Hi, I'm Ros Altmann. My blog covers finance, pension, economics, investment and retirement issues. I'm an independent expert, advising Government, pension providers and finance companies and also helping consumers. I'm the UK Government's Older Workers Champion.

FCA just doesn’t ‘get it’ – pension customers need immediate protection from mis-selling

11 December 2014

  • FCA still fails to ensure customers are properly protected despite finding frequent mis-selling
  • Regulator proposes more consultation and investigation instead of immediate action to protect customers
  • Annuities irreversible, people still effectively forced to buy, but the most vulnerable being let down
  • As annuities are insurance against running out of money if you live a very long time in retirement, those in poor health must be protected from wasting their pension funds

The FCA has just published findings and recommendations from its long-awaited study of the Retirement Income Market and Annuities.  The findings confirm that customers are still too often being short-changed, yet the recommendations fail to ensure proper protection is put in place straight away.

Having found, in February 2014, that 60% of annuity customers were just buying the product offered by their existing pension company even though 80% of them could get a better rate by switching to another provider, the FCA launched a full-scale study into how retirement income products are sold.  We have waited months for its findings, but the reports out today are deeply disappointing.

Evidence of mis-selling is uncovered but action is not stopping it happening: It is truly shocking that the FCA’s review uncovers what seems clear evidence of frequent mis-selling, yet is not proposing immediate action to stop it happening any more.  For example, even if people were being sent information that disclosed to them that they could shop around for better rates, or explained how annuities worked (and not all of the companies were even clearly doing this) the customers were not being told this information over the phone.  In some cases, call centres were being incentivised to sell their internal annuities with staff earnings linked to the number of annuity customers who did not move away, even though they could be the wrong products at poor rates.  Call centres were not explaining properly about how to benefit from better rates if you had health issues or how much annuity rates can vary if you shop around.  This is surely mis-selling, yet there seem to be no proposals for compensation.

Those in poorest health losing out most and still won’t be properly protected:  The FCA highlights once again, that those with health issues are most at risk of losing out from poor annuity sales practices.  This is a finding it reported back in 2008 ( when it said that pension firms were not telling customers about the advantages of ‘exercising the Open Market Option and in particular not telling people about shopping around if they had health problems’ when they could achieve much higher income from an impaired life or enhanced rate annuity.  Here we are, more than six years later, and similar failings have been uncovered yet again.  But still the FCA is not ensuring that customers in poor health will be properly protected from now on.  Despite the fact that the FCA believes more than half of customers could qualify for better annuity rates as a result of their health (and advisers report that around 60% of their customers are eligible for enhanced rates), the rules regarding selling standard annuities are not being immediately changed.

What has it decided to do now?  Instead of forcing firms to change their sales processes immediately, it has asked them to look back at a sample of their sales since 2008 to check if people with health issues might have been sold the wrong type of annuity.  The FCA says it ‘will be asking some firms to do further work to determine if the findings of this thematic review in relation to the sale of enhanced annuities are indicative of a more widespread problem.’  Based on the figures of low shopping around and low proportion of enhanced annuity purchases, it is blindingly obvious that there is a widespread problem.  Action is required immediately to stop these inappropriate sales happening in future, not just looking at the past.  Indeed, we do not know how long this inquiry by insurers will take, nor how the firms will assess their customers’ health.

Widows still at risk of being left penniless:  Another particular problem that leaves pensioners vulnerable to unsuitable annuity purchases revolve around those who have a partner and those with smallest funds.  Annuity companies are not clearly telling people about the risks of buying a single life annuity.  This means many widows are left penniless when their husband passes away.  The company will send information about ‘joint life’ and ‘single life’ annuities but most people do not understand what these terms mean.  However, the FCA is relying on ‘disclosure’ and paperwork to inform people rather than directly explaining in clear English what the implications of single life annuities are.

What should be done? – Stop this happening to anyone else straight away, second line of defence:   The FCA should impose a duty of care on all companies selling annuities to ensure that customers have a fair chance of doing what is right for their own circumstances.  That means proper risk warnings about the products they may buy and asking basic questions that would reduce the risk of those with shortened life expectancy buying an annuity that assumes they are in excellent health.  For example, before selling an annuity that assumes someone is in excellent health, they should be told this and also asked whether their health is actually good.  For example, the company should explicitly state ‘ this annuity assumes you are in excellent health’.  If you have had any particular health problems it may not be suitable for you.’  The firm should then also ask ‘are you in good health, or have you had cancer, heart problems, high blood pressure, diabetes, been a heavy smoker or had other serious health issues that might impact you in future?’  To protect partners, firms should be forced to say to someone buying a single life product, for example, ‘this annuity assumes you do not want to ensure your partner will carry on receiving income from your pension fund if you die before they do’ and ask the customer to confirm ‘I confirm that I do not want my pension fund to keep on paying a pension to my partner if I die first’.  This would be a proper protection measure.  Why is the FCA being so slow in ensuring proper protection and a second line of defence to protect customers?

Why is it so vital that annuity sales processes are changed immediately?  Annuities are a unique financial product, because once bought they can never be changed.  A standard annuity is for life, if you buy the wrong type of annuity at a poor rate you can’t do anything about it unless you can prove it was mis-sold.  Therefore, it is absolutely crucial that people are protected against unsuitable purchases.  Annuities are also complex – there are many different types and if someone buys the wrong kind, they usually cannot change it.

Didn’t the Budget pension changes mean that people no longer have to buy annuities?:  In theory, yes, the new pension freedoms mean people don’t have to buy an annuity any more, but in practice the pension companies are not allowing their customers to use the new freedoms.  In the past, anyone wanting to take money from their pension fund had to ‘secure an income’ which meant buying an annuity or income drawdown product with the rest of their fund within six months.  Those rules have been relaxed, so people will no longer have to do this, but pension firms have refused to embrace the new freedoms.  Therefore, most people reaching pension age are still being forced to buy an annuity or income drawdown product if they want to take any money out of their fund.  Thus, ensuring annuity sales work properly for customers remains imperative, but the FCA is not showing the required sense of urgency.  It is deeply disappointing that customers can still be left to their own devices, in a market where their pension company effectively forces them to buy a product that may be unsuitable for them and which most people do not understand.

