Pension Savers Face Large Fees to Access Their Pensions

Millions of retirees may have to rethink their pension plans when they realise their pension company could charge them up to 20% of their pot for accessing their nest egg.

From April 2015, pension savers over the age of 55 who have a defined contribution workplace pension can access their pension pots as they wish, rather than having to buy an annuity or drawdown product.   income drawdown

Whilst many will indeed be tempted by being able to get their hands on large sums of money rather than buy an annuity which will guarantee them an income for life, many will be left reeling when they find out how much their pension provider will charge them for the privilege.

Financial advisors are urging savers to go through their paperwork with a fine tooth comb, checking the small print for penalty charges that may occur if they choice to withdraw their pensions, with some companies charging as much as 20%.

Exit penalties are particularly prevalent on pension products sold in the 80s and 90s, with most of them being on defined contribution workplace pension along with private pensions for the self-employed.

The clauses were usually drawn up to deter savers from switching to a rival insurance companies to secure themselves a better pension deal further down the line.

Not only do savers need to be aware of the tax implications of accessing their pensions instead of buying an annuity, they also now need to be aware of how much of their pot it will cost them to do so.

Many insurance companies will also charge hefty fees for taking your pension before the retirement date logged in your policy documents, with most documents stating retirement ages of 60 or 65, and some as high as 70, leaving many who were planning to retire early because of the new pension freedom changes having to rethink their plans.

Whilst charges may vary hugely between companies and differing policies, charges start at as little as 2-3% but can go up to 20% on older policies which were sold before the insurance companies were fully computerised.

The exit charges will be even more of a blow to those who hold multiple pension policies because they have changed companies several times over their careers as potentially each pot will have an exit fee attached to it.

Withdrawing From Pension Pots Could Lead to Self-Assessment Tax Forms

Pensioners looking to take advantage of the new pension freedom reforms coming into effect next April will find themselves having to complete the complicated self-assessment forms,

In addition, many will face tax bills if they go over their personal allowance. piggy-bank

Experts in the field are concerned that many newly retired savers will not seek independent advice before deciding what to do with their pension pots, with many choosing to withdraw large amounts of money without realising they will be subjected to tax if their income exceeds £10,000 per annum.

As things stand, once a saver takes money out of their pension they would be liable to income tax (at a level depending on how much money they had withdrawn and other additional forms of income they may be receiving), and the money could not be returned to the pension scheme once withdrawn in an effort to reduce the tax bill.

There are approximately ten million people in the UK who have to fill out self-assessment forms each year – most of which are currently self-employed or people on higher rate tax.

This figure is set to rise if many pensioners choose to tax out lump sums from their pension pots.

Many pensioners will be receiving their retirement income from two or three different source – mainly the state pension and their personal or workplace pension and then any other investments or earnings, all with separate tax codes.

The self-assessment forms are acknowledges as being complicated and long-winded with many filling in their forms incorrectly each year.

Pensioners who don’t complete their forms correctly could find themselves landed with a large tax bill, or have any money owed taken from their personal allowance the following year (or years) to make up the difference. This could be troublesome for those who don’t have a large pension pot and are on a tight budget.

In addition, those who drawdown money from their pension pots which causes them to exceed their personal allowance could suddenly find themselves on a higher tax code.

Those who choose to keep their pension invested in the scheme but withdraw differing amount each year are certain to have to complete a self-assessment form and having to pay the tax owed in one lump sum rather than drawn out across the entire year.

As always, experts advise that anyone choosing to withdraw money from their pension pot seeks guidance from an independent advisor who will ensure they understand the tax implications of their decisions.

100K more over-60s in work since 2011

Over the past two years the older generation still working has risen by over 100,000. In other good news, these so-called ‘silver workers’ are being rewarded financially as their wages have risen more than any other age group over the same period.

According to data published by the Office for National Statistics (ONS) in conjunction with the Prudential, between 2011 and 2013, the average income for workers aged 60 and over increased by 6.1% to £17,250, compared to an average of 3.8% for other age brackets.

In addition, during this time an extra 100,000 older workers were in employment with a large section of these being in senior positions.

Roles in senior management rose most in older workers, as an extra 25% more joined the ranks in 2013 than in 2011 and earned them an extra £1,200 as their pay increased from an average of £24,000 to £25,200.

