Over 80 per cent of people approaching retirement are underestimating how long they will live

Financial experts are warning those who plan to take advantage of the Government’s announcement of being able to access their entire pension fund once they reach the age of 55 not to underestimate how long they will live for.

According to research by MGM Advantage the average worker approaching retirement age is underestimating how long they liv e for from 5-10 years.

The survey showed that 82% of people questioned between the ages of 55 and 64 thought they would die much sooner than they are statistically likely to.

The Office for National Statistics (ONS)data shows that the average British male will live until till he is 86 and women until they are 89.  However, this vastly differs from what age people think they will die.

Men estimated that they would die at an average of 81 – 5 years earlier than likely.  And women estimated their death at 79, a full decade before the ONS figures suggest.

The implications of people underestimating their lifespan could be serious in terms of ensuring how they invest their pension will see them through their entire retirement.

MGM Advantage warns that many people may not make adequate provision for the duration of their retirement and may invest badly thinking they won’t be alive as long as they probably will be. 

For those who choose to shun an annuity product which guarantees an income for the duration of a person’s life, they may find they have exhausted their pension fund and are left to rely solely on the state to see them through their final years.

With the recent industry shake ups, the annuity market offers much better value than it has over the previous years.    People are now encourage to shop around to ensure they get the best deal for them, and to look into enhanced annuities if their lifestyle choices could shorten their lifespan.

Pension providers now have to communicate with their clients a year before they are due to retire to discuss their options, including offering comparisons to other providers annuity products and insisting that the customer shops around before deciding upon an annuity. 

Inflation now at four-year low of 1.7%

The inflation rate now stands at four year low at 1.7% in February. The Consumer Prices Index (CPI) fell for the second month in a row from its January level of 1.9% and is looking to consolidate itself below the Bank of England’s target of 2%.

In addition, the Retail Prices Index (RPI) also fell in February by 0.1% from the 2.8% figure in January.

The Office for National Statistics (ONS) said that petrol and diesel prices were largely responsible for the fall.

Petrol prices fell by an average of 0.8p a litre between the first two months of the year, compared to an increase of 4p in the same time period in 2013. Diesel prices also fell by the same amount compared to a rise of 3.7p in 2013.

The fall in inflation is good news for wages as the gap between inflation and salary increases is closing in.
From November 2013 to January 2014 the average earnings increase went up by 1.4% compared to the same three months a year previous.

Those who worked in the private sector enjoyed the highest pay increases, rising to 1.7% compared to 0.9% for workers in the public sector. Private sector workers pay increases are now finally in line with inflation.

Economist predict that inflation will continue to fall over the year, with lower import prices, higher productivity and flat commodity prices all helping to push down the CPI rate of inflation. With some suggesting that it may get as low as 1% by the end of 2014.

The new low inflation rate is also likely to back up the Bank of England’s plan not to rush into increasing the base rate of interest, as the country continues on its path to recovery.

In addition to the fall in petrol and diesel prices, other benefits to the inflation rate were the cost of clothing and footwear hadn’t risen as sharply as at the same time last year and energy bills were not as high as last year.

At the other end of the spectrum, home furnishing and furniture prices rose by more than they did in the same period in 2013.

Two new NS&I bonds launched for pensioners

The Government have announced two new savings bonds available to pensioners.  The market leading bonds are only available to people aged 65 or over and they can save up to £20,000 in either the one or three year bond.

Chancellor, George Osborne announced the two new NS&I products in the budget. The one year bond pays out around 2.8% interest and the three year bond pays out around 4% interest. interest rates

The interest rates will be set in stone sometime in August and the products will be available in January 2015.

The news will come as a boost to many older savers who have seen their savings drop below the cost of living and inflation.

Pensioners will need to act fast in the New Year as just £10 billion worth of bonds will be available.   Savers can save up to a maximum of £10,000 in each bond, giving them a potential interest of £1,880 if they leave their investment untouched.

The interest will be taxed in line with the person’s personal tax band.

The saving products are a return to the NS&I’s previous form of offering market leading interest rates.

Over the past few years the NS&I has taken the decision to lower many of its interest rates as the Government was concerned that too many people were pulling their money out of banks and building societies.