Just ensuring ‘disclosure’ of ‘information’ is not enough to protect customers who don’t understand annuities:  The FCA is still relying on the insurance or pension companies to ‘clearly inform’ their customers about retirement, about their options for taking income from their fund and about getting quotes from other providers.  This does not work.  What is ‘clear information’ to a pension provider or a regulator is simply not understood by most customers who have never heard of annuities and never had to buy one before and may only ever have one chance to buy.  The FCA’s conclusion that it is really important consumers are ‘given sufficient information with which to make an informed decision’ is simply not enough to protect customers.  The terms and jargon used in annuities are baffling to most normal people.  The Regulator and the industry understand these terms, but customers usually don’t.  Therefore, just leaving it to firms to ‘inform’ customers and ‘disclose’ relevant information is not sufficient – a second line of defence is required.

Annuities are an insurance not an investment:  Annuities are basically an insurance product that protects you against running out of money if you live a very long time in retirement.  They are not an investment product.  With interest rates at such low levels, they are much poorer value than ever before and if you are not going to live a very long time, then buying this insurance may not be the best way to spend your pension fund.  In addition, standard annuities offer no inflation protection and, unless you buy the right type of annuity, they will not provide a pension for your partner if you die before they do.  It does not seem as if the FCA has really recognised the urgent need to stop the failings of annuity sales.  Just suggesting that annuities may be ‘good value’ relative to income drawdown ignores the impact of low interest rates, inflation and unsuitable product sales to give a false sense of reassurance to customers who may end up poorly served by a market that has failed its customers for far too long.

December 11, 2014   2 Comments

A day at the JobCentre – what I learned about over-50s employment

Out of work over-50s suffer from poor tech skills, loss of confidence and ageism

Some JobCentres offer specific over50s training for IT, CVs and interviews

Volunteering is a great way into work – half of over-50s volunteers find employment

Having spent a day at the Streatham JobCentre, I thought you might be interested in some of my observations.

What’s it like?:  The Streatham JobCentre is managed by a passionate woman called Denise who is clearly on top of her staff and encourages them to do their best for those who come through the JobCentre doors.  There is plenty going on.  Apart from the Advisers for JobSeekers Allowance (JSA) and Employment Support Allowance (ESA – which used to be called Incapacity Benefit) there are computers available for applicants to use, training sessions (some specifically for over-50s) and different seminars on various floors.  I was told that over 90% of JSA claimants find work within 12 months, but older applicants are less likely to find work than the young.

Current situation:  The local economy has been picking up in recent months, with far more jobs available.  Initiatives to encourage more work experience and apprenticeships for the young have had a real impact, but those who have been unemployed for longest are in the older age categories.  Some applicants have problems of drug and alcohol addiction (in fact the JobCentre staff had to help out someone who was drunk when I was there) as well as homelessness.  Specific staff are dedicated to dealing with these issues which are so challenging when seeking employment.

Training provided by JobCentres:  The JobCentre runs a range of different training courses and I sat in on one for the over-50s.  Not all JobCentres have prioritised older jobseekers in this way, as they have discretion on how they spend their budgets.  Older people tend to have specific needs, including requiring help with CV writing, interview techniques and new skills relevant to a modern workplace, including competency based application assessments or psychometric testing which older people are not familiar with.  The course I attended offered practical tips to a group of 12 older jobseekers on how to network, how to build a personal ‘brand’, how to think about persuading an employer they will fit into the workforce, as well as being given a ‘skills healthcheck’ form, to help identify the particular skills they are good at.

Particular problems for over-50s:  I was told that the biggest barriers for older workers are lack of up-to-date skills, lack of confidence and the ageist attitudes of employers who automatically assume older jobseekers will be less valuable to them than younger applicants.  Improving technology and social media skills of over-50s is vital as so much recruitment is on-line.  Many of those I met explained how being turned down for countless jobs leads to a loss of confidence, then to depression, which further reduces employment chances and they end up on ESA.

Promoting over-50s’ skills:  All the advisers and training staff that I met commented on specific attributes they believe over 50s bring to an employer.  These include loyalty, life experience, reliability, patience, organisational skills, time management and the ability to engage well with other people, including customers or even mentoring younger staff.  It is important to change the way employers think about over 50s, appreciating that experience DOES matter.

Volunteering can be a good way into work – 50% of volunteers find a job:

Encouraging older jobseekers to take up volunteering has achieved good results.  I met a firm which places volunteers locally, in roles including working in hospitals, food preparation or teaching.  There are websites such as ‘Do It’ – or Community Service Volunteers, who run a specific programme for over 50s volunteers or for volunteers with professional skills at .  Volunteers are effectively benefitting from work experience and can get references that ultimately lead to paid work.  In fact, I was told that half of the unemployed who do volunteer work end up with a job, therefore a greater emphasis on encouraging volunteering could be beneficial.

New Enterprise Allowance:  Many over-50s would like to work for themselves, especially if they find themselves discriminated against in the application process.  The Government’s new Enterprise Allowance scheme, offering loans to set up a new enterprise, has the potential to help many over-50s find their own niche.  Self-employment can suit older people well, allowing them to combine caring with working from home or at flexible hours perhaps.

Tailored help for over 50s:  Over 50s may need special help to adapt to the modern working world.  They may feel they don’t ‘belong’, or have outdated skills and need to learn new techniques.  There is a skill gap in jobsearch for older applicants, who need to learn about online applications, social media, electronic CVs and even Video CVs.  Further funding for training over-50s would be helpful.

Could Government subsidies for taking on younger workers be extended to older apprentices?:  Employers taking on younger workers aged 16-24 are paid £2275 if the young person stays employed with them for over 6 months.  There are no such subsidies for older workers, which means employers are biased against taking on the over 50s.  Having had tremendous success in reducing youth unemployment, I hope we may see subsidised training, work placements or apprenticeships to help reduce long-term unemployment and re-skill older workers.  From an employer perspective, training or recruiting an older person can improve their workforce stability, since older people are much less likely to move jobs than the young.

Zero hours contracts can be a barrier to employment:  Many of the job vacancies that exist are in the care or hospitality industries, but they are often zero hours contracts.  I think there needs to be careful consideration of the appropriateness of using zero hours contracts, especially in an industry like carework, in which staff continuity and reliability are so important.  With an aging population, it is inevitable that demand for care services will rise sharply in coming years and I think the industry needs to evaluate its approach to staff reward and retention.

Conclusion:  Streatham JobCentre is making progress in specifically helping older jobseekers, but the particular initiatives they have introduced need to be rolled out more broadly across the country. Volunteering can also help increase employment prospects.  If we are to tackle the issue of recruiting older workers, more interventions will be required to ensure the barriers they face – lack of skills, loss of confidence and ageist attitudes, are overcome.

