FCA Orders Pension Companies To Give Better Advice

Industry watchdogs have ordered pension providers to give better advice about retirement choices following the new pension freedom reforms.

In a bid to avoid pension savers making costly errors regarding their retirement income, the Financial Conduct Authority (FCA) has introduced tougher new regulations that pension firms must adhere to. uk-money

Because many pension savers approaching retirement (or over the age of 55) may be confused about their options once the new pension freedoms come into effect next month, the FCA wants companies to be more vigilant in the advice they give to their members to help them make the right financial decisions .

Many financial experts have long been critical of the way pension providers act, and welcome the fact that it will be more difficult for pension savers to get it wrong when it comes to buying an annuity.

Previously, pension savers would often accept the first offer their provider gave them, not realising they didn’t have to buy their annuity from their pension provider.

In addition, many people are eligible for an enhance annuity, which because of either ill health or poor lifestyle choices such as heavy drinking and smoking, would mean a better value annuity.

In some cases savers were offered annuities that didn’t take into account their partners, leaving them with nothing if they died first.

Under the new regulations set out by the FCA, pension providers must now ask its members about the state of their health and if they have any bad habits that might impact upon their health, whether they have a spouse dependent on their annuity product, and ensure they understand any tax implications that may arise if they choose to use their defined contribution pension fund as a bank account to withdraw large sums of cash instead of buying an annuity.

The pension companies will also be tasked to ensure that their members understand any potential impact on their retirement income if their means-tested benefits change.

The FCA also wants companies to warn its customers about potential scams, how the fraudulent companies operated and how their money will not be protected if they choice to invest in schemes that operate outside of the UK.

The FCA is concerned that many over-55s will fall foul to scammers who will offer ‘too good to be true’ investment returns, but fail to mention the tax implications of withdrawing large sums of money from their pension fund.  Often these schemes will also have a high administration cost.  Schemes such as this will not be protected by current UK financial laws so investors run the real risk of losing all of their retirement income.

The Government will also be offering its own independent guidance service through the Pension Advisory Service and Citizen’s Advice.  However, this will be a general overview of the freedom reforms, and will not be tailored to a person’s own financial situation.

 

New Pension Commission to Be Launched To Address Pension Savings and Life Expectancy

A think-tank has asked for a new independent pensions commission to be set to address the issue of people not saving enough money for retirement.

The International Longevity Centre-UK (ILC-UK) has established that on average men will live for 21 years in retirement and women for 26.  However, people are simply not putting enough money away in their pension funds or other investments to reasonably cover the amount of money they will need to sustain a comfortable existence in retirement and have to rely solely on the state pension in later life.  income drawdown

The ILC-UK feels longevity will only likely increase so the situation could get much worse unless the Government encourages workers to focus not just on the now, but on their retirement future.

The commission will have support from all leading political parties and would hash out realistic targets for pension savings.   It would then go forwards monitoring if these targets were being met and decide whether new policies would need to be put in place if they were not being met.

The independent commission would then liaise with the Prime Minister, Chancellor and the Work and Pensions Secretary as it reached its conclusions.

The think-tank warns that consumer spending is on the rise, but pension saving is not and unless wages start to rise substantially this will continue to be an issue.

In addition, most investments such as bonds and equities are only likely to return around 50% of what would have been achieved 30 years ago meaning savers are getting less for the money they invest in pensions.

A core strategy for the commission will be to monitor how much workers are saving towards their retirement and decide whether this level should be increased.

Whilst low wages and the ongoing financial uncertainty for many workers hinders their saving abilities, it is a real concern that as the population continues to grow older, hundreds of thousands of pensioners could find themselves in financial difficulty late in retirement.

It is estimated that by 2020, women who are at retirement age will leave until they are 90 and men until they are 85.

The increase in life expectancy for women has been around 30% since 1990, and has increased by a third since 1985.

It comes as no surprise the amount of people choosing to work past the state retirement age has increased dramatically over the past few years.  Whilst many are choosing not to retire because they simply don’t feel ready to give up work, many more are forced to continue working because they haven’t built up a large enough pension pot to sustain their retirement.