The Chancellor said in his budget speech that the Coalition wanted to give something back to older savers as they have seen their life savings eroded by high costs of living, inflation and ultra-low interest rates.

For savers who like to invest in Premium Bonds as Mr Osborne announced a rise in the cap on investments in the products to encourage more people to save and for people to be able to invest more in Premium Bonds. 

From June 1st this year the cap will be increased from £30,000 to £40,000, and then raised again to £50,000 in the 2015-2016 tax year.

The NS&I will also go back to offering two ‘£1 million’ prize draw each month instead of one, beginning in August.


Interest rates predicted to rise to as high as 3 % by 2017

The Bank of England Governor, Mark Carney has warned that interest rates may rise six-fold over the next few years as the UK’s economy goes from strength to strength.  He said that the country would likely see a return to ‘normal’ interest rates that savers enjoyed pre-crisis.

However, what is good for savers is also bad for borrowers as the inevitable rise will hit mortgage holders hard, with brokers expecting many customers to try and fix their mortgage rates before the interest rate start to rise.

Mr Carney said the interest rate could go up to 3% by 2017 from its current record low rate of 0.5%.

The Organisation for Economic Co-Operation and Development (OECD) said that the UK is currently experiencing the fastest growth of all of the G7 economies, with predictions that it will grow by 3.3% by the second quarter of 2014.

The current rate of interest has been kept at 0.5% for 5 years this February in order to help the country recover from the recession, but now that the recovery is underway the Bank of England say that the rate will start to rise and by 2017 will be between 2% and 3%.   interest rates

The low rate has meant good news for mortgage holders and has certainly played a part in the resurgence of the housing market, but this has come at a detrimental effect for savers, and pensioners in particular whose life savings have been eaten away by the rising cost of living and below inflation interest rates.   It will also benefit those who are due to retire over the next couple of years as annuity rates improve.

However, the Bank is warning that whilst the base rate of interest will start to increase over the coming years, it is unlikely that savers and investors will enjoy the high 5-6% interest rates on their savings they did before the financial crisis, as the way the banking system works has changed drastically.

Financial experts suggest that average rates for savings will settle around the 2.5% mark, which whilst above the current rate of inflation will not generate the decent level of return that savers would be hoping for.

Could the 25% pension tax break be moved towards a care home insurance?

Recent research has found that 90% of over-50s don’t trust the Government will keep the 25% tax-free lump sum rule. 

Currently, once a person retires they are allowed to withdraw 25% of their pension fund in a lump sum that will not be tax.

However, in a recent survey conducted for The Telegraph, it was found that just one in ten older workers believed this tax-relief perk would still valid by the time they came to retire.    nest egg

With all major parties hinting that they would be looking at tax-relief in a bid to raise more revenue for the treasury.  Labour is expected to either completely withdraw the tax-free lump-sum clause, or reduce it should they be elected in 2015.

A report by the Pensions Policy Institute was published in 2013 that said a cap of £36,000 on tax-free lump sum withdrawals should be put in place, rather than the current 25% of the pension fund.

A move such as this would impact anyone who had pension savings in excess of £144,000, but the PPI insisted that it would be a fairer way of distributing tax breaks.

Financial experts have told the current Coalition Government that a cap would be a sensible move and could raise approximately £2 billion a year.

The over-50s firm, Saga, conducted the research for The Telegraph.  It found that only 9% of people aged 50-59 felt the current tax-break would be in place when they retired.

Almost three-quarters said they didn’t expect whichever party next came into power to keep the rule as it is.

Some financial experts think the Government will bring in an initiative that will link the tax-free lump sum available to paying for long-term care later in life, which it hopes would mean less people would have to sell their homes and assets to pay their care bills.

The Government is looking for ways to encourage people to think ahead and plan for any long-term care that may be needed.

One solution could be to shift the tax-free lump sum into an insurance policy to cover against the costs incurred of a lengthy stay in a care home.

Pension Charges to be More Transparent

Savers who contribute towards a workplace defined contribution pension will be soon be given more information surround the costs applied to the administration of the scheme.

In an amendment to the Pensions Bill, pension providers will soon have to detail the investment costs that occur on pension schemes.