Case study – Martin:

I met Martin who left his previous job 6 years ago to train as an electrician.  He did three years’ training, but then found he could not be a self-employed electrician without further qualifications, costing about £1000.  He did not have the money for this and was very distressed to realise he could not do the job he wanted.  He explained how he then decided he just wanted to work, and did not mind what work he did.  He sent his CV to 20-30 employers a day for over 6 months and found no work.  He tried Universal JobMatch but his CV did not pass the computer process-driven assessments used by many firms nowadays.  CVs need to be tailored to keywords that computers search for to select candidates for interview.  Eventually, he was offered a job as a careworker but that offer was withdrawn because the company could not contact his references in time – his previous firm may have changed hands or the person who knew him had moved on.

It was heart-rending to hear him describe how he would look out of the window each morning and see people going to work and felt inadequate. He said ‘when you’re not working it takes away from your humanity’.  He ended up on ESA with depression but has now recovered and just found work.  He was really excited to be starting a job at last.  I suggested to the JSA advisers that when someone first signs on after redundancy that they should be asked if they can provide references immediately which can be placed on their file, so that they are readily accessible if an employer needs references quickly.


Case study – Kafa:

Kafa lost her husband a few years ago and had been looking after her 17 year old daughter, but now wanted to find work.  She was on JSA for a time but couldn’t find any work, then her Work Adviser suggested self-employment.  She received a £2500 loan and help with a business plan from the New Enterprise Allowance, bought some stock and set up a business selling hair pieces and jewellery at markets.  She is really happy to be working and proudly showed me some of the items she sells.

December 7, 2014   Leave a comment

My comments on the Autumn statement

3 December 2014

So what has happened in the Autumn statement?


  • No change to pensions tax relief but extra tax breaks for joint life annuities
  • Levelling the playing field between annuities and drawdown inherited benefits
  • New tax breaks for ISAs – will be inherited tax free between spouses
  • Tax breaks for carers and careworkers
  • Bigger rise in Pension Credit
  • More generous means-testing calculation for pensioners with pension funds
  • Promise of a pilot back-to-work scheme for older people on benefits
  • Stamp Duty reform to help 98% of housebuyers

What’s missing

  • Measures to incentivise training and employment of older jobseekers
  • Incentives to save for care
  • Incentives for pension funds to invest in infrastructure
  • The name for the Guidance Guarantee service
  • Protection for annuity and pension customers
  • The interest rates that will be paid on pensioner bonds

After the Chancellor’s Budget last March, which was such fantastic news for pensions and ISAs, but a painful shock for many insurers, I assume most of the financial services industry listened anxiously to the Autumn Statement.  They needn’t have worried.

It was, of course, impossible to upstage the Budget’s impact on pensions and the over 50s, but there were some announcements worthy of note.

Pensions tax relief – no change

The Chancellor has decided not to make any changes to pensions tax relief, despite some speculation that this was on the cards.  The pensions tax relief limits remain unchanged and people will still be able to contribute to pensions up to age 75.  After so much upheaval, it is important to allow the system to settle down so that individuals can make serious long-term financial plans in the knowledge that the goalposts won’t be moved.

The new pensions landscape will require significant changes in products and processes and If the government wants the industry to reform, we need a period of stability to allow this to happen.  We need to see interesting innovations from financial services firms, but it does mean that the industry needs time to change technologies and products properly and provide better outcomes for consumers, without fearing further radical overhauls.

Widows and widowers can inherit joint life annuity income tax free and any nominated beneficiary will be allowed to inherit an annuity in future products

New rules about inheriting pensions have been announced – although they were widely leaked before the Chancellor’s Statement.  Under previous rules, those who inherited pensions would pay 55% tax on remaining pension assets in drawdown funds, but that penal tax has now been abolished.  In order to level the playing field between drawdown and annuities somewhat, the Chancellor has announced that the income inherited by widows or widowers from their partner’s ‘joint life’ annuity, as well as beneficiaries of guaranteed term annuities, will also receive the money tax-free if the person passed away before age 75.  Having scrapped the 55% tax on inherited pension drawdown funds and allowing remaining pension assets at death to be passed on as a pension, tax free, it seems right that inherited annuity income should enjoy the same privilege.  Anyone who has already bought joint-life annuity (which is a minority of people, but nevertheless significant) could be better off as a result of this change.  The majority of past annuity purchases, however, were single life products which will not benefit.

Most importantly though, these new rules, coupled with the new Pension Guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.  The annuity tax rules are also being amended so that joint-life annuities in future can cover any nominated beneficiary, not just a spouse or civil partner.

New tax breaks for ISAs

The new ISA limit for next year will rise in line with cpi to £15,240 from current level of £15,000 (and Junior ISAs to £4,080).  There are also new tax breaks for the 150,000 married ISA savers who die each year.  Currently, when they die, their ISA just goes into their estate and the ISA tax advantages are lost.  However, the Chancellor is proposing that those who die can pass on their ISA accounts to their spouse or civil partner free of tax.  So ISAs will pass on as ISAs, to increase savings income for widows or widowers.  The Treasury is also considering allowing ISAs to invest in crowdfunding debt.

Help for Carers

One of the biggest problems facing families in future is likely to be the cost (both in time and money) of caring for older loved ones.  As the population ages and life expectancy rises, the numbers needing care will rise sharply in future years.  The Chancellor has announced a little extra help for people who are caring for loved ones.  The Carer’s Allowance earnings limit will increase to £110a week next April (it is currently £102pw), which could help more people work part-time without losing Carer’s Allowance.

In addition, the Chancellor is going to extend the £2000 rebate on National Insurance Contributions to cover careworkers.  The Employment Allowance will mean a family who directly employ a careworker earning up to £22,500 a year will not pay any National Insurance.  In addition, careworkers will not be affected by removing the £8,5000 threshold applying to tax on benefits in kind.  The care industry desperately needs more workers and any relief on tax or NI can help the affordability of care for families and improve the poor pay of care staff.