One in Four Workers Due to Retire This Year Will Continue Working

According to a recent study by the pension provider, Prudential, approximately half of over-55s are considering working past the state retirement age.

In addition, the Prudential found that a quarter of workers who are due to retire this year will continue to work instead. 20% said they certainly didn’t feel ready to retire yet and would continue to work until they did.

Whilst half of those planning to keep on working for a while cited finances as one of their main motives, most said they wanted to keep physically and mentally fit and saw that staying in the workplace would do that for them rather than retiring.  retirement

The Prudential’s survey covered 7,600 adults, of which 1,000 are coming up to state pension age this year.

The study showed that delaying retirement is becoming more common and is likely to increase as the years go on.

Whilst not specifically covered in the Prudential survey, many people due to retire this year may well be delaying retirement until after the new pension freedom reforms take place.

From 6th April, anyone over the age of 55 with a defined contribution pension can access their entire pension pot without having to purchase an annuity, but it is down to the individual pension providers to decide just how much freedom they will allow their members.

However, the industry is still very up in the air, and many pension savers do not know what their pension provider will or won’t allow and in many cases the companies haven’t actually come up with any definite answers yet.

The change in how people can access their pension pots could also mean that new annuity products could come onto the market which will be tailored for those who don’t want to invest all of their pension pot, but would like the security that a guaranteed retirement income of an annuity gives.

A change in Government in May could also lead to further changes to the way pensions can be accessed as well as other benefits and policies that affect the over-55s, so another reason for many to wait a year or so before retiring.

Steve Webb Pledges 33% Tax Relief on Pensions for All

Steve Webb, the Pension Minister, pledges to give a 33% increase to pension savers should his party form the next Government after the election.

In addition, the Liberal Democrat MP also wants to abolish the higher rate tax breaks to make the system fairer for all.

The radical scheme would see pension savers gain an £1 for every £2 they invested into a pension scheme.

Mr Webb, said he wants to see tax relief for pensions at a flat-rate across the board. He proposed a rate of 33%.
He went on to say that currently the system is skewed towards the very rich and other pension savers are not as incentivised because they don’t receive large tax breaks.  interest rates

The proposals are likely to form part of the Liberal Democrats’ election manifesto, with pensions featuring highly.

In order to appease high earners who would lose out on their current 40% tax breaks on pension savings, Steve Webb wants to see the end of the lifetime cap on pension savings which currently stands at £1.25 million. He said he was against telling people how much they can invest for their retirement and that people should be able to save as much as they wanted.

Whilst he accepts that the 33% figure hasn’t been finalised, he is keen to point out tthe simple fact a saver would gain £1 from the Government for every £2 they saved in a pension scheme, would incentivise more lower-paid workers to build up their retirement funds, particularly if they don’t necessarily understand how traditional tax relief works.

As things stand at the moment, savers are able to receive tax rebates for up to £40,000 of earnings they invest in their pension schemes in a year.

Someone who is on a 40% income tax rate will receive 20p from the Government for every 60p they invest.

This would either be claimed via the yearly self-assessment tax form or some companies offer pension schemes which pay the money in before the worker is taxed.

When a higher rate tax payer retires, they will typically have to pay 20% tax on withdrawals from the pension (unless they withdraw the full amount).

A think tank, the Pensions Policy Institute, told the Government that cutting the tax relief to 30% for all pension savers would be ‘cost neutral’, as all pension savers would have to pay income tax on their withdrawals.

Which?: British Household Overpaying Utilities by £145 a Year

According to the consumer group, Which?, the amount of money a household is overpaying on their utilities is an average of £145.

Whilst most of the big six energy companies have recently passed on small reductions to their customers, they failed to pass on lower wholesale cost in 2014 resulting in households paying around £145 more than they should have for their gas and electricity.

The major gas and electricity suppliers have now lowered their charges for their products, although there are vast variations between the companies, for instance EDF has offered just a 1.3% reduction compared to a more generous 5.1% cut by Npower.   gas1

However generous the offers seem, Which? report the cuts should be larger still as the wholesale prices has been dropping for the past two years, but they have only just recently passed on any reduction.

