New proposals from the government may provide a general pension income of £140 per week for all pensioners, and eliminate the current ‘top-up’ system whereby pension credits are added to the basic state pension for poorer pensioners.

Currently (2010/11), pensioners receive basic state pension income of £97.65 per week for a single or £156.16 for a couple. For those with little or no other income, this may be topped up by means-tested pension credits to £132.60 for a single or £202.40 for a couple.

The new system would provide a basic state pension of £140 a week per pensioner, whether single or in a couple, eliminating the need for means testing and the administrative costs which it entails.

The new plan is to be laid out in a Green Paper later in the year and, if approved, could be implemented by 2015.

While government claims that the new system is generous, it must be remembered that the reform is working from a very low base, in terms of state pension income. The EU agency Eurostat defines poverty as having an income less than 60% of the national average wage. This currently applies to 30% of Britain’s pensioners, putting Britain on the same level for pensioner poverty as Lithuania, and second-worst in the EU, with only Cyprus having a lower state pension income.

The average basic state pension income for the EU is equal to 60% of the national wage, according to Eurostat.

For those not contributing to a company pension, making private provisions for retirement, by setting up personal pensions, has never been more urgent.

Pensioner couples now take a quarter of their pension income from work in retirement, according to new data published this week by the Office for National Statistics (ONS).

In 2009, the average pensioner couple had a joint weekly income of £564, equivalent to £29,000 a year.  The general increase in income of retired households means that they are enjoying a better average pension income than in previous years, although research has shown that many continue to work out of financial necessity, and have sacrificed their dream of retirement, because their private pension savings have failed to deliver the lifestyle they had planned for, after work.

Pensioners now make up just 38% of the poorest fifth of all UK households, showing a marked improvement from the level of 56% in 1977.

The ONS has analysed the sources of pension income for retired couples, and found that while 25% comes from private pensions and company pensions, 35% came from state pensions , and 25% from earnings from continuing work.

At the lower end of the scale, however, the ONS has pointed out that over half of single pensioners receive less than £10,000 per year in total  pension income, and that the poorest 20% of pensioners get by on less than £197 per week.

In its previous-year data for 2008, the ONS showed that 31% of pensioners depended on the Basic State Pension and pension credits as their sole pension income.

EU statistics have recently shown that the UK basic state pension is the lowest state pension in Europe, at  just 30.8% of average working pay, compared with an EU average of 60%.

The retirement plans of UK workers reveal an over-optimistic view of what will be achievable with their actual pensions incomes, a new report reveals.

Over half of over 55s earning between £20k and £30k have saved less than £30k for their retirement, according to Aviva, which will give them a likely pension income from their personal pension or company pension of £165 per month, or just over £40 per week.

Despite this, 23% envisage global travel after retirement, and 43% see their lifestyle, on their pensions income, featuring ‘new opportunities and experiences’. In general, 23% are anticipating a retirement on their pensions income that they describe as ‘comfortable’.

The research shows a clear need for future retirees to take independent financial advice from a qualified pension planner, in order to have a realistic view of what they can expect from their pensions income.

Other aspirations which may be affected by the reality of their pension income include spending more time and money on hobbies, which is part of the pension planning of 63% of us, and 48% planning to spend more time with their loved ones and family, which may imply considerable expense on travel as well.

The post-war ‘babyboomer’ generation who are now in their 50s have generally experienced rising property prices, and lived in the golden era of final salary pension schemes, both of which can no longer be taken for granted. These may have given people exaggerated hopes for their pensions planning and lifestyle in retirement, according to Aviva.

“Unfortunately many may still struggle to fund the retirement lifestyles they desire,” said Clive Bolton, ‘at retirement’ director of Aviva.

“In the run up to retirement, people should think about how they want to spend their days, and in reality, how much this will cost. Regardless of what pension pots people have, turning them into a viable income is vital.”