Notional income calculation for means-tested benefits – assume annuity income is received even if not annuitized, so poorest will not lose out by not buying annuities

There has been significant concern that the changes to pension rules could unfairly hit those on lowest incomes, but the Chancellor has addressed this.  There were fears that those on means-tested benefits who did not buy an annuity would be penalised.  Under the previous system, if you had bought an annuity, only the annuity income itself would be included in your income.  However, for those who had a pension fund which was in drawdown, the means-testing benefit calculation would use an estimate of the income you could have received and that ‘notional income’ would be included in your income assessment.  If there had been no change, this would have assumed that the income you received from your pension fund was actually 150% of the amount you could have received from an annuity (rather than just 100% of the annuity which is what you would have had if you’d actually bought one).  This would have meant lower income households were penalised for choosing not to annuitise, which is not the Chancellor’s intention.  So, in order to create a level playing field between annuities and leaving the money invested in your pension fund instead, the notional income calculation for means-testing is being changed from next April.  (The 150% of the equivalent annuity rate was assumed under the old rules because this was the upper limit for capped drawdown and was based on the Government Actuary’s Department estimate of market annuity rates, known as the GAD rate).  It is good news that the lowest income pension savers will not find themselves significantly worse off if they want to keep their money invested in their pension fund.  It will be important for the Guidance to help them realise that they need to keep the money inside their pension fund in order to benefit from these rules.  If they move it to another type of savings account, they lose tax benefits and may find their income is assumed to be higher.  Of course, they could also just spend the money or use it to repay debt, rather than buying an annuity which could also help their long-term financial future.

It is interesting to note that, in fact, the means testing calculation for social care, which was announced in October, had already adopted this new approach, but this does not seem to have been picked up.  The Autumn Statement is another opportunity to highlight this change that will help the poorest older people.  There is no change to the tariff income assumed from savings other than pensions.

Pension Credit uprating

The DWP has decided it will uprate the Pension Credit level in line with the rise in the Basic State Pension, even though this is above inflation.  The Basic State Pension is set to increase by 2.5% next April, a rise of £2.85 to £115.95 a week (from the current level of £113.10).  Pension credit, however, was only due to rise in line with inflation which was 1.2% (and the additional parts of the state pension such as State Second Pension S2P will rise by 1.2%).  However, in order to retain the differential between Basic State Pension and Pension Credit, the Pension Credit Guarantee Credit will increase by the same cash amount as the Basic State Pension i.e. to £151.20 a week for a single pensioner (from £148.35 a week at the moment).  This is slightly more than it otherwise would have increased (about £1-78 a week extra) and will be of help to the poorest pensioners. This move also has implications for the level of the new State Pension that will be introduced from April 2016, since the new single tier state pension will be set to exceed the level of Pension Credit Guarantee Credit, so by increasing this, the new State Pension will also be able to start at a higher level.  It will thus have to be more than £151.20 a week – it will be at least £151.25 at the full rate from April 2016. ,

Part of the extra cost of uprating the Pension Credit Guarantee level will be recouped from pensioners with savings, as the Savings Credit threshold will be increased by 5.1%, so the poorest pensioners who have some savings will lose out on some extra income.  Savings credit gives extra money to people who have saved, but you only receive this credit if your income is above the Savings Credit threshold of £120.35 a week for a single person).  The Savings Credit threshold will be increased by 5.1%, so more people will fall below the new threshold and lose out on savings credit income.  For every £1 by which your income exceeds the threshold, the Government pays you 60p, but this is one of the most complex calculations and most people simply do not understand it.  The maximum savings credit anyone can get is £16-80 a week and many of those entitled never actually claim because it is so complicated.  Nevertheless, some people will lose out when the Savings Credit is increased.

Stamp Duty reform

This is great news for most housebuyers.  98% of home buyers will pay lower stamp duty as a result of the reforms that have been announced.  Many older people have houses larger than they really need, but the costs of moving have put them off downsizing.  The reform of stamp duty should help free up more movement in the housing market.  There also needs to be a construction programme to build homes that older people might want to aspire to downsize to, which will further help them move on to more suitable housing.

Stamp duty has long been a most unfair tax. This ‘slab’ tax creates distortions around the threshold levels and reform has been long overdue – under the current system imposes, tax is paid on the whole property value, not just the marginal extra slice as with income tax at the rates shown in the table below. As an example of the unfairness, if you buy a home worth just under £250,000 you pay 1% tax, or £2,500.  But if you buy a home for £251,000, then you pay 3% which is £7,530.  This creates significant distortions around the tax rate thresholds which interfere with a free market.

Current Stamp Duty Tax Rates

Up to £125000 no stamp duty

to 250,000                   1%

to £500,000                 3%

to £1m                         4%

to £2m                         5%

>£2m                           7%

Scotland has already decided to change its own stamp duty rules from next April.  The Scottish Parliament wants the most expensive homes to bear a higher burden of the tax, and now the Chancellor is following Scotland’s lead.  Scotland’s measures have zero stamp duty on the first £135,000, then 2% duty on the extra up to £250,000, 10% on the amount between £250,000 up to £1m and 12% on the balance over £1m.  The Treasury has used different rates and thresholds, but the same principle as Scotland, so the new system will have the following rates.

New Stamp Duty system

Up to £125000                       0

£125,001 – 250,001                 2%

£250,001 – £925,000               5%

£925,001- £1.5m                     10%

>£1.5m                                    12%

Under the new rules, someone buying a house worth £251,000 will pay £2520 in stamp duty (rather than the £7530 under the old system.).  Those who have already exchanged contracts but not completed will be able to choose whether to use the old or new tax systems.

What’s still missing?

Measures to incentivise employers to train and employ older people

The Chancellor has, quite understandably, focussed on getting young people into work and subsidised apprenticeships.  Paying employers to take on young people is obviously beneficial, but has had the knock on effect of stopping employers from taking on older people as apprentices.  The over 50s are the group most likely to be long-term unemployed and need urgent help to get back into work.  The two biggest problems they face are ageism at work and lack of skills – these two factors combine to product a loss of confidence.  The Chancellor has promised (see page 89 of the Green Book) that from April 2015 there will be some back to work support for older people, with the Government piloting career change work experience and training schemes for older benefit claimants who are out of work.  This could help them achieve the training and experience they need to re-skill and move back into work.  I would like to see the Government go much further than this and fund proper over 50s training schemes.  It is so important to help the unemployed over50s find work.  We have had tremendous success in reducing unemployment for younger people, which has rightly been a significant policy focus, however there are serious problems for older people who face age discrimination in the labour market.

By ensuring more older people find work, the long-term growth of the economy will be boosted.  In our aging population, with so many more over 50s in coming years, failing to ensure as many as possible can find work is a recipe for economic decline and a real waste of talent.  I am so pleased that the Government has understood the need to intervene to help overcome the problems faced by older jobseekers.  Having met a number of out-of-work older people recently, I hear time and again that they feel they are not taken seriously when looking for work.  They lack up to date skills and experience, but having a chance of training and work experience gives them the opportunity to show what they can do.  Rather than being written off as ‘too old’ or ‘past it’, these new initiatives can help restore their confidence and self-esteem by moving back into work.

