Pension Wise: A Disaster Waiting to Happen?

The countdown to the new pension freedoms is on. From April of this year, over 55s will be able to access money from their DC pension pots, and pay far less tax. This revolutionary move was welcomed by many, with 1 in 8 people declaring their desire to withdraw their entire retirement fund in the spring.

However, many experts have criticised the move, emphasising the chaotic nature of the reforms. The major concern is that people will not seek proper financial advice before withdrawing large sums of money. This would leave them at risk of a severely diminished retirement fund, which might not support them through later life.

The government’s hurried answer to this giant question mark was to announce the arrival of Pension Wise, a guidance service to support people through the reforms. So that’s that done and dusted then?

But it isn’t, as critics have correctly pointed out.

Firstly, guidance is quite different to advice. The service will not, by law, be able to offer people financial advice. It will likely simply be in place to explain the reforms in more detail, and then direct people to a financial adviser if they are unsure about what to do. This won’t prevent people from withdrawing money without seeking the correct expertise. Do you know how expensive it will be to consult an IFA about these reforms? A lot of people will not be willing to pay, and will rely on their own knowledge, which might not be enough.

The second flaw is that the people providing the guidance will not have much more knowledge or expertise than those seeking it. These recruits will have a fairly limited training period and there is no recommendation that people who have worked in the financial sector or have knowledge of pensions should apply. In fact, one financial adviser with four decades’ of experience has publicly revealed that he was rejected without an interview.

This suggests what many were already expecting. This so-called service will likely consist of inexperienced people reading from a script, guiding people through decisions that could affect the rest of their lives.

The government needs to take more responsibility for these freedoms. Pension Wise is not the answer to all the problems. But that doesn’t seem to be concerning Osborne and company. Their extension of the pensioner bond scheme has further illustrated that all they care about is a healthy burst to the economy and winning over ‘the grey pound’ for electioneering purposes, not ensuring people have the means to live a comfortable life past the age of 65.

Please leave any comments or criticisms in the section below.

-Written by Claire Flynn

Auto-Enrolment: Where Are We Now?

2014 has seen auto-enrolment further established in the UK. This year it has spread from larger businesses to SMEs and smaller businesses. Several firms were even subjected to fines when they chose to ignore the policy, showing that The Pensions Regulator was not messing around.

Auto-enrolment has met its fair share of critics in 2014, not least the owners of small businesses, some of whom claim the expenses of auto-enrolment threaten their survival. It is possible this policy might harm business growth and entrepreneurship in the UK. Larger businesses, some of which were subjected to auto-enrolment from October 2012, will be able to dominate with less competition.

The other major criticism has come from finance and pensions experts, who claim the auto-enrolment policy is still not enough to prevent people entering retirement with unsuitable savings. If people rely on their automatic contributions they are quite likely to be disappointed with their final pension pot. Some have claimed we should take further inspiration from the Americans and ask employees to agree to further percentage increases.

There has also been a distinct lack of education about this new pension policy, particularly for our young workforce. People still don’t prioritise saving for retirement, and those that do may still not know about, or fully comprehend, auto-enrolment and the consequences of opting out.

So what lies ahead for auto-enrolment? 2015 will a see a further expansion as the policy begins to affect more small and micro businesses, much to the dismay of owners and entrepreneurs.

The issue with auto-enrolment still not being enough is going to have to be addressed at some point in the near future. The government need to consider further solutions to the pension problem – whether we further Americanise our system or opt for another fix.

Ultimately, what is needed is a more in-depth explanation of auto-enrolment and what employees are entitled to from their employer. An increased education may encourage people to consider saving from earlier on in their career and lift the pressure of an ever-looming British retirement crisis.

All that is really certain is that the auto-enrolment discussion is far from over.

Please post comments in the section below.

-Written by Claire Flynn

Will Christmas 2015 be Funded by Pensions?

It’s the day we’ve all been waiting for. Christmas is here. You can finally say goodbye to purchasing brightly coloured decorations to string up around the house, fighting your way through the shops to buy presents and bringing home kilos of food and drink for the family.

While it is a fun time of year, Christmas can be stressful, and very, very expensive. From the decorations to the presents to the food to the travel, the average British family spends around £445 on the festive day. And with a long wait until their next payday, many British citizens will struggle financially through January.

With the new freedoms beginning next year, it is highly likely, therefore, that next Christmas, citizens will dip into their DC pension pots in order to fund their December splurges and support them through the January deficit. Even those that are planning on saving their pension funds for retirement may become tempted by the prospect of some extra cash during the Christmas period.

Having the option of using pension funds for seasonal expenses might take the pressure of what can be a taxing time of year, but unless people plan on re-investing the money they withdraw, it leaves them at risk of a diminished retirement income. They might not be able to afford to maintain a reasonable lifestyle past the age of 65, let alone a lavish Christmas.

Please leave any comments or criticisms in the section below.

-Written by Claire Flynn

-Image courtesy of Amber Mac (https://www.flickr.com/photos/ambermac/)

Why Aren’t We Teaching Pensions in Schools?

