PPI Warn Many Pensioners Could Make Costly Mistakes When Deciding their Financial Future

According to the Pensions Policy Institute (PPI), around 10% of people are likely to make expensive mistakes when it comes to making decisions over their retirement income.

The PPI’s study shows that around one in ten people who are due to retire over the next few years could end up losing about 20% of their possible retirement income by making incorrect choices or following bad financial advice.  piggy-bank

Complicated pension choices have made around 700,000 at risk of losing thousands of pounds by not fully understanding their options and the effects it will have on their retirement income

The PPI said that those who paid into a defined contribution pension scheme should ideal have good knowledge of how stock exchanges work and how the economy is faring. In addition they will need to understand how inflation will affect their investment and how long their retirement income will need to last.

Those who have poor numeracy skills are the least likely to get the most out of their pension investments say the PPI.

The institute expects the situation to become worse as the new pension freedom reforms come into effect in April 2015.

Currently, anyone with a defined contribution pension over the age of 55 must either purchase an annuity – where they will receive a guaranteed income for life, or have a drawdown – where they take an income each year from their pension pot and then leave the rest of the fund invested.

From next April, people will be able to access their pension funds like a bank account, but there are real concerns that many will make poor decisions with their funds, or be liable for large tax bills.

Some of the more common mistakes people make regarding their retirement income is to purchase the wrong type of annuity. Those who suffer ill health or have bad lifestyle habits such as smoking or heavy drinking should look at taking out an enhanced annuity product which will provide better pay outs than a normal annuity.

In addition, people who are married or in a civil partnership should ensure that they don’t accidentally take out a single life annuity, which if they died first their spouse or partner would no longer have a claim to the retirement income.

The new pension freedom reforms are likely to attract many bogus companies and scammers who will offer all kinds of investments to pensioners that don’t deliver, potentially taking a person’s life savings.

The PPI have found that those most at risk of losing some of their retirement income through bad financial choices are those with smaller pension pots of around £20,000 to £50,000 who have defined contribution pensions.

These people are statistically less likely to pay for independent financial advice, and also more likely to accept the first offer given to them for an annuity by their pension provider, rather than shop around for the best deal for them.

The PPI is urging people to spend a long time researching their retirement income options, taking into account how long they realistically think they may live for and how well they think they could invest their pension money themselves against getting a guaranteed income for life.

Whilst the Government is launching a guidance service in conjunction with Citizens’ Advice and the Pension Advisory Service, the advice given will only be a broad overview of the choices available and will not be tailored to the individual.

Pension Savers to Face Fines if They Don’t Inform All of Their Pension Providers of Withdrawals

Pension savers who have multiple pots could face fines when they withdraw from one pot and fail to notify the others of the withdrawal.

Small print in the new pension reforms shows that savers have just 31 days to notify other pension companies they have funds with if they make a withdrawal.

The rule has been included to ensure that people don’t try to avoid paying income tax on their withdrawals, but the short timescale could prove problematic for many and it is thought that many innocent pensioners will be fined.   nest egg

If they don’t notify other pension companies within the 31 days, the HMRC will charge a £300 penalty. In addition, this penalty will then incur a further £60 fine for every day after up to a maximum fine of £3,000.

Pension experts were quick to criticize the ruling, saying it was unworkable and not giving people anywhere near enough to time to track down missing pots or work in factors such as holidays and illness.

Workers who have changed employers several times over their working lives may well find that they have small pension pots that they have forgotten about, or have incomplete paperwork for. This would mean chasing around and completing their pension history before they made any withdrawal on an individual pot to ensure they don’t fall foul of the ruling.

It is expected that around 200,000 savers who have defined contribution pensions will take advantage of the new pension freedom reforms which come into effect in April 2015.

From next year, any saver aged over 55 will be allowed direct access to their pension pot to withdraw as they please, rather than have to buy and annuity or drawdown product. However, only the first 25% of each withdrawal will be tax-free and the rest will be charged at the appropriate tax band rate, and in a lot of cases the withdrawals will take them into a higher tax bracket.

The concern is that some people with multiple pots may try to get around paying large amounts of income tax by not declaring their withdrawals to other companies.

However, as the charity Age UK found out, the average person has worked with six employers over their career and a quarter of workers have no paperwork for at least one of their pension pots, particularly those where they may have only worked for a company for a short length of time and won’t have built up a significant pot.

To compound matters, millions of pensions started in the 80s and 90s are held in pension companies which are closed for business or have changed hands.

The Pensions Tracing Services estimates there is currently around £3 billion pounds held in lost or forgotten pension funds.

Think Tank Wants to Scrap Stamp Duty for Pensioners on Homes Less Than £250,000

A cross-party group of MPs and peers has said the Government should abolish stamp duty on properties up to £250,000 for the over-60s in a bid to help them to downsize.

The think tank has said a ‘Help to Move’ scheme should be made available to pensioners to help them to move into retirement homes which are more expensive than their current properties, and scrap the stamp duty for properties up to £250,000 so they can downsize without added extra financial cost.

The All Party Parliamentary Group on Housing and Care for Old People and Demos decided that the move would help many older homeowners who couldn’t afford the extra cost of moving, even if it was to downsize.

In addition, they estimate the move could free up around 4.3 million larger properties which would ease the property market for younger families.

MPs are keen for older people who find themselves in large, sprawling family homes to consider moving to either smaller properties or dedicated retirement properties, which would increase the amount of family homes on the market.

The Liberal Democrat Minister, Lord Newby, announced in October that approximately half of the homes owned by the over-55s had at least one spare bedroom and the Government should be looking at ways to help these people move into smaller, more manageable properties.

He said that renovations aimed to help the aged and disabled, such as modified baths, walk-in showers and chair lifts will only go so far in making an over-sized house more comfortable for people later in retirement.

In addition, downsizing to a smaller property will often lead to lower utility bills and newer retirement homes will have lower maintenance bills than older properties.

The group proposes a ‘Help to Move’ scheme that would allow a Government-backed mortgage to be attached to the new property. Where currently, pensioners find it difficult to get banks and building societies to consider them for any type of mortgage.

This would allow people to afford a buy a dedicated retirement home if it was priced above their own home.

The group also said that scrapping stamp duty for properties worth less than £250,000 will smooth the transition for pensioners as well as substantially reducing the costs incurred by moving house.

According to research more than half of over-60s, approximately 8 million people – would like to move house.

A third of this age group said they would like to buy a smaller property and a quarter said they would prefer to move to a retirement property.

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.

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