Which? calculated that the energy firms should have offered cuts from anywhere between 8 and 10% to show the true reflection of the fall in wholesale prices.

In response to the claims, many of the largest suppliers have hit back saying the figures Which? are working with do not take into account a variety of things, including
the fact that each firm calculates its costs differently, and other aspects such as weather, green levies and consumption all play a part in costings.

Also, energy companies tend to buy ahead to fix their prices, so reductions in wholesale prices won’t necessarily be passed down to the customer for another year.

On average, energy bills are currently around a £100 cheaper than they were 12 months ago, but a cold winter could wipe out any savings year on year.

Of the big six suppliers, EDF cut its prices by 1.3% commencing in mid-February, E.on has reduced its prices by 3.5%.

SSE’s bills will fall by 4.1% but not until April (when the colder weather has passed!) and Scottish Power are offering a more generous 4.8% to come into effect later in the month.

Both British Gas and Npower are bringing in price reductions later this months of 5% and 5.1% respectively.

However, the comparison website Uswitch has noted that many customers are switching suppliers and preferring to give their custom to smaller companies instead of the big six. And when smaller companies such as Ovo respond the wholesale price reduction by offering a 10% cut to its customers, you can see why.

Indeed, Energy UK announced last week that approximately 1.3 million household switched from one of the big six to smaller suppliers in 2014, accounting for around 40% of all energy company switches.

Pension Regulator Now Fining Firms for Not Being Ready for Auto-Enrolment

The amount of companies being fined for not implementing the auto enrolment scheme for workplace pension is now on the increase.

The Pensions Regulator has announced that during the last quarter of 2014, 166 smaller firms had been fined £400 for not being ready in time to enrol their employees into a company pension.

Prior to this, just three firms had been penalised.

The announced doesn’t come as much of a surprise as more and more medium sized company are included in the scheme, and as the scheme continues, reaching down to very small companies with just a handful of employees, this number is bound to increase vastly.

The auto-enrolment scheme began in 2012, when the Coalition announced that all private sector employees over the age of 22 and earning more than £10,000 per year would be automatically be entered into a workplace pension. It was then down to the employee to ask to be withdrawn if they didn’t want to continue saving in this manner.

It is hoped that around 10 million employees will be paying into a workplace pension for the first time once the project is complete in 2018.

The scheme started with large companies who employed more than 150 staff and the take-up was extremely positive with approximately 9 out of every 10 workers continuing to pay into the scheme.

Towards the end of 2014, the scheme was extended to smaller companies who employ between 62 and 149 people.

To date, more than 43,000 companies have their staff enrolled into the new workplace pension schemes, and another 32,000 will be included by the end of the financial year.

Companies are required to submit a declaration of compliance to the Pensions Regulator five months before their given start date, and so far 166 companies have not got this official document in place in time.

From the end of the year towards 2018, a further 770,000 small and micro companies will be expected to join the scheme, as the initiative works down towards the smaller companies, often who only employ a handful of people, it is more likely that vital paperwork will not be filed in time and more fines will he handed out.

Financial Conduct Authority Insists Pension Providers Warn Savers of New Freedom Pitfalls

Pension providers have been told by the City Watchdog to warn pension savers of depleting their pension pots too soon.

The Financial Conduct Authority (FCA) has told pension companies that it must inform any defined contribution pension holders of the risks of not budgeting their pension fund to last throughout their entire retirement.

As of April 6th, anyone aged 55 or over will be able to access their defined contribution pension fund as they see fit, meaning they don’t have to purchase an annuity product which would give them a guaranteed income for the rest of their life.

Whilst many pensioners are bound to make wise decisions when it comes to their retirement finances, the FCA worries that many will make rash decisions about investments or simply spend too much of their pension that will leave them reliant solely on the state pension for much of their old age.

