CPI Inflation Rate Now at Zero

For the first time since official records began, inflation is now at 0%.

The Office for National Statistics (ONS) has announced that the Consumer Prices Index (CPI) rate for inflation fell again last month from 0.3% to 0%.

Whilst most financial experts had predicted the rate would fall further from January to February.  Most anticipated just a 0.1% move, but ongoing supermarket price wars and lower fuel prices saw a deeper drop.

Economists are now expecting the country to go into deflation next month when fuel bills show the cut in the price of gas over the winter, and remain in negative figures for most of the year.  images (1)

Fuel prices have dropped significantly over the past year, falling by 16% and this has had a knock-on effect with other items in the basket of goods used to calculate inflation with manufacturing and transportation.

In addition, food prices are 3.4% lower than they were 12 months ago.

Whilst 0% inflation (and deflation) is good for households as their pound goes further and they are tempted to spend, it could have a detrimental effect on the economy if it continues for too long as many individuals and companies delay making purchases because they are waiting for prices to fall even further, thus stalling the economy.

Also, wages have fallen significantly from 2008 to 2014 and have only just started to outpace inflation whilst it has been at such a low rate.   Data from the ONS shows that the current wage growth is now 1.8%.

The ONS started to document the CPI rates in 1989 and at no point since then has it been as low as 0%, unofficial records pinpoint as early as 1960 since the last time inflation stood at 0%.

Deflation could also make the Bank of England finally change the interest rate.  However, they are unlikely to put it up which would please savers, but decrease it further to 0.25%, although it is thought the 9 member Monetary Policy Committee are very divided about whether to keep the rate at its record low of 0.5% or to increase or decrease it.

Budget: Tax on Interest Abolished for Most Savers

Savers received some good news at last in the Spring Budget yesterday.  George Osborne announced that from next year tax would be scrapped for the first £1000 of interest earned each year.

The change will benefit around 17 million savers who have been used to paying 20% tax on interest earned.

It is thought that only the super-wealthy will now pay any tax on interest on savings and most of them will fall into the 40% tax bracket and around 95% of savers will never have to pay tax on interest earned.   piggy-bank

To be liable for tax on interest a basic tax rate saver would need to have savings of around £70,000 in a high interest account.  Those who fall into the 40% tax rate would need savings of around £35,000 to have to pay tax on the interest earned.

The news is likely to render ISAs redundant, as the majority of people who hold ISAs will not receive £1000 worth of interest in any financial year and they won’t be limited to saving just £15,000 a year.

The Chancellor stressed in his budget announcement that savers had already paid tax on the money they save, so they shouldn’t be subjected to additional tax.

The announcement is likely to prompt more people to save, particularly as many have been turned off by ultra-low interest rates in traditional savings accounts and ISAs over the past few years.

According to figures calculated by the finance company Hargreaves Landsown, the average household has lost out on £5000 worth of interest over the past six years while the interest rate has been held at its record low of 0.5%.  Hargreaves Landsown used the Bank of England’s data to work out that an extra £130 billion would have been given out in interest if the rate was still at its 2008 level.

However, interest rates are still falling and many savers are holding vast amounts of money in accounts which pay zero interest.  It’s estimated that £149 billion is stored in bank and building society accounts which pay no interest—more than treble the amount in 2008.

Whilst the abolition of tax on interest doesn’t come into effect until April 2016, it is recommended that people still take advantage of the tax-free saving that ISAs currently offer.  Savers have 17 days to ensure they save their quota of £15,000 for this financial year and those who can afford to should be looking to save as much as possible in their ISAs for the 2015-2016 financial year.

Over-55s Warned to Be On Guard Against Pension Scammers

Over-55s looking to cash in their pension pots in April following the pension freedom reforms are being asked to ensure they are not the target of scammers.

