Retirement + 2 children = 49%

New research among 45-65 year olds by Standard Life reveals having children living in your household can have a big impact on your retirement decisions.
Almost half of respondents (49 per cent) with two children in the household have no financial plans to provide for the future, compared to just over a third (35 per cent) without children. Children also impact decisions on when to stop working and retire. You are more likely to retire later if you have children in the household with 10 per cent of adults who aren’t retired not planning to retire until 71-75 compared to only 2 per cent who don’t have children living with them.

Price inflation

Taking a career break or deciding to work part time can have a significant impact on your pension fund at retirement. A female saving £150 a month, increasing annually in line with price inflation from age 20 to age 65, could have a pension fund of £559,000 *1.
Taking a 5-year career break from age 30 during which pension contributions stop reduces the pension fund to £480,000 - a decrease of over 14 per cent. If you work part-time and cut in half your contributions from age 30 onwards this could reduce the pension fund to £380,000 - a decrease of over 31per cent.

Loss of pension

John Lawson, Head of Pensions Policy at Standard Life said: “It isn’t surprising that those with children living in the household have even more financial constraints than those without. Apart from the actual cost of bringing children up there are so many other considerations these days - such as childcare costs, then for some there are school and university fees to consider. There is obviously only so much money to go round. But the loss of pension can be a forgotten cost for many when making decisions, in particular by going part time."
But there are things you can do, and it’s never too late. If we can save even a small amount for retirement it can make a difference. How and when we retire has changed, we no longer have to retire at age 65, we can work flexibly for much longer.

Other findings from the research of 45-65 year olds include:
- 34 per cent of those with two children in the household will make up for lost time and travel the world in retirement
- 63 per cent with two children in the household are looking forward to spending their time with their children and grandchildren in retirement
- 44 per cent of those questioned without children in their household and who haven’t yet retired intend to stop working completely.

If you have one child in the household, 42 per cent intend to stop work completely but if you have two children only 27 per cent intend to stop working completely

As part of the Changing Face of Retirement research, Standard Life has published a list of top tips to help people re-engage with their financial planning:

- Don’t panic!
- Seek professional financial advice - see also http://www.iangreen.com/
- Continually review your financial goals
- If you don’t have one, make a plan.
- Ask for a state pension forecast and calculate your state pension retirement age)
see also http://greenfinancial.blogspot.com/2012/01/state-pensions-and-missing-14462581.html

- Review your investments
- Consider deferring taking the state pension at your default retirement age - for every year you defer taking benefits you can increase the pension by 10.4 per cent *2

- If you have moved jobs, ensure you have kept your old employer up to date with address changes so you can claim any workplace pension when you retire

If you can, increase your savings If you’re a higher rate tax payer, ensure you claim the tax-relief. Standard Life estimates 300,000 people are not claiming this currently

The above article is available in the Green Financial January/February client magazine at http://www.iangreen.com/magazine.php or via www.facebook.com/GreenFinancial

Notes:
*1. The pension fund figures assume investment returns of 7 per cent p.a. before charges, an annual management charge of 1.7 per cent p.a. and price inflation of 2.57 per cent p.a. The first monthly contribution is made at exactly age 20 and the last contribution is one month before the 65th birthday. The pension fund of £559,000 adjusted for price inflation in today’s terms would be £184,000 at age 65. A five year career break would reduce the figure to £158,000 in today’s terms.
Reducing contributions by half from age 30 would reduce the figure to £124,000 in today’s terms.


2. Source: DirectGov.

State Pensions and the missing £144,625.81

Pension Insight magazine (http://www.pensions-insight.co.uk ) editor Bob Campion recently wrote that the gradual reduction in maximum state pension benefits could end up costing some people £144,625.81.
He calculated this is the amount you’d need to buy an annuity to replace the lost £6,326.84 a year if the maximum state pension reduced from £13,606.84 to £7,280

The £13,606.84 is the theoretical maximum for someone with full basic state pension (BSP, currently £102.15pw in 2011/12 available to those with more than 30 years NI contributions) and maximum second state pensions (SERPS and S2P). This contrasts with the maximum £7,280 payable if we move to the proposed £140 per week flat rate system. It would affect most higher earners and those who do not qualify for any kind of pension credits or means tested pension top ups. At present almost 1 in 2 pensioners are eligible for top ups of some kind but for those who do not qualify for state assistance over and above the basic state pension the changes to state pension rules looks likely to mean a significant reduction in available benefits over the coming decades, with less effect on those retiring sooner, especially in the next 10 years.

As a point of interest if the new rules all come in when proposed (but it looks likely they will be brought forwards) it will be into the 2080’s before everyone is on the same rate. Until then there will be a mixture of different regimes and people will have multiple pensions (private and state) with different rules and retirement ages applying depending on age and pension structure.

This makes it nigh on impossible to accurately calculate one’s own state pension benefits until the point you reach them. Indeed even the DWP are not really sure what income a pensioner will get until they reach state pension age (65 and rising). As an IFA it makes it financially impractical to charge a client to work this out. The time and cost involved outweigh the benefit!