While 47% of parents wish to persuade their children to save into personal or company pensions, a third (36%) would actually contribute cash as a ‘kickstart’ for their children’s pensions planning.

Hard lessons appear to have been learned from the property downturn as well, Aviva reveals. Three quarters (76%) of homeowner parents are now advising their children that property ownership alone is too risky as a pension planning strategy. Their pension advice is not to rely solely on property, but to supplement this with structured pension planning and pensions saving.

Over half of parents surveyed, again perhaps disillusioned with their fortunes as property owners, believed the UK is too obsessed with getting on to the property ladder.

Parents appear to be pushing their children towards taking pensions advice, with 88% declaring they are worried about their child’s financial futures. For 7 out of 10 parents, there is a fear that the Basic State Pension may no longer exist, by the time their children reach retirement.

Other parents worry that a lack of pension planning could mean that their children will have to work beyond retirement age (60%), be unable to afford to pay their bills when they stop working (45%), or suffer health problems as a result of working longer (29%).

Furthermore, 11% of parents stated that they are warning their children not to make the same mistakes they did, by becoming over-reliant on property values in their pensions planning.

Of those homeowners who admit to having put their pension planning on the back burner, and have not yet taken pensions advice or set up a pension, 40% claim the economic downturn has prompted them to think about pensions advice and investing into a pension.

Property expert Sofie Allsop, who worked with Aviva on analysing the research, said: “Bricks and mortar are a good investment, but the recession has served us with a painful wake-up call that property values can go down as well as up. Parents are right to urge kids to climb both the pensions ladder and the property ladder.”

Halifax also revealed that house prices were up 6.6% quarter on quarter, i.e. in January to April 2010 over January to April 2009.

This is a marked recovery from a low base last year – house prices had gradually declined by 23% from August 2007, to the trough in April 2009.

The result of the recent price increases is that more people are now encouraged to sell their property, which will offer greater choice to those seeking a first time buyers mortgage deal. New sales instructions increased again in March, bringing the stock of unsold properties to the highest level since April 2009, Halifax said.

However, there was a drop in the first quarter of 2010 in the number of mortgages deals approved in the UK, which is a leading indicator of actual house sales. Bank of England figures showed that the number of mortgages deals in 1st Quarter 2010 fell by 18% compared to the previous three months, i.e. the last quarter of 2009. This is broadly attributed to the return of the lowest stamp duty threshold to £125,000 at the beginning of 2010, and the cold snap in January and February which affected the overall levels of activity, including demand for first time buyer mortgages deals.

“The imbalance between supply and demand is easing somewhat. Our view is that house prices will be flat during 2010 as a whole,” said Halifax.

Research by easyroommate.co.uk  claims that a rise in the cost of gilts following this month’s election will have an effect on the cost of first time buyer mortgage deals.

This is because lenders link the pricing of first time buyer mortgages to gilts, the company said.

Gilts are units of government debt, and gilt yields rose by 0.5% in the run-up to the general election, and are predicted to rise by up to a further 0.75% in the coming months, according to easyroommate’s director, Jonathan Moore.

“Mortgages rates are linked to the wider financial market. If the wholesale financial market is concerned the hung parliament cannot cut the deficit, and inflation will rise, yields on gilts will rise – pushing up the cost of mortgages,” he said.

“A rise of three quarters of a per cent in gilt yields is a conservative estimate of the impact of the hung parliament.”

This will mean that lenders could raise interest rates for many UK mortgage deals in response, according to Jonathan Moore.

If gilt rates were to increase by 0.75% and mortgage rates rose by the same amount, this would mean the average UK mortgage of £118,000 (source: Council of Mortgage Lenders CML) would increase by £52 per month, or £624 for the year in 2011.

This would more than cancel out the boost given to the first time buyer mortgages market by the recent increase in the lower stamp duty threshold from £125,000 to £250,000, and contribute to a continuing freeze in the mortgage market in general, according to easyroommate.

*Source: easyroommate.co.uk

 A lack of understanding of pensions annuities is costing pensioners thousands of pounds, according to a new survey by Aviva.