Recent research has revealed what we all knew already: young people are the least likely to care or know about saving for their pensions. One survey found that pension scheme membership is lowest among 16 to 21-year-olds. Another poll found that young people are disengaged from pensions, preferring to save up money to buy a house.

It is understandable why the 20-year-olds in our society do not hold pensions as their highest priority – 45 years is a long time to start thinking ahead. However, in an age with an unstable state pension and an ageing population, it is more important than ever that people, including the younger demographic, start saving for their future as soon as possible.

In some ways, those at the start of their working life are actually in a better position to start putting money away for the future than older generations. They are less likely to have dependants (either children or elderly relatives) or to be paying off bank loans or mortgages.

There is one, seemingly obvious, solution to remedy this gap. Teach pensions in schools.

Teenagers are already taught about basic finance in high school, but it mostly focuses on not being taken advantage of by high interest loan companies. This is important information, particularly for those children going on to become continuously broke university students who can be easily duped, but why shouldn’t we extend their financial education? Mortgages, credit cards, bank loans and pensions will all affect high school students in later life so it makes sense to ensure they have a basic understanding of these issues from a young age.

From sixteen years of age, teenagers could be entering full-time employment. It is increasingly pressing that they understand how to save for retirement on entering their first job. Auto-enrolment might have arrived, but it is not solely enough to support someone in their retirement years, and young employees need to know that. They also need to know about the consequences of opting out, to have some knowledge of the numerous tools out there for saving money and to know that 45 years is not too long to start planning ahead.

Providing lessons on pensions in high school could build the knowledge and understanding needed in our young workforce to ensure they start saving early on, lessening the pressure on them, and the state, in later life. So why aren’t we teaching pensions in schools?

We encourage feedback so please post any comments or criticisms below.

-Written by Claire Flynn

-Image courtesy of Angel Plaza (flickr.com/photos/masterdinnova/)

Pension Reform – A Cynic’s View

The recent announcement of drastic pension reform, which will allow British citizens to access their full pension pot next year at much less cost, has thrown the financial world into a frenzy. With one in eight people declaring their plans to cash in the entirety of their pension funds next year, you have to ask, what is the future for the pensions market?

While increased freedoms may be seen as a welcome change by many experts, we are taking a slightly more cynical approach. The government’s decision to offer easier access to pension funds is undoubtedly with the intention that people will spend more, providing a healthy burst to the British economy. Whether they choose to spend it on cars, holidays or a new home won’t matter. What does matter is that people will be left without a sizeable retirement fund to supplement their non-working life, which, with an ever-ageing population and an unsustainable state pension, is going to mean a country-wide crisis as people aren’t able to take care of themselves past the age of 65.

You might argue that it allows people to re-invest their pension funds, allowing for them to receive a more substantial pay-out on retiring. The problem is many people planning to withdraw their money will likely not seek the correct financial expertise before doing so, leaving them at risk of a diminished pension pot and no way of supporting themselves through retirement.

The government might see granting freedoms as a way of improving the economy, while also making money from the tax charges, but it is merely a short-term solution. The long-term problems lies in the looming financial burden of an ageing population lacking the appropriate funds to lead a comfortable life post-retirement.

Do you agree? Post your thoughts on the changes to pensions in the comments section below.

Pension provision in an independent Scotland

One of the most significant challenges for any country is the funding of state pensions. In September the Scottish government published the latest in a series of papers addressing issues pertinent to the future of Scotland. The report, Pensions in an Independent Scotland, stated, as Deputy First Minister Nicola Sturgeon put it in the foreward, “independence offers a genuine opportunity to deliver an affordable, fair and efficient pensions system, one that rewards hardwork and incentivises saving, while also tackling pensioner poverty.

But how realistic is the assertion that the pension provision in an independent Scotland will be affordable and how will companies with employees in both an independent Scotland and in the rest of the UK be affected by any changes?

A challenge for Scotland is that, currently, it has an older population in comparison to the rest of the UK yet one of the pillars of the report is to reduce the retirement age. While in an independent Scotland the government accepts that the retirement age will increase to 66 in 2018, in line with UK pensions policy, and that an increase to 67 may be required at some stage, it would consider delaying the implementation of this increase beyond 2026, the date currently set by Westminster. It is estimated that a years delay would cost the Scottish government around £200million. However it is the reason given by the government for having an earlier retirement age in Scotland than in the rest of the UK that is most interesting.

Life expectancy is lower in Scotland than the rest of the UK meaning state pensions liabilities accruing to an independent Scottish Government would be less than the UK average. This would be a financial bonus for Scotland. In pension terms the value of a pension pot is about 18 years, therefore at a retirement age of 66 then only when a recipient reaches 85 does it become unaffordable. Far fewer people in the east end of Glasgow reach that age compared to pensioners living in the south of England, for example. As Nicola Sturgeon put it in justifying an earlier retirement age in Scotland, “why should people in Scotland who pay the same contributions get less out of it because of lower life expectancy in Scotland?”