Contracting out (called SERPS up until April 2002 and S2P afterwards) will soon no longer be available from money purchase schemes, which includes personal pensions and SIPPs – see also http://greenfinancial.blogspot.com/2011/12/contracting-out-serps-s2p-all-that.html

It used to be the case, that as an IFA, I could estimate whether it was ‘worth’ contracting out or not. There were a multitude of individual factors but the biggest was often if aged under or over 45. So the ending of contracting out from money purchase schemes is a welcome simplification but as indicated above the change to the new regime will bring complification [ED: not a real word but should be] well into the 2080s. Again, on the plus side, the new rules should benefit lower earners.

But what is the detriment to higher earners?

The loss of the income as stated at outset in this article is one but there is another. The impact on attaining qualification for the new ‘flexible drawdown’
- download Green Financial guide here:  http://www.iangreen.com/downloads/Flexible.pdf
or view on facebook here:
http://www.facebook.com/media/set/?set=a.279726955386751.88831.136170059742442&type=1&l=b96248bd07

This requires a lifetime pension income provision of at least £20,000. So having state benefits of £13,000+ goes much further towards this than £7,280! If you had the £13,606 to buy a comparable annuity to top up to £20,000 would mean you’d need a personal pension of about £93,000 to buy the annuity. At the lower state pension income you’d need more like £200,000 to top up.

To repeat a fact I tweeted last year, to purchase an annuity (so income for life) on the same terms as the state pension a 65 year old male would need a private pension fund of £310,343.19

So in summary, pension and state pension simplification is of course welcomed by all, especially me as I will be far better placed to assist clients in calculating what there state pension entitlement might be. But the journey to a simple state pension regime is far from defined and will be a long journey whatever direction it takes.
Under current proposals I’ll be aged 109 when all pensioners are on a flat rate pension income!

For those retiring in the next ten years, there is not so much to worry about as the status quo all but applies, with changes to retirement age (upwards, see link to calculator below to work out yours) being the main factor coming slowly in.

But for those retiring 10 years out, especially those who aspire to or consider they will have taxable income at the higher rate of tax it is well worth making sure your pension – and most importantly forecast pension income - is reviewed to ensure it is on track to meet your aims.

If you are a pension or retirement income client of Green Financial or would be interested in becoming one, please do contact us. We’d love to help if possible.

Further Reading and Resources

28 page Green Financial Retirement Planning Guide - http://www.iangreen.com/downloads/Retirement.pdf

Government Money Advice Service - http://www.moneyadviceservice.org.uk/yourmoney/pensions_and_retirement/default.aspx

State Pension Age Calculator -
http://pensions-service.direct.gov.uk/en/state-pension-age-calculator/home.asp

Getting a State Pension Forecast - http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008

Green PEAs – The Green financial Pension Evaluation and Analysis Service for personal pensions -
http://www.iangreen.com/pensionperformance.php

Contracting Out, SERPS, S2P & all that

The powers that be are ending 'contracting out' from 6 April 2012

What does this mean?

Many people have built up pension pots since the 80s based on the fact they contracted out. This pension was known as ‘protected rights’. What happened, in simplistic terms, was rather than have a portion of their National Insurance (NI) contributions build up a second state pension (not to be confused with the basic state pension, which is not affected by this) their NI was diverted into a separate pot often alongside their personal pension contributions from earnings. The personal contributions were known as ‘non-protected rights’ or ‘ordinary benefits’. This could even be done if you didn't make any personal contributions yourself. I remember meeting a pension salesman in the mid 90s who built his entire career based on contracting out New Zealanders whilst they worked here in the UK.

The contracting out pension was once referred to as SERPS (State Earnings Related Pension Scheme) and in more recent times S2P (State 2nd Pension).

From 6th April 2012 there will no longer be the option to ‘contract out’ of S2P.

The change won’t affect any past benefit accrued in the tax years before 6 April 2012 – they’ll remain invested in the same way you have them now. However, there will be more flexibility over how you draw the benefits from the pension.

The rules and flexibility over accessing SERPS and S2P have changed in recent years. The latest big change is that at the moment (pre April 2012) you are forced to take a pension that also pays a pension to your spouse or civil partner when you die but after April 2012 this will no longer be the case – although you could if you wanted to of course.

Further reading is available on the Government website :
www.direct.gov.uk/en/pensionsandretirementplanning/statepension/DG_180010

What do you have to do now?

For most people the answer is nothing, the changes happen automatically.

However now might be a good time to review your pension contributions and what you might expect from your pension when you retire to see if it will be sufficient for your needs. It is important now, more than ever, to work out as best you can what the state will provide and therefore what gap needs to be made up personally.

I have more information on how I can help in reviewing your pension on my website:
http://www.iangreen.com/pensionperformance.php

Or my Guide to retirement guide on facebook:

http://www.facebook.com/media/set/?set=a.279745942051519.88838.136170059742442&type=1&l=e9d045b20c

(also available with many other guides here http://www.iangreen.com/education.php )

Could you live on £140 per week? or £161 million for life?