We need to do more to ensure older people’s skills are kept up to date, they have the chance to change careers if necessary, they can combine work with caring responsibilities and return to work after caring if they wish to.  Flexible working and even apprenticeships, returnships or mentoring are all important to help the employment prospects for over 50s.  Just one year delay in average retirement age can add 1% to economic growth and will increase lifetime incomes and national spending.

Specific incentives to save for social care

The Chancellor has not yet announced specific new incentives to help people save for later life care.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care.  The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary.  A specific tax break for care savings would help focus people’s attention on this vital issue.

Pensioner Bonds – what interest rate? We will know on 12 December

The Government says it will announce the interest rates for the new Pensioner bonds on 12 December 2014.  It has promised two different fixed rate market leading interest rate bonds to be available to people over age 65 from January 2015.  The original announcement was for each person to be able to buy up to £10,000 of a 2 year and a 5 year bond with interest rates of 2.8% or 4% respectively – let’s hope those plans haven’t changed.

Incentives for pension funds to invest in infrastructure

I am hoping that, sooner or later, the Government will wake up to the power of pension funds to invest in productive projects that can both help the economy and improve scheme funding. Infrastructure is an ideal asset to add to pension portfolios, as they offer the benefit of diversification which can reduce risk and potential inflation linked long term income streams.  If the Government were to underpin such investments, perhaps investments it would otherwise undertake itself by borrowing in the gilt market, then it could avoid worsening the deficit by only having to pay if the pension fund did not make sufficient returns to exceed gilt yields.  By offering at least gilt yields as a contingent payment in the event that a new infrastructure project did not deliver better returns in, say, 5 or 10 years’ time, the Chancellor could save the initial outlay and may never have to fund the project, but the economy would benefit from job creation in the meantime.  And if the project did succeed, the improved infrastructure would provide additional economic benefits and the funding of UK pensions would improve.  Offering meaningful incentives to UK pension funds to encourage them to use their assets to take construction risk on infrastructure projects, organised by trusted third parties, could boost the UK economy but the Pensions Infrastructure Project that was set up does not have such incentives in place.  That has failed to attract sufficient funding and has focussed on investing in existing projects or infrastructure secondary market debt, which does not have the same economic benefits or potential rewards as new projects.  Obviously these investments do carry greater risk, which is why a Government underpin that promises at least gilt yield returns if projects do not perform well enough could attract more money.  That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.

Guaranteed Guidance for pension savers– what will the brand name be?

We need to know what the name of the guidance will be.  It is supposed to help individuals with their pension decisions and guide them to the information they need to assess what they should do.  The government must now urgently start to promote this service, to build up a strong brand recognition.  The more people who take up the guidance, the more likely they are to understand the important issues they need to consider when reaching their scheme pension age.  It will be very important to explain that this is not ‘advice’ and those giving the information are ‘Guides’ not ‘Advisers’.  If people want individual, tailored expert help to know what is the best decision for their own circumstances, and someone to take responsibility for it, they need to pay for independent financial advice.

Force pension companies to treat annuity customers fairly – reform sales process

It is disappointing that we did not see any new measures to reform the annuity market.  There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers.  Reforms are urgently required to revamp the way annuities are sold, including the following measures:

  • Introduce standard forms written in plain English, to explain annuity products
  • Providers must ask basic questions to establish suitability before selling an annuity.  For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
  • Providers must explain the risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
  • The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.

December 3, 2014   1 Comment

Mis-sold annuities over past 10 years could amount to £8.5bn

1 December 2014

A leading newspaper asked me last week to calculate some estimates of the possible or potential losses suffered by pensioners over the past 10 years as a result of buying unsuitable annuity products.  They wanted an estimate of a potential base for mis-selling claims, following revelations that Aviva has already compensated some customers who were found to have been sold inappropriate annuities.

Over the years, customers reaching their scheme pension age have received an annuity offer with a communication from their pension company, or been sent to a tied annuity company which offered them this product.  The annuity quote provided was for the standard ‘single life, level annuity’.

The calculation is obviously a rough estimate, since we do not know exactly how many people have bought unsuitable annuities over the past 10 years.  I have tried to make assumptions about the numbers of annuities purchased, size of the fund, how many were unwell and how many would have a partner that could have benefited.  Inevitably, this is a rough approximation but it gives a starting point to assess the possible scale of losses and consumer detriment.

I assume the average number of people buying annuities in the past 10 years is 300,000 a year, so this means 3 million people.  All of these people might have been at risk of buying potentially unsuitable annuities, but I have then made assumptions about people receiving advice (which means they are likely to have had the right annuity), people who were healthy, people who had no partner and so on.


Summary of findings:

Potential loss to those who bought standard annuity but could have had enhanced rate    £5.4bn

Potential loss to those who bought single life but would have needed joint life                     £2.65bn

Potential loss to those who could have trivially commuted                                                          £0.45bn

TOTAL POSSIBLE LOSS/COMPENSATION                                                                     £8.5bn



Assume 300,000 annuities sold on average each year = 3million people bought single life, level annuity in the past 10 years

Assume 60% of these sales were non-advised and did not have guaranteed annuity rates = 1.8million.  These customers are more likely to have bought an unsuitable product.  Those customers who had advice or guaranteed rates are likely to have less case for compensation.  So I have assumed that 1.8million of the 3million people are at risk of having bought (or been sold) the wrong annuity.

We now need to look at the basis on which an unsuitable sale may have been made and compensation that might be claimed:

1. IMPAIRED LIFE:  Assume 60% of these 1.8million people would have some kind of impaired life = 1.08m who should have had enhanced rate

This is easiest to estimate:  If we assume an average uplift of 20% on their annuity rate and a standard £25,000 average pension fund, the value of their detriment would be 20% of £25,000 = £5,000 each on average

For 1.08m people that amounts to about £5.4billion (1.08m x £5000 = £5.4bn)

2. SINGLE LIFE/JOINT LIFE:  Assume three quarters are married or have a partner = 1.35million of the 1.8 million people

If we assume two thirds of these people have a partner who would have liked a pension to keep on paying if their husband died sooner, this means 900,000 people may have bought the wrong product – should have bought a joint-life annuity, not single life.

We then have to assume how many of these people will die before their partner and, as most purchasers are men, this is likely to be a relatively high proportion – let’s say two thirds.  That is 600,000 widows/widowers who will not get a pension from their partner who passes away before they do.

