UK News

The reform that breaks the camel’s back?

Trade union leaders have been warning for some time now that it would be pensions reform — not pay freezes or job cuts — that could prove the trigger for widespread public sector strikes this year.

Now activists, eager to punish the Conservative-Liberal Democrat coalition government, have all the ammunition they need in the Hutton pension review.

Few can argue that pensions do not need to be reformed. People in Britain are living longer, making it more expensive for the government and taxpayer to fund pension payments.

And private sector workers have long grumbled that the public sector has it too good when it comes to retirement.

Hutton’s recommendation to remove the final salary scheme was expected and hardly surprising.

But its consequences could be huge.

If the government adopts the suggestions of this former Labour minister, do not expect the unions to take it lying down.

Raising the pension age

The Conservatives say they plan to raise the retirement age for men to 66 from 65 by 2016 if they win power, a measure that could raise 13 billion pounds to help plug the huge shortfall in the public finances.

They would also hold a review of the retirement age that could speed up further rises – potentially ushering in a state pension age for both men and women of 68 as early as 2020.

Bringing forward the increase in the retirement age will mean about 2.5 million people aged between 48 and 57 will have to work at least a year longer than they were expecting before they can get a state pension.

Do you think this is either fair or necessary? Should the money come from other cuts and savings?

Equitable Life: another nail in the coffin for retirement savings?

Nine years after the near collapse of Equitable Life, pensioners and savers are still unsure if they see any compensation despite the long-awaited report by the parliamentary ombudsman, described by commentators as a “damning indictment of UK financial regulation.”

The victims may still be in for a long wait to get their estimated 4 billion pounds in compensation. Prime Minister Gordon Brown earlier this week indicated that he would not allow billions to be paid out automatically and maintained that Equitable Life’s “culpability” in the case had been proved.

Paul Braithwaite, general secretary of the Equitable Members Action Group , declared the publication of the report was “a red letter day for policyholders”.

But will the government cough up? Four billion pounds is a lot of money, which the government may be reluctant to spend when the slowdown in the economy is likely to hit tax revenues.

Equitable chairman Vanni Treves said: “I do not believe any argument that the Government has not got the money to do it. It is the job of the Government to fund it and pay out speedily.” He compared the situation to the government’s response to the crisis at Northern Rock: “It found 20 billion pounds for Northern Rock I think it should find a much smaller sum to compensate for its failings here,” he told Radio 4.

There are precedents for compensation payouts – in 1980 and 1990s, for example, over the Barlow Clowes and Maxwell scandals. More recently, when the ombudsman found maladministration in the regulation of the occupational pensions market, the Government paid out, albeit reluctantly and only after having been taken to court.

The Government keeps telling us that we should save more for retirement. But trust in the system is low and survey after survey finds that people do not save enough for their retirement.

Think pensions to get one up on Chancellor

Tax: it’s all getting a bit of a drag. The number of people paying the highest level of income tax has almost doubled since Labour came to power, according to recent statistics.

“Fiscal drag” — a fancy name for failing to uprate tax thresholds and allowances in line with wage inflation — has meant that many hundreds of thousands of middle earners (such as higher-paid teachers, nurses, police officers and many civil servants) have been trapped into paying 40 pence to the Exchequer for every pound on some of their earnings.

Around 3.7 million people are estimated to pay higher-rate tax, up from just over two million in 1997.

That figure, estimates the Institute for Fiscal Studies, will rise to more than 4 million by the end of the current tax year, due to fiscal drag alone. Indeed, the individual taxpayer has borne the brunt of Labour’s tax policies, according to a report by accountancy firm BDO Stoy Hayward released to coincide with “tax freedom day” earlier this month.

Higher-rate tax now starts for many at 41,435 pounds (the personal allowance of 5,435 pounds plus the basic-rate tax band of 36,000 pounds). But with some careful planning those dragged into the higher-rate tax net could save some or all of the extra tax levied by paying money into a private pension — and pave the way for a rosier retirement.

You should always try to make a pension contribution which attracts higher rate tax relief. So, if you’re earning 50,000 pound per annum and make a contribution of no more than 8,565 pounds (50,000 pounds minus the starting point for higher-rate tax of 41,435 pounds), this will attract tax relief at 40 percent — boosting your pension contribution by 3,426 pounds that would otherwise have gone to the tax man.

There are other ways, too, to maximise the amount of pension contributions that receive 40 percent tax relief, says Malcolm Cuthbert, managing director of financial planning at independent financial services group Killik & Co: take into account other sources of earned pensionable income — such as bonuses, redundancy payments (if above the first 30,000 pounds, which is tax free), as well as holiday lets (although not rental income).

Why life doesn’t begin at 40…

Think you’ve got plenty of time to save for retirement, boost your bank balance or achieve the level of wealth you’ve always aspired to? Think again.

While it might be said that life begins at 40, this is far from the case on the financial front: wage growth stalls 30 years before the average retirement age, according to personal finance website Fool.co.uk.

