Think Tank Suggests Paying Less NI, But Halving State Pension

The Institute of Economic Affairs has proposed a solution to the ever-growing pension bill which would turn taxes and pensions on their heads

The think tank has suggested that workers pay less tax, but only receive around half the amount of state pension they are entitled to presently.  StatePensions

The IEA said that the Treasury was ‘overstretched’ and the cost of paying for British pensions would soon be ‘unsustainable’ as the number of pensioners grows and they live longer.

The body wants the Government to scrap the new flat-rate pension which is said to be worth around £155 a week for those with enough years of National Insurance contributions.

Instead, it advises that the state pension should only be worth around £75 a week and workers should be given tax rebate each year – the value of which would depend on their age.

The rebate which could be raised by paying less National Insurance, would then be used by the individual to save into a personal or workplace pension scheme.

Chairman  of the IEA, Phil Booth, said the current system for paying state pensions was ‘overstretching the public purse’ and he raised concerns about how long the Treasury would be able to continue paying out pensions to an age group whose numbers are swelling due to the Baby Boom generation and people living for much longer.

He claims that paying lower taxes would encourage more saving, particularly into private pension schemes.

The IEA suggest that a worker should be able to ‘opt out’ of paying National Insurance in return for a lower state pension pay out in retirement, which is similar to the present scheme were workers can opt for paying lower NI contributions but will forego their rights to any top up pension payments after the current basic pension of £113.10.

The current system of opting out will be abolished under the state pension reforms which come into effect in April 2016, which means that many workers will find they don’t qualify for the full single-tier pension because they haven’t paid enough National Insurance over their lifetime.

It has been estimated the cost of paying out state pensions will rise to £420 billion a year by the 2060s, four times more than the present cost.

In response to the proposal the Department for Work and Pensions has stressed that funding for state pensions remains strong.

 

Pension Savers Under-Estimating How Much Money They Will Need in Retirement by Almost £100 a Week

A recent survey has revealed that many Britons will fall short of the required amount of retirement income to lead a comfortable life in retirement.

It has been estimated that the average Briton will require an income of £409 a week during retirement to cover housing and day to day living costs. However, the average saved towards retirement will only provide an income of £312 a week, leaving a short fall of £96.69 a week, more than £5,000 over a year.  retirement

The pension company, Friends Life surveyed 18,000 to establish how much money they were saving for retirement via pension plans, savings, property and other investments.

58% of people surveyed were saving into a pension fund of some type, and 23% of these were saving the maximum amount they could afford.

However, most people questioned were facing a large shortfall in the amount they would receive as retirement income and the amount they would need to live comfortably, with many failing to prepare adequately for the years ahead and underestimating both how much they money they will need and how long their retirement income will have to last.

The amount people save towards retirement seems to depend upon the area of the country they live in, with some faring much better than others.

Of those questioned who live in the East Midlands, East of England and the South West, more than half admitted to not saving any money towards their retirement.

The Friends Life study found that those living in Scotland, the South East and West Midlands were the best retirement savers, with the highest amounts of people saying they saved as much as they possibly could towards retirement.

Those living in the Capital and the East of England were saving the least amount of money towards retirement, and the average Londoner can expect to have a retirement income shortfall of more than £120 a week. Although, this is not surprising as London has the highest overall living costs at an average of £228 a week and many striving to get onto the property ladder rather than save for the future.

Even people who were realistic about how much money they would need in retirement such as those in the North East and South West would still be around £85 short each week.

More Pensioners to Qualify for Warm Home Discount This Year

The Government has announced that more pensioners than ever are set to receive help with their fuel bills over the winter.

Energy companies are to expand their Warm Home Discount Scheme, which has been running since 2011, so that this year anyone who gets the Pension Credit Guarantee will be eligible.   gas fire

The discount is worth £140 a year, and pensioner groups have welcomed the extension, although they are concerned that those who don’t qualify for the Pension Credit Guarantee will not receive the discount.

The discount also applies to households on low incomes. However, those who qualify for the Warm Home Discount must contact their energy supplier to apply for it, as they will not get picked up automatically.

With the cold weather rapidly approaching, charities are advising low income families and pensioners to contact their electricity and gas companies to ensure they have the credit in time for the winter bills.

The credit was brought in to ensure that families do not have to switch their heating off in cold weather because they are worried about not being able to pay their bills.

Age UK is not only urging pensioners to contact their energy suppliers to get the discount, but also to ensure that they are receiving the Pension Credit Guarantee if they are eligible.

It is estimated that around a third of pensioners who should be receiving the Pension Credit Guarantee do not realise
that they are eligible and are missing out on vital money.

Lack of communication and in some cases, pride – where older people feel that they are claiming “benefits” when they
have worked all their lives – are the two main reasons why older people are not getting all the money entitled to them.

The Department of Work and Pensions admits that there should be around 1.7 million pensioners eligible for the Warm Home Discount, but they only expect 1.4 million to take up the offer.

The scheme is expected to cost energy suppliers around £315 million this year, and in addition to extending the
scheme they have also promised that no supplies will be cut off for vulnerable customers over the winter if they default on their bills.