Whilst many over-60s workers continue to work due to insufficient pension savings, many are choosing to continue to work because they’d prefer not to retire. Now that companies are not allowed to force people to retire once they reach state pension age, many workers are enjoying the challenges of employment well into their late 60s and even 70s.

Employers are recognising that older people have a lot to offer the workplace, with experience and the ability to guide their younger counterparts. They are often seen as being more reliable and less likely to jump ship.

Women aged 60 and over have seen the highest wages rises, with a hefty average increase of 11.4%, compared to 4.2% for men aged over-60. However, this increase in salary could also be down to working more hours rather than getting paid more per hour.

Some people are concerned that the increasing number of ‘silver workers’ is having a knock on effect on the salary increases of younger workers, along with holding back their careers as they unable to climb the ladder.

Academic Study Shows Annuities Still Offer Good Value for Money

A study conducted by the Open University has found that contrary to popular belief, annuity products offer ‘fair’ value for money for those looking to guarantee their income in retirement.

Whilst annuities have suffered by way of reduced interest rates over the past 25 years and along with a general increased cost of living, have not given customers the same kind of returns they did in the 90s, they still represent good value.

In fact, one of the major reasons that annuities now create less retirement income than they did twenty years ago is because we are all living much longer, so therefore the same amount of money has to go further than it did two decades ago.  piggy-bank

The Open University study found that 97% of the reduction in retirement income from an annuity was down to increased life expectancy.

The report said that annuities should be looked at as an insurance against living longer than your savings or other investments will last.

A spokesperson for the Open University said that drops in annuity rates coupled with living longer doesn’t mean that they offer poor value for money, and stressed that they should still play a vital role in people retirement plans.

However, she was keen to point out that there can be up to 25% difference in annuity rates on similar products, so it was vital that anyone planning to buy an annuity really needs to shop around and if possible, seek the guidance of an independent financial advisor.

Many annuity customers make the mistake of taking the offer from their pension provider, without bothering to check if they could get a better product elsewhere.

In addition, many don’t realise that they need to declare all their health issues as this may mean they are eligible for an enhanced annuity if they are likely to die earlier than expected from unhealthy life choices or medical complaints, which offer considerably better rates than normal annuity products.

As from April 2015, anyone with a defined contribution pension can access their entire pension pot without having to buy an annuity product.

However, after receiving the 25% tax-free lump sum, any futher drawings from their pension will be subject to income tax.

Many people may find that they want to spend or invest some of their pension cash from next year, but also use part of their pension pot to buy annuity so that they do have some guaranteed retirement income for life.

Most annuity providers are coming up with newer, more flexible products that will suit a variety of needs.

Pensioner incomes now higher than working households

IFS data shows that pensioners have a bigger income than working families.

The Institute for Fiscal Studies has found that pensioner households now have bigger incomes than those of working age.

The gap between young and old when it comes to income is becoming ever wider, as the report details that a quarter of young adults haven’t yet got onto the housing ladder and still live with their parents.

The IFS report found that pensioner households had a 5% higher income than working households, whereas people aged between 22 and 30 have seen their incomes shrink by 13% since the start of the financial crisis.

Unsurprisingly given the increase in house prices along with the lack of wage rises over the past few years, the number of under-30s owning their own homes has fallen sharply over the decades, with 45% of young people owing their own home in the 1960s to just 13% in 2012-2013. The IFS report notes that renting for young people will become the norm and many of them will never be able to get on the housing ladder in their lifetimes.

A spokesperson for the IFS said that there has been a large shift in direction when it comes to the incomes of the young and old, which has been accelerated by the recession. Even though younger people had gained through lower interest rates and lowered rent prices, they had been badly hit by unemployment and lower wages.

Pensioners have gained overall since before the recession. In 1992 they had an income that was 20% less than working households and was an average of £256 a week.

Fast forward 12 years and they now enjoy a higher income and the average income for pensioner households is now £388 a week.

The report also noted that there wasn’t a north-south divide with falls in income for working households, although the level of losses differed greatly between different areas ranging from 8% drop in Northern Ireland to a 2% fall in the East Midlands.

Average living cost for over-65s is £10,387

According to recently published research, the average pensioner spends around £10,000 a year in living costs.

Key Retirement Solutions have found that the cost of basic necessities is £10,387 a year for the over-65s.