The Government has recently proposed a single-tier, flat-rate state pension worth around £140 a week, and are currently consulting on how this might be introduced in 2015 at the earliest. Recent research from Standard Life has revealed that almost two out of three people (63%) think they couldn't live on £140 a week in retirement, rising to 72% for the 55 and overs.
And with more than one in six Brits (17%) not doing any financial planning, now is a excellent time to consider your own financial planning and ensure it is up to date (or exists!)

And in this sense, retirement planning is not just pensions, although they play a big part. Much of my work with clients is showing how to provide income in retirement, that won't run out before you do.
Whether that is improving and fine tuning your pensions, considering other sources of future income such as property rental income or investment income or something else entirely.

One thing my work does not include is a recommendation to invest in lottery tickets just in case you are the next lucky winner of £161 million! Although if the recent UK big winner is reading this, I'd be delighted to help with future tax efficient income planning ;-)

Simpler Tax for Pensioners?

The Office of Tax Simplification (honestly, this IS a real department, it is not run by Sir Humphrey and today is not April Fool’s Day) has announced it will review the pensioner tax system as the Treasury attempts to simplify the pensions tax regime alongside the generally stated aim of the Government of simplifying tax as announced in the recent budget.


The OTS chairman Michael Jack has said: “For the estimated 5.6m people of pensionable age paying tax, this area is widely acknowledged as causing too many problems for a group, some of whom are the least able to cope with them.
The OTS will be looking for ways in which pensioners’ tax affairs can be dealt with in a much more straightforward way - especially for those with multiple sources of income.”

The OTS has now been ordered to carry out a review of pensioner taxation. But for now at least this will not include tax relief on pension contributions.

The Treasury exchequer secretary David Gauke commented: “I would like the OTS to carry out a review which identifies and examines which parts of the tax system cause the most complexity for pensioners, looks at how this varies across the pensioner population, and proposes ways to make their tax affairs simpler.
I look forward to an interim report on these issues ahead of the Budget 2012, and a final report with policy recommendations later in the year.”

So it seems the aim of the review will be to examine and identify which areas of the tax system cause the most complexity and uncertainty for pensioners, consider how these issues vary within the pensioner population and explore what changes could achieve simplification (There’s that word again!) and what the wider implications of these might be.

I’ve said it before and I’ll say it again. Simplification, Tax and Government are 3 words which just don’t seem to work for me in the same sentence. Call me a cynic, but there you are. That said, I’ll look forward to what comes of this and hope it achieves its aims. I just won’t be holding my breath while waiting...

The 'P' Word

I read at the weekend that "Government spending on social security benefits has almost doubled over the last 30 years". This came from the Office for National Statistics in their annual Social trends report.
Allowing for inflation the amout rose from £69billion to £135billion. The item that caught my eye was that in 2008-09 almost half the bill went in pensions. Reading further it is plain to see that demographic changes including the increased size of the elderly population are a massive part of this. The so called baby boomer generation coming into retirement meant that over £50billion was spent on the basic state pension alone.

Of great interest to me, as a financial planner that has advised on pensions for over 15 years now, was the expressed views in the report from the public. Six out of ten people agreed that "the Government [IG: and remember this is not supposed to be political, it generally refers to whoever is in power at the time, rather than being aimed at a specific party] should be mainly responsible for ensuring that people have enough money to live on in retirement"

Personally I have no trouble agreeing with that statement. However, based on my professional experience and knowledge of the welfare system I am afraid I just don't see it happening. Whether or not certain elements come in to play, such as indexing state pensions to more realistic benchmarks, it is a fact that for many people, the state pension is just about subsistence level. There certainly isn't much room for the finer things in life (said tongue in cheek - I am not talking about having your own private jet, more like just running a new private car!) when living on around £5,000 a year [basic state pension-single person-£97.65 per week 2010-11]

Over the years I have come to grow more and more concerned over the P word - Pension. Generally I find clients and the population in general (if the papers are to be believed) have become fearful, mistrustful, bored, frustrated and fed up with Pensions. And no wonder. From the constantly changing rules and regulations in my world to the high profile failures of pension providers such as Equitable Life, the 'black hole' in company schemes such as ITV and British Airways, the 'fatcat' pensions for company directors and MPs whilst lower ranked staff and civil servants see benfits cut, the personal pension mis-selling of the past, the ever creeping increase in retirement ages, the list just goes on and on and on.
And don't even get me started on the unfairness of means tested benefits in retirement - there is a blogpost for another day...

So what to do? What to think?
Despite all these changes my view remains pretty much the same as it has for over a decade. That if one wants to have a reasonable level of income in retirement, commensurate with what one was used to whilst working, then the basic state pension will provide something, but probably not enough. And therefore it falls to us, the individual, to take responsibility for saving more, elsewhere, to 'top-up' our retirement income to the level we desire.
There are many ways to save for retirement in addition to pensions and I refer back to a previous posting I made. What I do for my clients is try to help them answer the question 'How much is enough?' What do I actually need to retire in the fashion I desire for me and my family? If you'd like help answering that question, I'd be delighted to assist. And remember, the answer does not need to include the P word.