If we assume that these widows/widowers on average live 5 years longer than their partners, they are losing out on 5 years of income.

If we assume that they could have had an average income of an extra £900 a year for those 5 years, that means 600,000 widows or widowers lost out on £540m a year, which is £2.7billion over 5 years.  So the ‘mis-selling’ of single life rather than joint life annuities may have resulted in a loss of £2.7billion in pensioner income over the last ten years.

(PLEASE NOTE: To do this properly one would need to estimate the extra income that the household originally received from a single life annuity, but this is more difficult since some of those affected may have had or been entitled to enhanced rates, so the mis-selling could apply on that basis too.  I have therefore assumed the relative positives and negatives from this source cancel out).

3. TRIVIAL COMMUTATION: Assume 5% could have trivially commuted = 90,000 out of the 1.8million

If we assume 5% of those who bought an annuity could have taken the cash instead, then that means 90,000 people may have been able to trivially commute and bought an annuity unnecessarily.

If we assume the average size of the pension that could have been commuted was £5000 then that means £450million of annuity purchases may have been unsuitable (90,000 people x £5,000 pension = £450million)


Therefore the total potential amount of mis-sold annuities over the past ten years is estimated to be around £8.5billion.


December 1, 2014   Leave a comment

Autumn Statement – my expectations and my wishlist

1 December 2014

What will the Autumn Statement announce on pensions, savings and over 50s?

The Chancellor’s surprise Budget reforms last March offered fantastic news for savers. The radical reforms to pensions and more generous rules for ISAs proved so popular, this Autumn Statement can’t possibly provide as much excitement. Nevertheless, more announcements that will impact pensions and the lives of over 50s are expected and I also have a ‘wishlist’ of further reforms that may or may not happen.

Expectations – measures which are likely

  • We’ll learn the brand name of the free pensions Guidance service
  • Joint life annuities will pay income to widows or widowers tax free
  • The FCA may announce the results of its Thematic Review of annuities
  • No changes to pensions tax relief
  • More spending on infrastructure (it would be great if this could include new incentives for pension funds to invest)


Wishlist – measures which are still needed

  • Incentives to save for care e.g. Care ISAs that can be passed on IHT free
  • New measures to help older workers stay in or return to work
  • Rules to ensure pension companies treat annuity customers fairly

There has been so much change in a really short space of time, but whilst the Chancellor is on a roll, he should keep going. Some of the measures he will unveil have already been leaked and others are generally expected. These are the reforms that are likely to be announced:

Guaranteed Guidance brand name to be announced
From April 2015, everyone with a defined contribution pension who is approaching their scheme’s pension age, or who is considering withdrawing money from their fund, will be offered free, impartial Guidance to help them make better-informed decisions. The Treasury has been frantically developing this ‘Guidance Guarantee’ service in recent months, with the Citizens Advice Bureau and Pensions Advisory Service gearing up for launch. The new guidance is meant to be free and impartial and will have its own brand name. The name is likely to be announced this week and there is likely to be a marketing programme financed by the Treasury to promote it and explain its value to pension savers. Establishing a strong, trusted brand is essential to ensuring the guidance is taken up.

Widows and widowers who inherit joint life annuities will be able to receive their income tax free
Changes to pensions tax rules have seen the 55% tax on inherited pension funds swept away and any remaining pension assets can be passed on as a pension, tax free. In order to level the playing field between drawdown and annuities, the Chancellor will announce that any income that is inherited by widows or widowers from their partner’s annuity will also be tax-free. This will help people who have already bought joint-life annuities but will be of no value to those with single life products. Only a minority have bought joint-life annuities up to now, but in future these rules, coupled with the guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.

The FCA may well announce the results of its Thematic Review of annuities
The FCA has been investigating the annuity market and is expected to announce its findings and recommendations this month. It is possible that the announcement will be made to coincide with the Autumn Statement. I am hoping that the Review will recommend measures to properly protect customers who are at risk of buying unsuitable annuity products. At the moment, there is no duty on insurers to explain in plain English how annuities work, what their risks are and to ask a few relevant questions that would identify potentially unsuitable sales. As annuity sales are still widespread due to pension companies failing to allow their customers to take advantage of the new pension freedoms, the need for a second line of defence for annuity customers is urgent, in particular in light of the fact that once the annuity is bought it can never be changed.

No changes to tax relief
There has been some speculation about changes to pension tax relief, perhaps removing higher rate relief, but I do not expect any decisions to be made. At some point in the next Parliament, this issue is likely to be reviewed, but I would not expect anything to happen imminently.

More spending on infrastructure (it would be great if this could include new incentives for pension funds to invest)
I expect the Chancellor to announce further major infrastructure initiatives and would certainly be delighted if he were to offer meaningful incentives to UK pension funds to encourage them to use their assets to boost the UK economy in this way. Pension funds may need a Government underpin that promises at least gilt yield returns if they commit money to infrastructure projects that do not perform well. That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.


More measures still required:

Further measures are required in order to address the needs of the ageing population and improve pensions and savings for the over 50s:

New incentives to save for long-term care – ISA savings set aside for care could pass on free of inheritance tax if not spent
The Chancellor could announce new incentives to help people save for later life care. The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this. A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care. The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary. A specific tax break for care savings would help focus people’s attention on this vital issue.

Force pension companies to treat annuity customers fairly – reform sales process
There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers. Reforms are urgently required to revamp the way annuities are sold, including the following measures:

  • Introduce standard forms written in plain English, to explain annuity products
  • Providers must ask basic questions to establish suitability before selling an annuity. For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
  • Providers must explain risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
  • The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.

New measures to help older workers stay in or return to work
As the population ages, it becomes increasingly important to ensure people are able to work in later life if they want to. Currently, too many people leave the labour market relatively early for a variety of reasons. This premature retirement represents a loss to the individuals as well as a loss to the economy. If more older people stop work they will have lower lifetime incomes and economic output will decline. We have had tremendous success in reducing youth unemployment, but further measures are needed to tackle the problems of older age unemployment as well. There remains widespread ageism in the workplace, but Government could help improve the employment prospects of unemployed over 50s, or help people either stay on or return to work in later life, by encouraging employers to retrain and recruit older people. Apprenticeship and work experience schemes for young people are often subsidised, which has caused employers to ignore older people for such opportunities. I am hoping that there may be increased emphasis on creating work and training opportunities for older people. This is in all our interests. The more older people there are in work, the better their own prospects will be and the better the outlook for economic growth. Old people do not take jobs from the young. Indeed the academic studies clearly show that having more older people in work is associated with higher employment and wages for young people. In my role as Business Champion for Older Workers, I can see the clear need for special interventions to encourage later life working. I have called for ‘mature apprenticeships’, ‘returnships’ and ongoing training for all ages and hope that the Government will respond.