Lack of understanding leads to uninformed choices by those who do not avail of financial advice as they approach retirement, choices which could have dire financial consequences, the Aviva report shows.

Almost two-thirds of over-65 couples do not take out a joint annuity, even though this option leaves an annuity income for the surviving partner, when the first partner dies. In fact, 54% of consumers over 55 do not understand what a joint life annuity is, according to Aviva.

The vast majority of those surveyed also showed a lack of understanding of how health conditions should impact on their choice of annuity.

Most believed that being obese, a smoker or heavy drinker would reduce your pension income, whereas these conditions actually increase your payout, as they are deemed likely to shorten your life expectancy (and therefore the length of the term of the payout).

Aviva estimates that 40% of people could benefit from taking an impaired or enhanced annuity, which provide a higher monthly income to those with health conditions.

Many retirees also fail to realise that they have the option not to buy an annuity at age 65, and that, by waiting if they can, their eventual annuity income will be higher. The law allows a retiree the option to postpone purchase of an annuity until age 75.

A person aged 62 with a pension pot of £29,600, for example, would realise a monthly income of £151, according to Aviva. By waiting to purchase the annuity for ten years until age 72, that person would increase this monthly income to £199.

Indeed, the basic understanding of what an annuity is and does seems lacking in over-65s, the very group who could benefit from this knowledge.

This group did not understand that purchasing an annuity with their pension savings was one route to providing themselves with a regular income. Only 4% of those in this age group rightly stated that an annuity provides an income in retirement, while the remainder of respondents believed that their income would come directly from their personal pension or company pension.

The majority of over-50s are unaware of the upcoming changes in the minimum retirement age, and other legislation affecting their retirement planning, according to a report published this week*.

As many as 59% of people over 50 are currently unaware that from 6^th April 2010, the minimum retirement age will increase from 50 to 55.

This means, for example, that a person now aged 50, who is able and wishing to retire soon, must act quickly, as from April they will be ‘locked out’ of taking their personal pension until they reach 55.

Given the administrative process involved in cashing in a pension fund and selecting and purchasing an annuity to provide an income, it would be necessary to take action by February 2010, in order to avoid the April deadline, according to Rockingham Retirement, the authors of the report.

Over-50s also now have ISAs advantage

Another legislative change that affects over-50s, but in a positive way, is the recent alteration of their annual allowances for saving in Individual Savings Accounts (ISAs).

As of 6^th October 2009, people over 50 have been allowed to place up to £10,200 per annum in ISAs, compared to £7,200 for those younger than that.

ISAs offer tax-advantaged savings using two account models, the cash ISA and the stocks and shares ISA. Money held in the cash ISA is as secure as in a bank deposit account, but interest is paid tax-free. Investing in the stocks and shares ISA is slightly more risky as the funds are invested in the stock markets, but there is a possibility of a better return than a cash investment if the funds can be left invested in the longer term.

The stocks and shares ISA is not a totally tax-free savings opportunity, as government takes a small amount of tax (10%) on share dividends paid within the fund, but still offers a tax advantage when compared with a conventional bank account.

*Survey of 500 over-50s in Britain by Rockingham Retirement, November 2009

These are the conclusions of the charity Elizabeth Finn Care, which specialises in assisting professional people in need of financial and emotional support due to changes in their circumstances.

The charity compared the expectations of two groups, consisting of professionals in the above age range, and a group representing the parental generation of these professionals (i.e. people aged 65-75 with children).

Of the professionals surveyed, 51% said they would encounter financial problems if they did not receive their expected inheritance. Three in 5 said they were counting on receiving between 71% and 100% of their parents’ wealth.

The reality is likely to be very different, however, as only 27% of the parents’ group declared they would be in a position to bequeath such a large portion of their estate.

Elizabeth Finn’s research has also uncovered a widespread lack of understanding among the professionals of the value of the state pension and the cost of care in old age, with 55% declaring they believed their state pension would cover the cost of a nursing home bed.

