (£14bn assets and 695,000 members).

Companies are closing final salary pension schemes to new staff at the fastest rate on record, the report found. It said only 13pc of final salary pensions were open to new joiners last year, a fall of a third from 2011.

It was the biggest reduction since comparable figures started in 2005, when almost half of private sector schemes were open to all employees. The annual survey also showed that the defined benefit funds were increasingly closing to workers already in them.

Thirty-one per cent of open private sector schemes were planning changes in respect of existing members and around 60pc were planning changes for new employees. Plans included reductions to scheme benefits and closing the scheme in favour of a defined contribution plan.

Source: Richard Evans,  28.1.2013

Q&A: Changes to drawdown rules


Minister warns of auto-enrolment fees –

– Pensions

Revealed: The £200m pension pot raiders who target the needy

  • Mail on  Sunday investigation uncovers cold-calling firms who target Britons to release  money from their pensions
  • Schemes  promise high return through unregulated and offshore investments for price of  agent’s commission
  • Financial  watchdog warns they can be a scam – victims face tax bill of 55 per cent on  their savings

A Mail on Sunday investigation today reveals  how unscrupulous cold-calling firms target hard-pressed  Britons and entice them to release money from their pensions, without warning  them of the risks.

An undercover MoS reporter obtained a job in  a telemarketing company which texts and cold-calls thousands of Britons each  week, encouraging them to release their pensions early in what the taxman  describes as an abuse of the pensions tax rules. The firm passes on details to  pushy salesmen who try to complete the deal. 

Tens of thousands of Britons have already  been persuaded to release £200 million worth of savings through so-called  ‘pension liberation schemes’ since the beginning of the recession in 2008,  figures obtained by this newspaper show.

Consumers are called up and told they can  liberate the money before the legal age of 55 and promised high returns by  investing in unregulated funds and offshore schemes – for the price of an  agent’s commission. 

But the financial watchdogs warn that people  can easily become unwitting victims of a scam, as anyone who  releases their  pension early could face a hefty tax bill of up to  55  per cent on the  value of their savings. Some have been left feeling  suicidal or forced to sell  their family homes as a result. 

Last night, Pensions Minister Steve Webb  said: ‘If a deal looks too good to  be true, it probably is. People should think  extremely carefully before  they give up their valuable pension rights. Money in  a pension is there  for retirement and should not be released before at least  the age of 55. Accessing money in a pension before you are 55 will also lead to  serious tax penalties.

‘Firms like these are preying on people when  times are tight. The Government  is investigating a number of these schemes and  I am working closely with the Pensions Regulator to make sure the rules that  already exist for  good reason are enforced.’

Earlier this month, the Pensions Regulator  and Revenue & Customs announced a new warning on pension-release schemes and  the firms that offer them.

But days after the announcement, an  undercover reporter for this newspaper obtained a job calling the mobile numbers  of hundreds of people a day in just such a scheme. 

The directors of the company, Lead  Performance Limited, told the reporter they knew the pension release schemes  were ‘not ethical’, with authorities trying to put an end to them. But they said  they were entering the market as it offered the opportunity to earn hundreds of  thousands of pounds in commission per year – and set up a meeting at their  offices to introduce the reporter to an investment firm, City Bay Consultants,  which operates pension release schemes.

LPL is one of the biggest telemarketing firms  in the UK, cold-calling more than two million Britons each month from 15 call  centres around the world, and offices in Nottingham and Northampton, on behalf  of companies that include British Gas and TalkTalk.

The firm, which has headquarters in Watford,  Hertfordshire, rings homes and mobile phones from midday to 8 pm daily and  conducts fake surveys to gain information, much to the irritation of most  householders.

Details are then sold on to their client  companies to follow up as potential leads. Our  reporter was encouraged to work hard at his new job and promised the opportunity  to earn up to £4,000 a month in commission, on top of his basic salary. He was  told that if he could find one individual who would invest a pension pot of more  than £100,000 through pension release schemes, he could earn up to £1,000  commission. 

LPL was co-founded by Bill Burey, 47, and  Troy Attwood, 34. Discussing the pension-release schemes, Mr Attwood admitted it  was not ethical. He told our reporter on his first day: ‘I think the Government  do not want people taking cash out [of their pensions] is the bottom line, but  there are people that are going to do it.’

David Fernandes, another LPL director, said  the schemes offered could be a lucrative source of business, as the recession  was leading people to raid their own pensions for cash. He  said: ‘We’re just really conversational [on the phone] .  .  . and then people  sit there and tell us their life story, just going, “I lost everything and you  know, I need this money, and my wife died .  .  .”.’

Once the reporter began work, LPL directors  provided him with databases of more than 300 mobile phone numbers. The people he  called had supposedly responded to a spam marketing text message offering  consumers cash lump sums from releasing their frozen company or private  pensions. In reality, many said they had not responded and were angry to be  called out of the blue.