Pensions Minister, Steve Webb said that many of the charges could be limited or capped and some may banned completely.

The new rules regarding pension charges are due to be published soon with a view of them coming into effect early 2015.

The rules regarding transparency of pension charges come as part of a number of reforms to the Pensions Bill with Mr Webb assuring us that major changes will start to happen early next year.

There are currently many hidden fees which members of pension schemes are charged; the investment transaction costs including the buying and selling of stocks, shares and bonds are taken from the person’s pension fund but are rarely explained fully to either the companies or employees.

The Office of Fair Trading held an inquiry in 2013 into hidden pension charges and found there was a number of different fees applied to schemes including commission to brokers, bank transaction charges, foreign exchange fees, stamp duty and bid-offer spreads which is the different the buying and selling price of a financial product.

Many of these investment charges were not detailed to the contributors even though they would eat into a sizeable chunk of their investment.

The OFT said that a 0.5% annual charge for management of a pension scheme across a contributor’s career could erode the pension savings by approximately 11%. A 1% annual management charge would reduce the pension by approximately 21%.

In addition to the investment charges, contributors to workplace defined contribution pensions also have to pay administration costs on their schemes.   These hidden costs cover investment management services and expenses, payment to advisors as well as the cost of the administration of the pension by the provider.

The OFT discovered that many of these fees were not included in the annual management charge which is detailed by the pension providers.

Steve Webb wants to put an end to the additional expenses that devalue retirement savings by bringing in a cap for annual pension charges and for all charges to be declared by the providers.

One in Five Pension Savers has Cancelled Contributions Due to Financial Worries

According to a recent survey by the insurance company, MetLife, more than 20% of people who were contributing towards retirement savings have now stopped paying into their pension schemes.

The study found that one in five savers had chosen to cancel their pension contributions because they couldn’t afford to keep up the payments with the higher cost of living and needed to money to pay for day to day essentials.

Those who were raising young families and in the 35 to 44 age group, were the most likely to have cancelled their pension contributions altogether, with almost a third of people surveyed in this age group saying they had stopped saving for retirement.  In the 45 to 54 age group, 28% had cancelled their contributions.

Whilst it has been acknowledge that many of these people have simply taken a break from saving towards their retirement and will restart contributions once they feel their finances are in a healthier state, there is concern that many will completely stop contributing towards their pensions.

It is also likely that many have taken a break from contributions knowing that they can make up the money at a later time, particularly as nearly half the people surveyed said that would probably still be working past the state pension age.

Workers in the 55 to 64 age group were the most likely to say they would continue working past 65, with many realising that their pension savings would not be enough to provide them with a comfortable retirement so they would need to continue working for a few more years.

Of those surveyed who admitted they would like to continue working once they reach the state pension age, approximately half would like to stay in their current roles fulltime.  Others said they would like to work part-time in their current jobs, and others said they would look for a completely different job once they reached retirement age.

In a separate survey by the Prudential, it was revealed that around a quarter of workers who reach the state pension age this year didn’t want to stop working full-time, with many more saying they would like to continue working part-time.


Iain Duncan Smith wants pensioner benefits to be part of the welfare cuts

It is looking more likely that the Conservatives will be cutting pensioner benefits if they get re-elected next year.

The Works and Pensions Secretary, Iain Duncan Smith, warned that the welfare bill will be set at a limit of £100 billion so therefore sacrifices have to be made and that pensioners shouldn’t be excluded.  Bus stop

It is expected that pensioner benefits such as free bus passes, TV licences and the winter fuel allowance will be means tested so that wealthier pensioners will not be eligible.

Mr Duncan Smith has stated that the State Pension and the job seekers Allowances are the two areas that will not be affected by future cuts to the welfare bill, but money must be saved in other areas, including pensioner benefits.

There is some in-fighting between ministers about where the cuts should be made, with George Osborne wanting cuts to benefits for people of working age.   However, other senior members of parliament feel that pensioners’ benefits should also be looked at more closely in a bid to cut £12 billion off the annual welfare cost.

Prime Minister, David Cameron, has said on numerous occasions that he would not cut pensioner benefits and that they would remain universal for all under his leadership until the next general election.