Number of Centenarians Rising

Financial analysts concerned that money worries will become the norm for people as more older people than ever pass their centenary birthday.

The Office for National Statistics data reveals that there are currently approximately 13,780 people who are 100-years-old or more.

An increase of over 10,000 over two decades compared to the figure of 3,040 recorded in 1983.    100

The number of people receiving their telegram from the Queen is expected to continue to rise, prompting the fear that people will need to work for much longer into their supposed retirement years, and save more money for retirement whilst working.

Advances in medicine, standards of living and better overall general health have contributed towards an ever-growing ageing population in the country.

In fact there are so many people reaching their century birthdays nowadays that people wonder if the Queen should wait until people reach their 105th or 110th for their prestigious telegram. In fact the telegram is now a card, and it is the Department of Work and Pensions responsibility for sending out the cards, not Buckingham Palace, which has had to take on extra staff to cope with the workload!

The ONS predicts that the number of people aged over 100 will increase tenfold over the next decade to 33,989 and then by around 2034 there will be over 80,000.

The UK ranks fairly highly on the list of countries whose residents enjoy longevity.

Japan ranks the highest in the charts for people aged 90 or over for every 100,000, with 1,266. After Japan, Western European countries fare well for the elderly.

Sweden had the most elderly residents aged 90 or over in Europe at 1,004 per every 100,000 and then France with 995.

Harsh winters and even harsher political regimes in former Eastern Block countries means that such places tend to have lower numbers of residents reaching their 90s, the lowest in Europe is Russia with just 212 per 100,000.

It’s has been estimated that there are still around 104,000 people still alive in the UK who were born during WW1 from 1914 to 1918, which means a sudden boom is expected of the next couple of years, after the war there was a baby boom so turning 100 could become something quite ordinary instead of unique with the next decade.

Couples retiring now are wealthier than ever before

Data released by the Institute of Fiscal Studies (IFS) shows that nearly half of couples recently retired are better off in retirement than when they were working.

According to a report by the IFS, UK retirees born in the 1940s have a better disposable income than they did in their working years, and more than enough money to fund their lifestyles.  nest egg

In fact almost half of couples questioned said they had a better income in retirement than they did working.

The study by the IFS looked at the retirement income of couples now compared to their earnings in the thirty years from 20-years-old to 50-years-old.

The findings showed that 80% of those born in the 40s had an retirement income at 65 worth around two-thirds of their average career earnings if they combined their private and state pensions.

Four in ten said were now enjoying higher incomes than their working life average earnings.

Pensioners generally by the age of 65 have grown up children who are no longer financially dependent on them, and have usually completely paid off their mortgages and no longer have to pay into a private or workplace pension which greatly frees up a large portion of money that would have been accounted for in their working lives.

In addition, housing wealth has meant that many 65-year-olds are considerably better off than they were when working, particularly those who first got onto the housing ladder in the 1970 and 1980s when houses were cheap.

The IFS report found that 92% of recently retired couples had an average surplus wealth, including property wealth, of £220,000 over and above their needs or around £7,000 a year – more than enough to enjoy a comfortable retirement.
When housing wealth was eliminated from the calculation there was still three quarters of couples who had more money than they needed to maintain their standard of living throughout retirement, with an average wealth surplus of £120,000.

The news is likely to add fuel to the fire of the argument that wealthier pensioners should not be given pensioners benefits such as the winter fuel allowance, free TV licences and bus passes and other perks.

Many of the people retiring now have been paying into the more generous final-salary pension schemes, compared with the majority of workers now paying into a defined contribution scheme. In addition the rapid rise of house prices over the past two decades has also ensure that many pensioners are now much more wealthy in their retirement than their parents.

More British Pensioners Filing for Bankruptcy now Than at Height of Recession

According to recent research by Moore Stephens, more over-65s declared themselves bankrupt in 2013 than at the height of the credit crunch and the situation looks set to continue.

Low incomes coupled with the increasing cost of living and easy to get credit are being blamed on the recent spate of pensioner bankruptcies.

Overall, the number of people becoming insolvent fell last year, but it seems that m0re pensioners than ever are starting to succumb to the financial strain.  uk-money

The accountancy company revealed that 5,672 pensioners declared themselves bankrupt in 2013 compared to 4,727 in 2009 – a 22% increase.

Throughout the UK, 100,389 people became insolvent last year, a 25% fall on the figure in 2009 of 134,052.

In 2009 pensioners made up just 3.6% of the total of insolvencies, compared to 6% now.

Moore Stephens said that pensioners in particularly had been hard hit by the recession, with low interest rates affecting their savings and their annuity rates, along with rising living costs stretching their money further than ever before.

Because many pensioners are on a fixed income it is harder for them to pay off debts incurred, particularly when it was so easy for them to procure the debts such as credit cards, bank loans and overdrafts prior to the start of the recession.

Whilst the economy is growing, those already retired are unlikely to be affected and will continue to struggle financially if they cannot bring in any extra income to help pay debts.

However, charities dealing with debt advice say that many pensioners could avoid bankruptcy if they looked at other options, including re-negotiating their payment plans with creditors or looking into equity release products to release vital funds that could pay off debts.

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.

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