Read more:–make-million-nuisance-calls-MONTH.html#ixzz2JAxe11tJ

By  Abul Taher and Martin Delgado

PUBLISHED: 01:58, 27 January  2013 |  UPDATED: 01:58,  27 January 2013

Govt confirms new drawdown limit start date

The Government has confirmed the new drawdown income limit of 120 per cent will be introduced from 26 March this year.

Capped drawdown was launched as part of Government reforms to abolish compulsory annuitisation at age 75.

Following the changes, which came into force in April 2011, the maximum amount a person in capped drawdown could take as income was reduced from 120 per cent of the equivalent GAD annuity rate to 100 per cent.

Chancellor George Osborne (pictured) announced in his Autumn Statement in December plans to reinstate the 120 per cent cap following industry concern about the impact low gilt yields, coupled with the reduced income limit, were having on peoples’ retirement incomes.

A HMRC spokesman says: “We are proposing to increase the drawdown limit to 120 per cent from March 26.”

A J Bell head of platform marketing Mike Morrison says: “This is good news for a lot of people but we now need to see a root and branch review of drawdown and annuities to make sure they remain fit for purpose.”

Source of article: Tom Selby, Money Marketing, 17.1.13

Flat-rate pension: more readers’ questions answered

Readers have bombarded us with queries about how the new flat-rate pension will work. It appears that many stand to lose out when the new pension system comes into force in 2017. We have enlisted expert help to answer your questions. An earlier selection appears here.

A number of readers said they had retired, or left the workforce through redundancy, but were told at the time that they would be entitled to a full state pension, as they had 30 years’ National Insurance contributions (NICs). Now, if their state pension age is after 2017, they need 35 years’ NICs to get a full pension. The email below is one of many we received on this topic.

I was born in 1955 and retired from full-time teaching with a final salary pension aged 52 years. I am now part-time and self-employed, and have not yet taken my pension, as I do not qualify until the age of 60 years. I qualify for my state pension at the age of 66 years, I believe. Currently, I have 30 years’ service so am expecting to achieve the full single person pension. Am I now to understand this will be reduced as I have not earned 35 years’ entitlement? What if anything can I do to change this situation?

It is difficult to say at the moment what your entitlement will look like. Your qualifying years will count towards the new single-tier pension, which is higher than the basic state pension you would normally be entitled to. So even though you may get 30 35ths of the single tier, this still may be more, in pounds and pence, than you would get from the full basic state pension today.

However, if you are still working and paying NICs on your earnings, this should count towards your pension.

But there is a complication: an adjustment will also be made for the years you were contracted out of the state pension through your teacher’s final salary scheme, and hence paid less NI. The details of this adjustment have not been released yet, though we think it unlikely that the adjustment will reduce anyone’s pension below the level of the current basic state pension.

I have made 30 years’ contributions, and now work unpaid in China. I checked that my contribution would give me a 100pc state pension when I retire. Will this now change? I was born in 1953.

If you were on course to get the full basic state pension you should get at least this amount, possibly more. You will have at least 30 years of NI contributions, which will entitle you to 30/35ths of the new single-tier pension – about £123. However, an adjustment may be made if you have ever contracted out of the additional state pension, though we think it unlikely this adjustment would take you below the level of the basic state pension.

I was born in 1955, worked for 30 years, was made redundant in 2001, haven’t worked since, nor have I claimed unemployment benefit. Under the old scheme I would have qualified for a full pension, but I now believe you have to have made contributions for 35 years to receive a full pension. More worryingly, I have also read that unless you have paid contributions in the last 10 years before retiring you won’t qualify for a pension at all. Is this correct? This will also affect my husband in the same way.

If you were on course to get the full basic state pension you should get at least this amount, possibly more. You will have at least 30 years of NICs, which will entitle you to 30 35ths of the new single-tier pension, which as stated above is about £123 a week – compared with the current basic state pension of £107.

There is nothing preventing you from claiming your entitlement if you haven’t contributed in the 10 years before reaching state pension age. It is likely you will need to have made NICs for between seven and 10 years to qualify for a state pension, but these don’t have to be within the last decade.

I am currently drawing a state pension which is index-linked by a minimum of 2.5pc or CPI, whichever is the larger. My pension is currently £120.20 a week. My wife also has her state pension in her own right and which will be slightly more than the flat-rate pension by the time it comes into being. Will we both continue to be index linked under the current system for the foreseeable future, or has the Government plans to reduce our pensions?

The basic state pension and the new single-tier pension will be indexed based on the triple lock of 2.5pc, earnings or CPI, whichever is highest. Additional state pension (also known as S2P or Serps) will be indexed by CPI alone. The chances are, therefore, that most of your entitlement will be indexed according on the triple lock, but some will be linked to CPI alone.