Pensions expert Ann Flynn thinks that the report reveals a conflict between pensions and welfare policies. “The recent paper by the Scottish Government on a post independent Scotland is
bullish about pensions. It states that state pension may be paid earlier in and independent Scotland than the rest of UK as life expectancy in Scotland is shorter. Surely this is a clear contradiction of the social inclusion policies of the Scottish Government helping people to live longer.

And how would these differences affect organisations who have employees on both sides of the border?

According to Ann Flynn, “With respect to differences in retirement age, it is far from clear how companies will be able to manage a single pension scheme with two different retirement ages but there are even bigger concerns which would arise from independence. European directives mean that UK-wide pension schemes would be deemed “cross-border” and since all cross-border schemes need to be fully funded this will have significant cost implications for companies which currently operate non funded schemes. This is because schemes which operate in more than one country must fund their liabilities in full and, unlike a domestic scheme, any underfunding must be rectified immediately rather than tacking any underfunding through the use of a staged recovery plan.”

As for autoenrolment, would the Scottish Government continue with existing arrangements for auto-enrolment? It would appear that the Scottish Government is keen to develop its own master trust, an equivalent of NEST (National Employment Savings Trust). How would this newly created SEST (Scottish Employment Savings Trust) operate in association with NEST for cross-border schemes.

Ann Flynn has particular concerns in this area, “Auto enrolment in the workplace will happen in an independent Scotland but the current management and regulatory structures will be duplicated. How efficient this will be and how long it will take is far from clear. Complex organisational structures like NEST will be duplicated and it isn’t clear to me that the Scottish government have fully understood the concept of “national”. By that I mean, what arrangements will they put in place which will ensure that existing master trusts can operate across the border?”

“Further duplication will arise with regulatory bodies too. From April this year the FCA has taken over the FSA’s role in relation to work-based personal pensions and individual personal pensions in the UK however, under EU law, an independent Scotland would have to have its own financial services regulator.

While independence offers the people of Scotland full control over the type of pensions system that they would like to see, given the extent of the challenges and the importance of pension provision in an ageing population, it is important that the government commits time before September 2014 to address the many issues raised by the prospect of independence.

Will women be disadvantaged by auto-enrolment?

The working lives of women is often very different to that of men. For a start it is often the woman in a relationship who will take career breaks to bring up a family and, typically, women more than their male counterparts will work reduced hours to accommodate child care and other care duties. And women are far more likely than men to be in part-time employment. Of 7.72m part-time workers 5.9m are women. These factors all contribute to a lower earning potential throughout a woman’s working life.

Add to that the gender pay gap and the picture becomes even bleaker. The most recent bulletin from the Office for National Statistics states that the gender pay gap, based on median gross hourly earnings (excluding overtime) for all employees (full-time and part-time)is 19.7 per cent.

So a double-whammy then. Women are likely to have worked fewer hours in total during their working lives than men and the pay that they get, on average, will be 20% less than their male counterparts. So where does that leave single women and their retirement income?

State provision, with private schemes following suit, was based upon the assumption that a marriage was for life and that the husband’s pension would meet the needs of both man and wife in their retirement. Today more and more women are reaching retirement age single and, consequently, do not benefit from the husband’s contribution to a pension scheme, as was initially envisaged.

Auto-enrolment ought to be a positive step in improving saving behaviours for men and women alike. And since, when questioned, women are reported to be twice as likely as men to be concerned about their pension provision, auto-enrolment offers a real chance to take control of their own retirement income. But will auto-enrolment actually benefit women?

The current rules state that anyone with earnings above £5,564 will be eligible for assessment for auto-enrolment. At earnings of £9,440 employees must be enrolled in a scheme and employers must make a contribution. So under the current levels low paid workers lose out. According to the TUC, half a million low paid workers are losing out on employer contributions and, as we have seen, 80% of these low paid workers are women.

Ann Flynn, expert in the field of pensions and specifically auto-enrolment says, “since women are over represented amongst lower paid and part-time workers they should be the target group for auto-enrolment and earnings triggers mean women will be the biggest losers as they lose out on employer contributions too.”

Ann adds, “ Women take career breaks for many different reasons and these breaks in employment may see them come into and then fall out of the eligibility criteria for auto-enrolment. In assessing eligibility it would make sense to consider an annual snap-shot rather than track a moving target. Alternatively, there could be an earnings trigger that at least means employer’s contribute on behalf of low earners as the affordability issue is important.”

While lowering of the earnings trigger would benefit women, and indeed all lower paid workers, lowering the threshold would be very costly to the treasury. Since this is the case the threshold is likely to stay at £5,565 or higher so it is unlikely that auto-enrolment will benefit low earners.

As Ann Flynn suggests, “cash ISAs may remain as a better savings product for women but as pension advisers we still face a massive problem in finding ways to encourage those on low incomes, those who find it most difficult to put money away each month, the majority of whom are women, to save in order to make some provision for retirement.”

So while auto-enrolment is increasing the number of people saving into a pension, it is clear that not everyone is benefiting from the policy, and the biggest losers are likely to be women.