Industry experts are predicting a surge in people who get caught out by investment deals that offer huge returns.  Often these unregulated companies will persuade people to part with the money they have saved all their lives to put into a fraudulent scheme that either gives nothing back or the administration fees charged by the companies will totally negate any returns.   download

In addition, any money withdrawn from a pension will be subject to income tax after the first 25%.  This will mean that many savers will be pushed into a higher tax bracket if they take out large sums of money in a single tax year.

From 6th April, anyone with a defined contribution pension over the age of 55 will be able to access their pension pots as they see fit.

Industry experts are concerned that less people buying annuities will mean more people will end up spending all of their pension pots long before they die and have to rely on the state pension for the latter years of retirement.

Annuities offer a guaranteed income for the whole of a person’s life and joint annuities will also protect a spouse if the annuity holder dies first.

Those who fall foul of scammers could end up losing their entire pension pots, or vast sums of money through administration charges and tax bills.

Fraudsters looking to take advantage of the new found freedoms have already started to cold call and send spam text messages and emails and the situation is likely to get much worse over the coming months.

Over-55s are being urged to be wary of any company offering free pension reviews or detailing legal loopholes for people to cash in their pensions, particularly if they approached via spamming methods.

The Pensions regulator is re-launching it’s ‘Scorpion’ campaign this week, highlighting how the fraudster work and the real financial risks to pension savers if they believe the ‘too good to be true’ returns promises these firms offer.

In the majority of cases, once the money has been transfer from the pension fund into these dodgy investment companies, the saver is unlikely to see a single penny yet will need to raise significant amounts of money to cover the tax bill they will receive.

As always we advise that a person takes independent financial advice before making any major decisions regarding their pension fund.  The Government’s ‘Pension Wise’ advisory service will also help many who are unsure of what the changes mean and how they are affected by them.

Many Pension Savers Will Fall Foul of the Taxman

Pension savers wishing to taking advantage of the new pension freedom reforms to withdraw large amounts of money from their pension funds could find themselves on the receiving end of a very large tax bill.

In a little over three weeks anyone over the age of 55 with a defined contribution pension can choose to access their pot whenever they wish and take out however much they want, where previously they would have needed to buy an annuity.   piggy-bank

Many savers will be looking forwards to getting their hands on large sums of money, and many have already decided how they are going to spend some of their pension pot.  However, many will not have factored in how much tax they will have to pay on withdrawals, and how large withdrawals could well take them into a higher tax bracket than they are currently.

Those who wish to withdraw their whole pension pot will be most likely to suffer a large tax shock.

In the worse possible scenario, a person withdrawing their entire pension pot could face part of their pot being subjected to a 60% tax bill, and their personal tax allowance being withdrawn.

Even savers with small pension pots could find a large withdrawal will take them from the basic rate of tax to a 40% tax rate and wipe thousands of pounds of their retirement income.

In addition to finding yourself in a higher tax bracket, many pension companies will be forced to put you into an emergency tax situation for large withdrawal which means you will need to reclaim your overpaid tax at the end of the tax year.

A person on a fairly average salary of £25,000 per annum could pay as much as an additional £4,000 in income tax if they chose to withdraw their entire pension pot.

Most financial experts agree that to avoid a large tax bill, anyone wishing to drawdown from their pension funds should stagger the amount of money they withdraw over two or three tax years, and to keep the withdrawals fairly low in value to keep within the same tax bracket.

An estimated half a million over-55s are expected to dip into their pension pots from April, withdrawing up to £5 billion.

Around two-thirds are likjely to withdraw less than £30,000, and half of those would be likely to keep the drawdown to less than £10,000.

However, around a third of those planning to withdraw cash from their pensions have admitted they plan to take more than £30,000.

If an over-55 earning £25,000 a year drewdown a pension pot of £50,000 in its entirety, they would face a tax bill of £11,523.  However, if they chose to stagger with drawdowns over three years they could reduce that tax bill by almost £4,000.

The first 25% of any withdrawal from a defined contribution pension fund will be tax-free, regardless of the amount; the rest will be taxed according to the savers tax band, which will go up the more they withdraw.