The FCA want pension providers to alert savers of the tax implications of withdrawing large sums of money from their pension pots, and also to question them about their lifestyle choices and general health so they can estimate how long they are likely to live for and how long their pension fund has to last.

Many industry experts are concerned that savers will take advantage of the ability to get their hands on large sums of cash, but not be aware of how much they will have to pay in income tax.

Also, it is expected that many fraudulent companies will appear over the next few months, offering ‘too good to be true’ investment opportunities that will plunder savers’ nest eggs and leave them with extremely high administration charges and tax bills with very little, if any, return on their initial investment.

Pension providers have been tasked to help ensure that savers are aware of the potential pitfalls of being able to manage their own pension pots, they are also expected to inform savers of the Governments guidance scheme where general advice about the new pension reforms can be given out over the telephone, online or in person via the Pensions Advisory Service and Citizens Advice.

The guidance service will not be able to offer a tailored financial plan for individuals; it will only provide a basic background into how the new system will work. Anyone seeking further advice will need to employ the expertise of an independent financial advisor.

However, the FCA only regulates the private pension sector. Workplace pensions are currently regulated by the Pensions Regulator who has up to this point not put in place any similar demands on pension providers.

It is expected that within the first few months of the reforms coming into effect, up to an additional £6 billion will be withdrawn from pension pots in the UK.

Many over-55s have said that would take advantage of the new rulings and use some of their pensions as cash to either help out family or to pay for high value one-offs such as home improvements, a new car or a luxury holiday.

The concern is that many will not realise that a large withdrawal from their pension funds may take them into a higher tax bracket.

In addition to the FCA wanting to alert savers to any potential tax bills or scams they may fall foul of, the body also wants pension providers to ensure that their pension holders disclose their health situation and marital status so if they choose to buy an annuity they buy one that offer the best value for them.

Thousands of over-55s each year lose out on their retirement income because they buy the first annuity they are offered by their pension provider.

Often if they are in ill health or are heavy smokers, they qualify for an enhanced annuity because their life expectancy is shorter.

In addition, many people fail to realise that buying the wrong annuity could leave their spouse without any retirement income if they die first.

The FCA wants to ensure that anyone wanting to purchase an annuity has all the relevant facts and knows they can shop around for the best deal rather than have to take the annuity their pension provider offers them.

All Members of the Monetary Policy Committee Vote to Keep Interest Rate the Same

The Bank of England’s Monetary Policy Committee (MPC) has decided unanimously that the interest rate will remain at its record breaking low of 0.5% for another month.

Previous months have shown that two of the MPC; Ian McCafferty and Martin Weale, had voted to increase the interest rate to 0.75% to help increase stimulus in the economy.

Whereas January’s meeting shows that all 9 members voted to keep interest at the five year level of 0.5%.

Both Mr Weale and Mr McCafferty were concerned that the low inflation rate would become entrenched if the interest rate were to rise, and that an rise wasn’t in the economy’s best interest at this time.

In December the Consumer Prices Index (CPI) rate of inflation fell from 1% to 0.5% to its lowest level since 2000 and even further away from the Bank of England’s own target of 2%.

With fuel prices continuing to drop, with a knock-on effect to other areas such as heating bills etc, many feel that inflation will fall even further over the coming months and may even become negative.

The minutes of the MPC meeting show the Bank thought it was 50-50 as to whether inflation would become negative before the middle of the year, although it felt it would be a temporary measure that would right itself once the price of oil started to rise again.

However, whilst the Governor of the Bank of England, Mark Carney warned of negative inflation, he stressed that interest rates may begin to rise later in the year, although not as quickly as many financial experts had previously predicted.

Most economists have now revised their timescale, with many doubting the interest rate would change until early 2016.

The Bank has said that it would focus on wage growth before it looks to raise the interest rate.

Data published by the Office for National Statistics shows that wages have risen faster than inflation for the past three months and would continue to do so while ever inflation remained so low or go into negative.

Previously the Bank had said it would look at unemployment rates to decide when to raise interest rates, but unemployment now stands at 5.8% – much less that the target of 7% set by the Bank of England.