Iain Duncan Smith is amongst many who feel this needs to be reviewed if the Conservatives remain in parliament next year.

Chancellor, George Osborne, announced details of a cap on welfare spending in the Autumn Statement with a view to reducing the current £112 billion annual bill down to £100 billion.

Speaking to fellow MPs, the Works and Pensions Secretary said that pensioner benefits would need to be cut if the Government struggled to meet this target.  Fuelling more confusion about which direction the party would go should they remain in parliament after the next general election.

Both Labour and the Liberal Democrats have said they would be reviewing the existing systems for pensioner benefits if they were to get elected in 2015.

Friends Life Launch New Annuity Just for Smokers and Drinkers

Good news for people who smoke and drink as another insurance company has brought out an enhanced annuity.  Friends Life have announced that they will be providing annuities for those who have unhealthy lifestyle habits such as drinking or smoking.

The company had only offered annuities of any kind to its existing pension clients, but it is now offering the enhanced annuity on the open market.   annuity rates enhanced table

The news is good for those who wish to be able to shop around and find the best annuity deal for them, which isn’t necessarily from their own pension provider.

There have been a number of measure undertaken recently to help people coming up to retirement to get the best annuity deal for them, including setting up a register of providers which list their going average rates so that accurate comparisons can be made between providers.

It is estimated that almost half of newly retirees make the mistake of taking up the annuity that their pension provider offers once they approach retirement, rather than seeking independent financial advice and looking for the best deal on offer.

This could mean a costly mistake of £1000s over the course of a retirement.

People also mistakenly think that they need to hold back some of their medical history or perceived bad habits in case this has a negative effect on the annuity they can purchase.  IN fact the opposite is true, as those who have medical conditions, smoke  or drink excessively will be eligible for an enhance annuity which takes into account the shortened life expectancy and gives out a higher yearly retirement income than a normal annuity.

The Friends Life enhance annuity however, is tapping into a niche market by only targeting people who drink and/or smoke, rather than focusing solely on existing medical conditions.

With a play on words, the company are calling the product the Friends Lifestyle Annuity and will look at the alcohol consumption and smoking history of a person, along with their occupation and family medical history to tailor quotes.

Other annuity providers are expected to follow suit, giving greater choice for those who choose to partake in unhealthy lifestyle choices.

Cap on Pension Fees to be delayed whilst responses to proposals are dealt with

Recently Steve Webb, the minster for pensions, promised that the Coalition would be looking at more detail into capping pension fees, with a view of having a new system in place by this April.

However, this has now been delayed with the Department for Work and Pensions saying there has been 166 responses to the original consultation and that time would be needed to properly respond to them all and suggesting caps to pension fees would be unlikely to be introduced in 2014.

The proposals were for administration fees charged to automatic enrolment pensions to be capped at somewhere between 0.75% and 1% in a bid to stop providers charging high management fees and potentially putting workers off from saving towards retirement.

Research found that many older workplace pension schemes had large management charges, with some schemes that had been running more than 10 years having fees of up to 2.3% each year.

The Treasury said that capping the fees could save workers who signed up for automatic enrolment tens of thousands of pounds over the length of their working life.

However, some critics argued that many pension providers charges were already much less than the cap and bringing in a maximum fee could mean that they raise their charges to bring themselves in line with their competitors.

Indeed, a study by the Office of Fair Trading (OFT) found that the average management fee for pensions was 0.51%, but it also estimated that there is approximately 186,000 pension funds worth £2.65 billion who are levied with fees of over 1%.

The original consultation looked at three different options for pension caps, a 0.75% cap, a 1% cap or a two-tiered system where pension providers started off at a lower 0.75% charge but could increase this over time to 1% if they could give the regulators valid reasons for the rise.

Automatic Enrolment began in October 2012, and so far over 2 million workers have begun saving into a workplace pension scheme.

The scheme has so far been hailed as a great success with 9 out of 10 employees choosing not to opt-out of the scheme and save towards their retirement.

This year will see the scheme being rolled out to medium sized companies who employ between 50 and 2000 workers.  The Government hopes that by completion in 2018, more than 9 million additional people will be saving towards their retirement for the first time.

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