From April 6th the personal allowance will rise to £10,600, the 20% tax band is from £10,601 to £31,785, income from £42,385 to £150,000 will face a 40% tax and a 45% tax is applied to anything over £150,000.

Work and Pensions Committee Wants to Raise Age of Accessing Private Pensions

A cross party committee of MPs has urged the Government to alter the age at which a person can access their private pension.

Currently anyone over the age of 55 can access their private or workplace pension, but the committee want this to be raised to 60 for men and 57 for women.  income drawdown

The Work and Pensions Committee is concerned that being able to access your pension at 55 will create an ‘unrealistic expectation’ about when it will be financial safe to retire, and that many pension savers will simply not be able to make their pots last throughout the whole of their retirement if they can access them too early.

The committee wants the age to be brought in line with the state pension age, so that no-one can access their pension less than five years before the state pension age.

The ever-changing state pension age will mean that by the middle of the 2020s, both men and women would need to wait until they were 62 before they could access their pension, unless there was a medical reason for them to access them earlier.

The chairperson of the committee, Dame Anne Begg, said that in addition to potentially using up their nest eggs long before they passed away, pension savers would also waste tax breaks given to them if they accessed their funds too quickly.

Increased longevity is the main reason behind the proposal for bringing the minimum age to stay at five years below the state pension age.  Many people accessing their pension pots at 55 will live for another 30+ years, meaning their money will need to go further and they will miss out on additional pension contributions they could have built up.

Currently, anyone with a defined contribution pension will be able to take advantage of the new pension freedom reforms next month once they reach the age of 55.  This will rise to 57 in 2028.

However, the 11 strong Work and Pension Committee— made up of 5 Conservative MPs, 5 Labour MPs and 1 Liberal Democrat MP—wants the increase in minimum age to happen much sooner.

The committee has asked for an independent pension commission specifically to look at the age at which people can start drawing their private or workplace pensions.

They are concerned that if savers could access their pensions 10 years before they receive the state pension, they may vastly underestimate how far their nest egg will need to stretch and that they won’t have built up enough years of savings to last throughout retirement.

 

Pension Experts Warn People to be Vigilant for Fraudulent Investment Schemes

Pension industry experts have warned the new freedom reforms will mean ‘open season’ for scammers and fraudsters.

In less than a month the new pension reforms come into effect which means that anyone over the age of 55 with a defined contribution pension can drawdown money from their pot at any time, rather than having to buy an annuity.

Whilst many will relish the chance to invest their pension funds in the way they want to, there will be many that are targeted by fraudsters offering ‘too good to be true’ investment deals.  nest egg

The Government is urging people not to respond to cold calls or text messages from people claiming to be pension experts and trying to sell them various get rich quick schemes.

It is inevitable that many will fall for the scams, often not realising that the returns will be little at best, and in the worse cases, a completely false scheme.

For schemes that do actually exist, many will also have a large administration fee attached, plus the saver will often be liable for a large tax bill if they take a considerable amount of money from their pension pot.

Pension liberation schemes have been around for a long time now, but it will become even easier for criminals to persuade people to part with large sums of money from their pension pots.

The cold calls and text messages have already started ahead of the implementation date of April 6th and are likely to rise in frequency and quantity once the new changes come into effect.

The Pensions Minister, Steve Webb has conceded that a large number of people will suddenly have access to a lot of cash in a few weeks, and unfortunately there will plenty of crooks to persuade people to part with it.

He has urged pension savers take out independent advice before making any important decisions regarding their retirement income, and that if they are unsure of an investment company to do their homework and check them out thoroughly.

The Government’s own advisory scheme called Pension Wise has been launched to help those nearing retirement fully understand the changes and what they mean.  However, the service run jointly by the Pensions Advisory Service and Citizens Advice will only be able to offer a general overview of the changes and will not be able to tailor advice to the individual.

 

6 Million Workers Won’t Qualify for New Full State Pension

A new report estimates that approximately 6.1 million people aged between 40 and 65 will not qualify for the full state pension.