December 1, 2014   Leave a comment

The Ten Vital Issues Pensions Guidance Must Cover

The ten vital issues pensions Guidance must explain


The Government’s proposed free Pension Guidance service will have a huge impact on whether the entire reform programme of flexibility and choice for pensions actually works well.  Guidance is only a start, but an important start to ensuring people know what they need to consider when they are told they have reached their scheme pension age.  If the Guidance works well, it can ensure people are able to make sensible choices.  It must also help people realise the value of paying for advice, beyond just the free Guidance.  In addition, I would like to see the FCA require all pension companies to give people a simple one-page standard statement explaining what type of pension they have, whether there are any penalties or guarantees, what charges are involved and how much money they have.  This ‘pensions passport’ would mean the Guidance sessions can focus on the important issues, armed with the relevant information.  Here are the top ten issues the Guidance must explain:


  1. Do nothing option: Make sure people know, right at the start, that they don’t actually need to do anything at all if they’re still working or have other pension income they can keep their money invested for longer (or just take tax free cash but nothing else).  Many people have been buying annuities because their pension company has sent them a wake up pack, but the wake up pack is only sent because the person is reaching the pension age they originally selected – sometimes age 55 or 60, which seemed a reasonable choice many years ago.  However, most people are now working on longer, so they don’t actually need their pension yet, and if they do nothing they have a chance to build up a bigger pot for later.
  2. Tax on withdrawals: Make sure people know that they will have to pay tax on any large sums they withdraw.
  3. Tax free pension returns:  Make sure people know that by leaving the money in their pension fund it will still earn tax free returns, whereas cashing it in to put into another investment or bank account will mean paying tax on any returns or income.
  4. Inheritance tax advantages of pensions:  Make sure people know about the inheritance tax benefits of pensions, so that if they die before age 75 they provide tax free, cost free life insurance for them, whereas if they withdraw the money, any other assets they may buy will usually go into their estate.  It is also vital that the guidance makes sure people know they should nominate a beneficiary so that their fund does pass on to the person they want it to go to without tax, as it will otherwise have to go into their estate
  5. Financial planning:  Point people to financial planning tools – they need help to plan their pension income (state pension forecasts etc) and any work income, together with other pensions or downsizing their house, to get a better picture of what their income prospects are.
  6. Long-term care:  Explain the benefits of leaving money for later life, in case of need for care.
  7. Life expectancy and personal circumstances:  Help people recognise their life expectancy, the impact of health issues and what this may mean for product choice or investment risk, buying annuities, covering a partner and so on
  8. Inflation:  The guidance needs to explain the risk of inflation if people do not protect themselves against rising prices and do live a long time.
  9. Products and charges:  After all this, if the person still wants to take money out, they need to be told about the various products.  Guidance should explain the risks of annuities (as well as the benefits), the risks of drawdown (as well as the benefits), and point to information on any new product types that are introduced.  People must also be told how to find out about charges or commissions when buying products including annuities or other products, since many have no idea they pay commission even if they receive no advice.  (Ideally, commission should be ended and only pounds and pence fees quoted to be totally transparent).
  10. Financial advice:  The final vital part must help people find expert independent financial advice, and explain why paying for advice can be beneficial to help with this important decision


The above are the vital issues that the Guidance needs to cover.  The default option should, in my view, be a ‘do nothing for now’ option.  The more we can encourage people to keep money in their fund for later life, the better.  Many will still be working or have other pensions and, therefore, could keep the fund invested for longer.


November 27, 2014   Leave a comment

Victory for common sense – People won’t be fined for not finding all their old pensions!

Government has listened to reason and dropped plans to force anyone taking money from their pension flexibly to notify every past pension scheme

Proposals were unworkable, impractical and would have penalised the poorest pensioners

Pensioners faced hefty fines for failing to find all past pensions within a month

I’m delighted that the Government has changed  its plans that would have forced anyone taking more than their Tax Free Cash out of their pension fund after April 2015 to contact every past pension scheme within 31 days.  They would have had to tell each old scheme (even ones that they may not have paid into for decades) that they could no longer contribute £40,000 a year to a money purchase pension, as their annual allowance had been cut to £10,000 a year.

These original proposals would have placed an impossible and unreasonable burden on many people, especially those with smaller sums in pensions they had lost track of.  There are millions of ‘lost’ pension accounts and often people fail to trace them until they are retired, which is when they actually have time to get their paperwork sorted out.  Yet if they failed to find them, they could have faced fines of hundreds of pounds, even though most could probably not afford to put anywhere near £10,000 a year into a pension scheme in future.

The Treasury has now laid amendments to the Taxation of Pensions Bill which will only require current or future schemes to be told and the time limit is extended to 90 days.  This is far more sensible and was one of the suggestions in my own response to the Taxation of Pensions Bill proposals. Others, including Labour MPs, had been calling for changes too.  It shows that the process of consultation is working.

The original proposals were most unfair.  They would have hit those with moderate pension savings, while the better off are most likely to have their financial affairs in good order (and most likely to be able to afford £10,000 a year extra contributions) so would not have faced large fines.  Those with larger funds will often have a financial adviser to sort out their financial affairs, while most people with smaller savings do not.  So the least well off, who were more likely to have untraced pension accounts, would have ended up paying the fines, even though they had neither the intention, nor the ability, to contribute more than £10,000 a year to a pension scheme.  This risked undoing some of the advantages of the new pension regime, which is designed to offer more freedoms to moderate savers who can now have flexible access to their pension funds, just as the wealthiest had in the previous regime.  I am delighted that people will not now face fines just because they couldn’t trace old pension entitlements.  A victory for common sense in pensions – let’s enjoy the moment!



November 26, 2014   Leave a comment

Bank of England staff pensions immune from problems facing other workers

3 November 2014

  • Bank of England 2014 pension contributions are over 50% of salary
  • Pension scheme only invests in UK bonds and offers generous pensions
  • Members do not have to contribute, all costs met by Bank of England, even in auto-enrolment
  • How many other employers could afford to contribute an extra 50% for their staff’s pensions?

Latest figures show Bank of England pension scheme generosity:  In case you missed it, the Bank of England’s latest Financial Statement for its staff pension schemes shows that even the Bank itself has not been immune to the pension problems affecting other schemes (you can link to it here The Report shows a 4% deficit and pension contributions are over 50% of pensionable earnings.  The amount being contributed for each member is way beyond the hopes of other workers.