A poll of 3,321 of its panel members found that average earnings accelerate in the 20s and 30s. A typical 16- to 20-year-old sees their wages increase from 15,000 pounds to 17,500 pounds by the time they reach their mid-20s, then to 25,000 pounds between the ages of 26 and 30. The rate of increase accelerates through the early 30s — to 35,000 pounds between the ages of 31 to 35.

But, average earnings then flatted out — and remain at 35,000 pounds until aged 55. If that doesn’t make painful enough reading, it gets worse: income typically falls to 25,000 pounds from the ages of 56 to 70, then drops to 20,000 for those aged 71-plus.

Women’s earnings reach their potential earlier, but with a whimper rather than a bang. Earnings plateau in the mid-30s, compared to the mid-40s for men, and never reach the peak of 45,000 pounds hit by their male counterparts.

This withering in wages coincides with a stage in life that is typically more dynamic — making income stagnation a double blow. It is around this stage that eight out of 10 people own their own homes, of which a third are family dwellings. Six out of 10 support dependents — including both parents and children.

What makes the findings even more worrying is that people in their 20s and 30s have racked up a sixth of Britain’s total consumer debt in recent times, according to Bank of England figures. It is this uncontrollable spending — and “can’t save, won’t save” mentality — and could spell serious trouble.

Level the playing field to bring back ‘girl power’

Whatever happened to “girl power”? The phrase became a cultural phenomenon after the formation of the Spice Girls pop band in 1994, and was adopted as the mantra for millions of girls, even making it into the Oxford English Dictionary.

But, it seems that many fans — now grown women — are relinquishing this ideology in favour of that portrayed in a later cult classic: Sex and the City. Today’s generation of single women are relying on finding their “Mr Big” to fund their future and are investing a significant amount of time, effort and money in pursuit of the Carrie dream, a survey shows.

Almost one million women have set their sights on a knight on a white horse, banking on finding a rich man to take care of them, according to the “fashionistas not cashonistas” report from Friends Provident. Just 23 percent of the single women it polled have a pension and 20 percent have life or health insurance, yet just over a quarter own more than 30 pairs of shoes. Many are investing in their appearance to help them net an eligible man, too, the survey of 1,458 women aged between 25 and 45 found: 36 percent spend more than 50 pounds per month on clothes and accessories and 24 percent spend more than 200 pounds per year on beauty treatments.

And, it seems that money — not love — is the motivating factor in many relationships. Almost a third of Britons state they are reliant on their partner or spouse for financial security — but not all these relationships are based on love, according to another recent survey. Over 955,000 Britons would leave their partner if financially independent, according to Kaupthing Edge, the online retail financial services arm of Iceland’s largest bank.

It might be a sad fact of life that many women — like their counterparts in years gone by — still marry for money. But, for those women trying to stand on their own two feet there are still huge inequalities, particularly when it comes to pensions.

Figures from HSBC show the picture of retirement savings among women has improved greatly: in 2005, when it started tracking consumer attitudes to pension planning, just over a third of women surveyed aged 18 to 60 were contributing to a pension. Three years on, over half of women questioned are now paying into a pension.

But there is still a serious issue that lies largely outside women’s control. They still have far more erratic working patterns than men, taking time out from employment to raise children, for example. That means that, currently, only 35 percent of women retire on the full basic state pension, according to the Department for Work and Pensions’ gender impact assessment of pension reform, published last December.

Long life? It could be seriously bad for your wealth

Long life: it might be seen as a blessing, but increasing longevity poses one of the biggest risks to our financial wellbeing.

A person aged 55 today has a one in two chance of living to 90 and a one in four chance of living to 95, according to acturial consultancy Watson Wyatt. By 2010 the number of pensioners will, for the first time, exceed the number of children in the population, according to the Office for National Statistics, and by 2031 there will be 40,000 people aged 100 or over, compared to just 300 in 1951.

This creates a huge issue for retirement savings: there is an estimated 57 billion pound savings gap in the UK and the government has repeatedly warned that people must increasingly shoulder the responsibility of providing for their own retirement.

“The fact is that the UK’s population is growing older by the day: we are all, on average, living longer — and this has alarming consequences for both society and the individual,” says Mike Lake, chief executive of Help the Aged. “More than ever we need to be aware of the implications of living a long life, and a vital part of this is for people to consider their longevity hand-in-hand with their future finances.”

It is exactly this that a new independent, not-for-profit organisation aims to address. The Life Trust Foundation has been formed to act as a central voice and point of education and research into the financial implications of long life. Chaired by Lord Hunt of Wirral, president of the Chartered Insurance Institute, the organisation also boasts Lake, Fay Goddard, deputy director-general of the Association of Independent Financial Advisers, Anna Bradley, chief executive of the National Consumer Council, and Laurence Heyworth, founder and non-executive director of Life Trust Holdings, on its board.

During its first year, the foundation will work with the Institute of Ageing at Oxford University to analyse a wealth of existing information on longevity; bring together people from the worlds of academia, business and charity to debate the issues; and set up a consumer panel of people aged 60 to 85 to help gain and develop insights into the behaviour and attitudes of those in or nearing retirement. It wants to “understand the delicate relationship between money, lifestyle, relationships, health and happiness”.