This includes expenses such as food – which works out at an average of £1,563 a year and housing and utility costs come in at an average of £1,485. piggy-bank

The amount needed to cover the bare essentials is significantly less than the state pension would provide on its own, so the over-65s have to fund their lifestyle through private pensions and savings.

Unsurprisingly, those living in the South East of the country have the highest cost of living, typically spending almost £12,000 a year. Those in London spend slightly less at £11,322 and the over-65s in the East spend an average of £11,144 a year.

Those who live in Wales have the smallest cost of living expenses at £8,829.

The data highlights the importance of carefully planning for your retirement future and more importantly, not to underestimate how much your standard of living will cost you in later life.

The average annual spend on basic necessities doesn’t include luxuries such as holidays or trips to the theatre, so if you want to live a full and rewarding retirement you need to ensure you put enough away to generate a healthy retirement income.

The Office for National Statistics (ONS) released data last week that showed company pensions accounted for more than a quarter of the income for the over-65s households, with other sources of income coming from investments, personal pensions and earnings post retirement.

Just Retirement completed a survey which found that 41% of people were planning to access their pension cash after next April, with many choosing to pay off debts such as loans and mortgages.

16% said that would like to invest the money, prompting the company urged people to ensure that they searched for the best interest rates in savings or Isa accounts rather than transferring their cash into a low return account if they wanted to be able to access their money easily. Almost three quarters of those questions admitted that they didn’t want to invest their money in what they saw as high risk investments such as shares or bonds.

Annuity companies are bringing out a range of products that will offer both short and medium term solutions, whilst offering a guaranteed income. People will also be able to use part of their pension to buy an annuity, freeing them up to spend or invest the rest as they wish.

Female workers aged over 65 set to surpass male workers of the same age

According to research by the Institute for Fiscal Studies (IFS), women are set to take over men when it comes to working in later life.

As things stand, there are already more women still working in their late sixties than for the past 40 years and the trend is set to continue and rise with the IFS suggesting that more women in their late-60s will be working than men by 2020.

The rise in women working much later is accredited to better health, the increasing state pension age, which has risen substantially for women and the lack of enough pension funds to provide a comfortable retirement.

The research looks at people aged 65 and above in England and their demographics and the financial factors that affect them from now until 2023.

The IFS estimates that by 2023 the percentage of women in their late sixties still working could be as high as 37%, compared to just 16% in 2011 and only 8% in 2000. retirement

The proportion of men in their late 60s also continuing to work is also set to rise over the next few years although not at such an accelerated rate, going from 29% to 33%.

The Office for National Statistics backs up this trend with their report published earlier this month. They found that between February and April this year, around 435,000 women over the age of 65 were in employment—an increase of 12% on the same time period in 2013.

In the same time frame, there were approximately 664,000 still working past the state retirement age, jumping 8% from last year.

The IFS report also backs up a recent announcement by the Government that those who work longer will have more money, larger pension pots and be less likely to suffer from boredom and loneliness.

In addition, those in their late 60s and early 70s can expect their net incomes to increase by around 3% each year until 2023, compared to an increase of 1.6% for those aged over 75.

Many Final Salary Pension Savers Looking to Switch to Defined Contribution Schemes

Pension industry experts are concerned about the number of savers who want to exit their generous final salary pensions and switch to a defined contribution pension so they can access their full pension pot when they reach retirement age.

Following the announcement in the March budget that anyone with a defined contribution pension can access their money once they reach the age of 55 without having to buy and annuity or drawdown product, many defined benefit pension savers are looking to see if it’s worth their while switching over to the less generous pension.

The Government is now concerned that many public sector workers who are in final salary pensions will want to switch and it doesn’t have the resources to pay out the pensions so is now looking to ban defined benefit pension savers from switching once the new system comes into effect next spring.

Pension companies have been inundated with requests from final-salary savers to move their retirement savings into a defined contribution scheme, many of whom are concerned over a permanent lock-in to their current pension.

The Department for Work and Pensions (DWP) is currently consulting on a variety of details of the new pension system, including how to handle pensions for both private and public sector workers.

It is thought that almost 5 million public sector workers will have their pension savings locked in so they cannot be transferred to another scheme. The Government would be unable to handle large volumes of public sector workers moving their pensions as they don’t put aside money for such eventualities so they would have to borrow significant amounts of money.