I was able to defer my state pension for five years and thus collected an enhanced weekly amount of nearly 50pc above the basic. Will I get the same enhanced amount when the new system kicks in?

Individuals who reach the state pension age before the implementation of the single-tier pension will continue to draw their entitlement as is, including any enhancement due to deferring. If you defer your state pension beyond the implementation date you will receive benefits under the current system, not the new single-tier one.

I was widowed at 38 when pregnant with my first child and have only worked part-time since as my son was born with a disability and needed me. It has been suggested that widows could lose out as they will no longer be able to inherit from their husband’s record. Can you please confirm whether this is true and I am going to be so much worse off?

In addition my pension forecast stated that if I put off claiming my pension until August 31 2018, I would get an extra £30.02 per week, giving me a total that is far more than the £144 single-tier pension. What will happen to that forecast now? It looks like I will miss out enormously. It is all very upsetting.

There will be transitional arrangements to recognise shared or inheritable additional state pension in the current system. The documents states that widows, widowers and surviving civil partners may inherit additional state pension if the deceased died under the state pension age. This would suggest the inherited pension will be protected.

Although your state retirement age is in 2018, after the new rules come into place your entitlement to a higher pension under the current scheme should be protected under the transitional arrangements.

I receive my pension in 2014. Do I receive the new pension rate in 2017? I have 35 years’ NICs.

No, those already in receipt of a pension should be unaffected by these changes.

I have 29 years’ contributions and decided a while ago to make no further voluntary contributions, as the cost became prohibitive. We are living in Greece, and have no paid employment, but my husband has a pension from his company and will be 65 in 2015 so will, presumably, receive the state pension under the old rules.

Is there any indication at what point it will be necessary for me to start making contributions again (if we can afford it)? I won’t receive the state pension until I’m 66, as I am 53 now.

Your husband’s state pension will be paid under the current rules. You can make additional contributions to buy back any of the past six years. You can do this when you wish; however, sooner may be better than later as the cost of buying additional years may go up, because you will be buying a higher pension under the new single-tier arrangements.

I am living in Cyprus and am 58 years old. In 2007 I requested a pension forecast from the UK and was told that I would be entitled to one third of a basic state pension when reaching retirement age at 65 in 2019 as I had paid 10 years’ contributions – one third of the qualifying 30 years. Will the new reforms affect my entitlement?

You are likely to receive 10 35ths of the new single-tier pension, adjusted for any periods you were contracted out of the additional state pension, or one third of your basic state pension, whichever is higher.

Answers from Laith Khalaf and Danny Cox of Hargreaves Lansdown, who said their responses were “based on our understanding of current proposals, which are subject to change”.

Source of article: The Telegraph, Emma Simon, 16.1.13

OFT launches investigation into workplace pension schemes

The OFT has launched a market study to examine whether defined contribution workplace pension schemes are set up to deliver the best value for money for savers.

Alongside the introduction of auto-enrolment, the OFT says it wants to investigate whether competition will work in the best interests of workplace savers to deliver low cost, high quality pension schemes.

The study will focus on value for money and the size of pension pot savers end up with at retirement.

It will look at how pension providers compete with one another and how the market may develop over time and whether there is sufficient pressure on pension providers to keep charges low, plus the extent to which information about charges is made available to savers.

It will also consider whether smaller firms face difficulties in making pension decisions in the interests of their employees and whether they receive appropriate help and advice in setting up and maintaining workplace pension schemes.

The OFT says it will look into barriers to switching between schemes and a potential lack of ongoing employer engagement in setting up and managing pensions.

Senior director in the OFT’s services, infrastructure and public markets group Mary Starks says: “The UK workplace pensions market is set for rapid growth and change over the next six years, in particular with the introduction of automatic enrolment.

“It is important that these savers get a good deal. We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement.”

The OFT says it will work closely with the Department of Work and Pensions, The Pensions Regulator and the FSA during the course of its study.

It will also seek input from key players including the National Association of Pension Funds, the Association of British Insurers, pension providers, trade bodies and those that represent employers and employees.

The OFT plans to complete the study by August 2013.

ABI director general Otto Thoresen says: “People rightly need confidence in a system that delivers value for money pensions and works well for employees and employers. ABI members recognise this and are raising standards to meet customer expectations.

“Pension charges have fallen to their lowest level, and industry initiatives are set to ensure charges and costs are disclosed clearly in a consistent format, and that people nearing retirement get more help to get the best pension deal.

Aegon head of regulatory strategy Steven Cameron says: “We are pleased to see OFT will also examine if smaller firms receive help and advice. Advisers play a key role and we have concerns regulation is making it harder for them to help such employers. Advisers also encourage greater employer engagement which is particularly key as we progress with auto enrolment.”

Source of article: Money Marketing; 17.1.2013