It is, certainly, a tricky relationship — and one that few are addressing head-on. A fear of finances is creating a “pensions paralysis” among Britain’s over-40s, according to research by Norwich Union. Over a third of those in their 40s admit they have no financial plan for their retirement, and of those who do, the same proportion (37 percent), say they have no idea what their final settlement will be. A lack of understanding and “complicated” products are the biggest barriers to pension planning, the research shows.

The pensions runaway train gathers speed

Few people are more on the pensions money than Scottish Life’s Steve Bee. And he has some strong views in his latest “BeeHive” post following publication of our exclusive story on the soaring costs of setting up “personal accounts” — the government’s brainchild aimed at solving a looming pensions crisis.

Reality seems to be kicking in early on in the dream, says Bee, who finds the whole thing “really depressing”. A chink of light amid the gloom came in this week’s Budget, he says: the extension of the ability of pension fund managers to allow trivial commutation of small pension pots should make things easier and cheaper for occupational pension schemes. But, sadly, such rights are not to be extended to personal pension schemes, a move that only serves to “drive a horse and coaches through the whole idea of our having one simple set of pension rules for all types of pension scheme”.

Others point to the failings of other Budget measures. The formation of a “Savings Gateway”, again aimed at low and moderate earners, might seem like a nice little give-away. It will attract government matching on money saved into the scheme. But, viewed alongside personal accounts, it prompts serious questions, says Tom McPhail, head of pensions research at Hargreaves Lansdown — another leading commentator on the world of pensions. “If the government’s going to match savings pound for pound and your money isn’t locked in until retirement, then surely people will choose that over signing up to personal accounts,” he says. “And the generic advice model proposed by Uncle Otto will simply not be sophisticated enough to cope with these kinds of choices. It strikes me that in themselves these are all good ideas. But throw them together and it’s like cats in a bag.”

Perhaps, then, the answer is something far more simple. Rather than spending billions of pounds on building an “untried and clumsy” pension scheme, wouldn’t we all be better off if those billions could be channelled into directly boosting people’s pension entitlement, asks Bee. This vast sum of money could instead provide a decent basic state pension entitlement for everyone, providing a solid bedrock for private pension saving.

He is not the only one of that mindset. As another leading light, who wished to remain nameless, said to me this week: “If you’re going to spend 2 billion pounds, why not just set up an account and put a lump sum in there for that part of the population (low to middle income earners) that they can’t touch until they’re 65, rather than have all these intermediaries all taking a cut, all making a profit?” Hear, hear.

Consumers go it alone as storm clouds gather

The dust has settled on Alistair Darling’s first Budget and consumers have been given little reason for celebration. The Chancellor, though announcing various measures designed to increase housing affordability, has done nothing to help the masses.

There were no moves to give a helping hand to hard-pressed householders, already struggling amid rocketing mortgage, food, fuel and tax costs, to ride out an impending recession. Darling did pledge to introduce a savings scheme targeted at low and moderate earners, often least able to save: the “saving gateway” will attract government matching for savings over the duration of people’s participation in the scheme. This has the potential to introduce up to eight million people into mainstream savings in the UK who otherwise might not make thrift a priority.

But the level of take-up of such a scheme, amid record personal debt levels and huge pressure on people’s purse-strings, is debatable. Other such government schemes to encourage the nation to save have hardly been a runaway success: think stakeholder pensions and child-trust funds (CTF). One fifth of parents currently let their CTF expire — the government can’t even give money away.

Individual savings accounts (ISAs), on the other hand, have flourished. They are one of the government’s true success stories. More than one in three adults hold an ISA and almost 215 billion pounds has been invested — making them far more popular than other savings initiatives.

Yet, the limits that savers can squirrel away into these tax-efficient vehicles have sorely failed to keep pace with inflation. The allowance will increase to 7,200 pounds from 7,000 pounds (3,600 pounds of which can be held in cash, up from 3,000 pounds) in the coming tax year — but that means the total threshold has risen by less than 3 percent since the accounts were introduced almost a decade ago. “Failing to increase ISA allowances further is a poke in the eye of savers who need encouragement to put away money,” says David Kuo, head of personal finance at Fool.co.uk.

Other changes to the ISA regime mean people will be able to switch cash holdings into stocks and shares — but the reverse will not be possible. And, once the switch has been made, there’s no turning back. The new rules raise the spectre of “another ghastly financial scandal”, according to Cliff Husband, research director at AWD Chase de Vere. “People could switch their ISA cash savings into investments unaware that they can’t switch back. This looks like another poorly delivered initiative from the government; it would be far fairer to all taxpayers if the switch between cash and investment within an ISA could be easily reversed.”

On pensions, too, there is little to encourage saving. While scrapping the 10 pence income tax rate and reducing the basic rate by 2 pence has done next to nothing to increase people’s take home pay, it has reduced the amount of tax relief they’ll get on their pension savings. The Chancellor has maintain higher level tax relief on gifts to charities, so why not for pensions?