Third of People Expect to Have to Use Pension Fund to Help Out Family

According to a recent survey, many people who plan to take advantage of the new pension freedoms that will come into effect in April will use their nest egg to help out family members.

The research conducted by Scottish Widows in conjunction with YouGov, shows that far from buying Lamborghinis as suggested by the Pension Minister, Steve Webb, around a third of pension savers will be helping out both younger and older relatives with their pension funds.

From this April anyone with a defined contribution pension can access their pension fund and withdraw as much or as little cash as they please. Currently a person needs to buy either an annuity product – which gives the pension holder a guaranteed income for the rest of their lives, or a drawdown product in which a set amount of the pension is released each year and the rest left investing in the fund.

The Scottish Widows survey of 2000 adults shows that around half of the people questioned felt the new relaxed rules would mean family members became more financially reliant on them.

Surprisingly almost 1 in 4 said they thought the new rules would mean that many pensioners wouldn’t be able to make their pension pots last throughout their retirement, whereas 30% said they felt that the new reforms meant that people would be able to better manage their finances in later life and they would be less reliant on others in old age.

The ‘Centre for the Modern Family’ questionnaire discovered that approximately 20% of people surveyed will use some of their pension pot to help family out with large financial commitments such as a deposit for a house or university fees.

This rose to 25% of people who had adult children who were still living at home, or ‘boomerang children’ who had left home, but return due to not being able to afford to live outside of the family home.

22% said they would probably use some of their pension pot to help out older relatives with care homes or other services to help make their lives easier.

However, those who choose to withdraw large sums of money from their pension pots to help out family with large expenses could well discover the move puts them into a higher tax bracket, as only the first 25% of any withdrawal from the fund is tax-free and the rest taxed at the relevant income tax band.

NS&I Launch New Pensioner Bonds

The Government has announced that its Pensioner Bonds will be available as from today through the National Savings and Investments (NS&I).

The bonds offer high interest rates which beat high street bank and building society savings accounts and ISAs.

The bonds, which have been named ‘65+ Guaranteed Growth Bonds’, are only available for those aged 65 and over and are expected to move quickly.   ns&i

There are two different types of bond available: the first is a one-year bond which offers an interest rate of 2.8%, and a three-year bond which offers a 4% interest rate.

Both bonds require a minimum investment of £500, and the maximum that can be invested in either bond is £10,000 per person.

The NS&I has set aside £10million for the bonds and several millions of over-65s are expected to take advantage of the offer. Financial experts have predicted that this amount will have been exhausted in a matter of weeks, so is urging those interested in investing to act fast.

Thousands have already attempted to apply for the bonds, jamming phone lines and bringing the NS&I website to a crawl, however people are urged to keep trying or to leave it a day or two and try again.

The one-year bond at 2.8% beats the nearest rival on the high street by almost a percent in terms of interest paid on investment, whereas the three-year bond at 4% is substantially better than the next best high street offer of just 2.5%.

Couples over 65-years-old may both invest the maximum amount with the knowledge that if one dies before the end of the term, ownership of the bonds will pass to the other partner.

Whilst the Pensioner Bonds will be subject to tax for most investors, they are still a better alternative to the leading ISAs currently available for investors on the basic tax band. Those on higher tax bands will find that ISAs offer a better deal, but they offer a good return on investment if they want to invest more than the ISA’s maximum allowed.

For a person paying basic rate tax, the bonds will pay out an after-tax return of 2.24% or 1.68% for higher tax band payers, compared to the best performing ISAs at 1.85%.

The three-year bond will offer an after-tax return of 3.2% for those who pay a basic tax rate and 2.4% for those on a higher rate, compared to 2.5% from the best performing ISA.

All investors will benefit from higher rates than the current best cash ISAs which stand at 1.65% for a one-year fixed rate and 2.15% for a three-year fixed rate from Virgin Money.

As with most bonds, the interest will be paid when the investment matures and if you wish to access the money earlier then you will lose some of all of this interest.

Pensioners who don’t pay tax will need to reclaim the tax taken from the interest from HMRC.

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