Savers who have an old final salary pension from previous employers are the ones most likely to request a move into a defined contribution pension scheme.

It is likely however, that many top private sector employees will welcome the change as this means their pension schemes will be cheaper to run and would reduce their liabilities. Pension experts predict that many firms who have final salary pension schemes will offer incentives to help persuade people to switch.

Prior to the recent changes, a final salary pension was considered extrememly valueable because the payouts were based upon a person’s final salary rather than an average of what they have earned over their career.

Indeed, many younger workers who are in final salary pensions could end up losing thousands of pounds if they chose to switch to a defined contribution pension to give them more options.

There are circumstances where it may be prudent for a saver to opt out of his or her final salary pension; particularly for those with small pots from previous jobs.

Pensions experts are advising that anyone who is thinking of switching seeks independent financial advice and to remember that any money over the initial 25% tax free lump sum will be taxed at your usual rate of income tax.

Also those who are in ill health or have a shorten life expectancy and are without any dependents may well want to take advantage of being able to access their entire pension savings rather than let it accumulate over the years.

 

 

Auto Enrolment and Recovering Economy Given Credit for Rise in Pension Savings

According to a recent survey, British workers are starting to take saving for retirement much more seriously and are saving nearly treble the amount they were in 2006.

Mainly due to the Automatic Enrolment scheme, the amount of workers now contributing towards a pension is the highest it’s been for the past five years.

The Scottish Widow’s Retirement Report shows that 53% of British workers are now contributing towards a pension scheme, an increase of 8 percentage points since last year.

The study found that the average contribution was £130 a month, compared to £54 eight years ago.  In addition, the amount of money the average person has in pensions and other savings investments is now around £40,000 – the highest it’s ever been.

It seems that not only are more people saving toward retirement thanks to the auto enrolment scheme, but they are also saving more money than before.

In terms of the percentage of their salary which workers are investing in a pension scheme the news is equally encouraging, with large companies employing more than 250 people show that average percentage of salary saved in a pension has risen from 9.7% in 2013 to 11.6% this year.   piggy-bank

The ongoing economic recovery, along with the decrease in the cost of living is probably why people are able to start investing more money into their pension schemes.

The Scottish Widows’ report shows that only 59% of people said the day to day cost of living was the reason why they couldn’t contribute more towards their pension, whereas last year’s report showed the figure at 71%

More people are now free from debt compared to last year, with 16% saying they were debt free compared to 13% in 2012.

However, pension experts are still concerned that people are not saving enough.  There is worry that people are underestimating how long they will live for, as well as overestimating just how much their pension pot will yield once they retire.

Labour Pledge to Lower Earnings Threshold for Automatic Enrolment

Labour have announced that if they come into power after the next general election, they would extend the current automatic enrolment workplace pension initiative so that more lower paid workers were included.

Currently only workers earning over £10,000 each year can be enrolled automatically into a workplace pension, but they may join a workplace pension voluntarily. Labour plan to expand this and reduce the threshold to those earning a minimum of £5,772 a year.

The move would mean that many more part-time workers were including in the scheme, and in particular, more women would be able to save for a pension for the first time.

Rachel Reeves, the shadow secretary of state for work and pensions has said that this would allow a further 1.5 million workers to start saving for their retirement and give them some financial security in their old age.

However, lowering the threshold to £5,772 – which is the limit for when workers have to start paying National Insurance contributions would cost a Labour Government an extra £20 million each year.

The Conservatives have hit back at the promise saying that such a move would put financial security at risk for lower paid workers.

The current Work and Pensions Secretary, Iain Duncan Smith, said it would mean more spending, borrowing and increase taxes. The move would also hit small businesses who rely on part-time workers. He argued that lowering the threshold would actually put jobs at risk, with smaller companies unable to afford the extra administration costs and the pension contributions for lower paid workers.

This sentiment is echoed by the Pensions Minister, Steve Webb, who has previously said that people earning less than £10,000 a year wouldn’t need as much money in retirement and would have their financial needs met by the state pension.

Malcom Small, the senior pension policy adviser for the Institute of Director agrees. He said that most low paid workers needs all their earnings now and cannot afford for a percentage of their wages to be taken from them until they are 55. He stressed that the new flat-rate pension would provide a retirement income that was relative to their wages whilst they were working.

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