The new single-tier state pension comes into effect in April 2016 and will supersede the current basic state pension which pays £113.10 (increasing to £115.95 next month).

State Pensions

State Pensions

The system was brought in to help make it easier to understand, as currently people can apply for various benefits and top-ups which made it difficult for people to accurately predict how much they would receive from the state when they retired.

However, it now seems that millions of workers won’t qualify for the full amount of the new state pension (predicted to be around £155 a week) because they won’t have paid enough National Insurance contributions over their careers.

Under the system used currently, a person needs to have paid 30 years’ worth of NI contributions to qualify for the full state pension, but this will rise to 35 years next year.

The average amount of years of NI payments for workers aged between 40 and 65 is expected to be 37, but many will fall short.

Unsurprisingly, women are most likely to not have paid enough NI contributions for the new full state pension. Often taking career breaks to look after young children, or later in life leaving the workplace to care for elderly relatives means that around 40% of female workers in this age bracket will not qualify for the full single tier pension, compared to just 14% of men.

Others who missed out are those who had been ill for long periods of time or had a prolonged period of unemployment. However, those who took time away from their careers to return to study or retrain may also be affected.

Those who opted out of the second state pension will also be affected as they paid less National Insurance to boost their own workplace pensions.

For those who only missed their NI contribution target by a few years, it may be in their interest to buy extra NI contributions so they can qualify for the full amount, although they will need judge whether the investment will be worth it in the long term.

Deferring the state pension for a few years, if they were financially able to do so, could also buy back a few years of NI contributions, so long as the person was happy to continue working or receiving a personal or workplace pension.

The Government is giving over-55s the chance to find out approximately how much they will receive in state pension from their NI history, visit the website to find out more details gov.uk/state-pension-statement

FCA Warns 40% of Pension Savers Will Make Bad Financial Choices

According to a report from the Financial Conduct Authority (FCA), nearly half of over-55s who choose to cash in their pension pots will be making a costly mistake.

The financial watchdog is concerned that from April 6th, when the new pension freedom reforms come into effect, many savers with a defined contribution pension will plunder their nest eggs without considering how they will fund their retirement in later life.

From next month, anyone over the age of 55 with a defined contribution pension will be able to withdraw money from their scheme as and when they wish, rather than have to buy an annuity.   income drawdown

Many savers will undoubtedly be tempted to get their hands on their cash, but the FCA is worried that up to 40% will make bad choices regarding their pension cash and will end up much worse off financially.

Currently, a person with a defined contribution can get 25% of their pot tax-free when they retire and the rest must be used to purchase an annuity.

Whilst annuity rates have dropped over the last few years making them a less attractive option for some, they do offer a guaranteed income for the whole of retirement.

Those who choose not to buy an annuity, but to invest or spend their pension cash could well find that in 10 years’ time they have drained their funds and have to rely solely on the state pension to get by.

A lot of people coming up to retirement have already said that they plan to withdraw money from their pension funds.  Whilst some plan to invest the money, others want to spend large amounts either on luxury purchases such as exotic holidays or new cars, others plan to use the money for home improvements.  Many are planning to use the cash to help out family members with large financial commitments such as house deposits or paying for university fees.

However, many over-55s could be unaware that by withdrawing large amounts of money from their pension pots, they will be placed into a higher tax band.

The Government is launching its Pension Wise advisory scheme next month, where with the help of the Pension Advisory Service and Citizen’s Advice, savers will be able to get free impartial advice regarding the new changes and how it may affect them.

But, the advice given with only be a broad overview and will not be able to tailor advice to an individual’s financial situation.

Financial experts are predicting that the service will be unable to cope with the sheer volume of requests for advice.   Currently the service hasn’t got a dedicated phone number or booking system, just a website.

Insurance companies are also bracing themselves for a flood of calls next month, as their clients look to see what their options are or simply want to start withdrawing money from their pension funds.

 

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.

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