The basic state pension currently pays £95.25 per week, compared with an average cost of £540 per week for residential care, the charity said.

The conclusion was that reliance on inherited money as part of retirement planning is a false expectation, and provision for retirement through a personal pension, or other investments, is essential.

*Source: YouGov survey for Elizabeth Finn Care of 1051 professionals aged 35-45, and 539 adults aged 65-75 with children

However, with over half the nation not saving towards a pension at all (source: Halifax), most people seem unaware that the traditional streams of retirement income are dwindling. 

It is a full-time job to keep up with the evolution of the pensions scene, with separate developments in the state, public and private sectors coalescing to form the complete picture. 

It is therefore understandable that employees are often unaware of the gradual erosion of their (likely) retirement income from state and employer – and fail to see the urgency of arranging a personal pension, to support a comfortable lifestyle at the end of their working life. 

The Six Sins

 There are six assumptions about retirement planning which are potentially disastrous for pensions savers. These assumptions are based on the realities of previous generations – realities that are now gone forever. 

1 We will have a substantial basic State Pension, as our parents did 

2 We will also have a substantial company pension, as our parents did 

3 There will be strong government support for pensions saving, as our parents had 

4 The size of our retirement fund can be modelled on what our parents did 

5 We can think of our house as part of our retirement planning 

6 The government Personal Accounts scheme is coming 

Each of these six assumptions contains a flaw. Taken together, they demonstrate the need for vigorous and sustained saving into a personal pension plan – which, with 20% government tax relief, is still an unbeatable option. 

The Six Fatal Flaws 

1 ‘Substantial State Pension’: The basic State Pension is now far from ‘substantial’. It has been losing value since it was liked to the Retail Price Index in 1979. It currently stands at under £5,000 per year, and pays out no more than £95.25 per week – and less, if you do not qualify for the full amount. 

2 Substantial company pension? Many private sector employers are shutting down the ‘defined benefit’ pensions our parents enjoyed – household names such as Amex, Pirelli, Costain and Barclays. Defined benefit pension schemes guaranteed a predictable income related to final salary and years of service. These companies are now shifting to less predictable ‘defined contribution’ schemes instead. With a defined contribution pension, your return depends on how well your pension fund was invested, with no guarantee of what you’ll get. In other words, the risk of the investment has been shifted from the company to the employee. 

3 Government support for pensions? The huge explosion in birth rates from 1945 into the 1960s (the ‘baby boom’) has now itself given birth to ‘the Pig in the Python’. This image, of a long python with a large bulge in the middle, depicts all the baby boomers coming along who will be arriving on the retirement scene over the next 20 or 30 years (also known as the ‘demographic timebomb’). Government will be under financial pressures that will make our current ‘financial crisis’ seem like a damp squib – who knows what the future holds for the state pension then. 

4 Size of retirement fund: pensions provision for current and future generations will have to be greater than it was for our parents, because we are living much longer. People are no longer looking ‘old’ at 60 – in fact, we are expected to live into our late 80s. This means we need much bigger pension pots to fund retirements of 20 years and more. 

5 Think of our home as part of our retirement planning: even if you are prepared to sell your cherished home and downscale, the belief in the solid value of property is a legacy of the 1980s boom, and no longer holds water. Average house values have tumbled to £158,000 from £200,000 in this decade alone, according to Halifax. 

6 The Government Personal Accounts Scheme (PAS) will provide: the soon-to-launch Personal Accounts Scheme will give workers a standard pension based on an employer contribution of 3% of gross salary, an employee contribution of 4%, plus 1% in tax relief from government. This is precious little, and for anyone over 40, will have precious little time to grow. To provide context, compare this to the enlightened Swedes, where the basic contributions for their personal accounts scheme start at 16%. 

The conclusion? Starting a personal pension, and saving hard to grow it, is no longer optional – it is essential!