All investments only in UK fixed income but don’t match liabilities:  The scheme has £3billion of assets (up from £2.3bn in 2010) with no exposure to the risks of the stock market – the fund is invested entirely in bonds.  (75% in UK index-linked gilts, 8% in ordinary UK  gilts, 6% in quoted corporate UK index-linked bonds and 10% in unquoted UK corporate index-linked bonds).  As these bonds do not rise in line with salary inflation, nor do they protect against increases in life expectancy, an ongoing deficit is likely to arise.  This helps to explain why contribution levels are so high, since no allowance is made for additional investment returns from risky assets to keep up with rising salary costs and longevity.  The Bank of England simply makes up any shortfall.

No room for Socially Responsible Investment:  Most pension schemes invest in a broad range of assets, which allow for some extra returns above those available from gilts and bonds in order to keep up with their rising liabilities.  They have been hurt by the sharp fall in long-term bond yields and have been trying to find sources of extra return to make up their deficits.  In addition, pension assets are often invested in equities or in projects that have social responsibility benefits.  Large pension schemes are powerful forces that can help improve corporate behaviour, however the Bank of England report specifically states that its bond investments leave no scope for Socially Responsible Investment or shareholder engagement.  Other pension schemes are trying to find ways to use their assets to benefit society, but the Bank of England scheme will not do so.

But members do not need to worry:  Their employer is hardly at risk of insolvency and, therefore, the Bank of England just pays in whatever is needed to their very generous pension scheme.

Bank of England staff pensions are outstandingly generous: While many private sector scheme benefits are under threat and we are used to hearing about pension deficits and problems resulting from central bank policies of Quantitative Easing, such dilemmas hardly affect the Bank of England itself.  There are just over 1000 staff in the final salary scheme (with 12,500 members including pensioners and deferred pensioners) and around 1400 members of the new career average scheme.  These pension arrangements are, in several ways, the envy of others:

  1. Members do not pay anything at all, even those auto-enrolled:  Members do not have to contribute anything to their scheme – all the contributions are paid by the Bank of England itself.  Even staff who are auto-enrolled are not required to pay, the employer puts in the money for them, every penny.  Most of us can only dream of a scheme like this.
  2. Employer contributes over 50% of salary and costs have risen sharply:  The Bank of England just pays whatever is needed into the scheme.  Its pension contributions rose from under £50m in 2013 to almost £75m in 2014 as it needed to plug its deficit.
  3. Both final salary and career average schemes have rpi-linked benefits:  All benefits remain linked to the retail prices index (while other public sector pension schemes have been moved to a consumer price index inflation link).

It’s nice to know some pension arrangements are still so generous, despite the problems faced by most companies trying to offer defined benefit pensions to their staff.

November 3, 2014   3 Comments

Auto-enrolment increases pension coverage but private sector, especially women, and self-employed lagging behind

30 October 2014

  • Pension scheme membership increases as auto-enrolment starts to have an impact
  • First increase in pension scheme membership in private sector this century – but public sector workers remain the pensions aristocracy
  • 2013 saw 200,000 extra public sector workers saving in pension compared with 100,000 more in private sector
  • Still need to address low pension coverage for private sector women (only 30% contribute) and the self-employed (only 22%)
  • New pension freedoms may start to increase self-employed interest in pensions again

The latest data for pension scheme membership, just released by the ONS, show some interesting statistics.

1. After years of decline, there was a rise in the numbers of people contributing to pension schemes in 2013. Pension scheme membership reached a record low in 2012, with a massive drop from 8.2million in 2011, to 7.8million in 2012. Last year, the number increased by 300,000 to 8.1million. Of course, this figure is still below the 2011 level, but at least the declining trend has been broken. The table below shows the figures:

Total pension scheme membership
2000 10.1m
2006 9.2m
2007 8.8m
2008 9.0m
2009 8.7m
2010 8.3m
2011 8.2m
2012 7.8m
2013 8.1m

2. Auto-enrolment seems to have reversed the declining trend of membership of private sector schemes. The figures show that, for the first time this century, in 2013 membership of private sector schemes actually increased. In 2011, the number of members of private sector schemes dipped below 3million for the first time, and fell further again in 2012 to just 7.8m, but in 2013 it rose to 8.1m.

Private sector scheme members
2000 5.7m
2006 4.0m
2007 3.6m
2008 3.6m
2009 3.3m
2010 3.0m
2011 2.9m
2012 2.7m
2013 2.8m

3. However, auto-enrolment has had an even greater impact on public sector workers, with a larger increase in the numbers now contributing to pensions. The number of workers in public sector schemes had also dipped in 2012, but the impact of auto-enrolment seems to have increased membership back to the levels of 2011 with 5.3million workers contributing. Membership of public sector schemes still far outstrips that for private sector workers, with nearly 90% of workers covered, compared with much less than half of those working in the private sector. There is a long way to go before pension coverage for private sector workers reaches that of the public sector.

Public sector scheme members
2000 4.4m
2006 5.1m
2007 5.2m
2008 5.4m
2009 5.4m
2010 5.3m
2011 5.3m
2012 5.1m
2013 5.3m

4. Pension coverage in private sector still far too low – around 40% of men and only 30% of women contributing:  Between 80% and 90% of those working in the public sector – both men and women – are paying into a pension scheme, whereas in the private sector, even though membership increased in 2013, less than 40% of men and only 30% of women were in pensions. Clearly, the public sector workforce remain the pensions aristocracy.

5. The increased pension coverage did not extend to the self-employed, who continued to turn their backs on pensions in 2013, as numbers contributing to pensions declined once again. The figures are only given as percentages and only for men, but they show the proportion contributing to pensions fell to just 22% in 2013, down from 24% (a previous record low) in 2012 and way below the 62% level of 1996/97. Clearly, pensions are not of much interest to the self-employed. What could explain this? I suspect that the inflexibility of pensions is partly responsible for the lack of contributions. Many self-employed people have chosen to invest in ISAs rather than pensions, since if they need their money they can use it whenever they want. If their business needs some funding, but the money was locked into a pension, they would not be able to use it, whereas with ISAs they can. In addition, the self-employed have no contribution coming from another source. With auto-enrolment, workers receive ‘free money’ from their employer which adds to their pension and that money is only available to them if they contribute to their employer’s pension scheme. This does not apply to the self-employed of course.

Self-employed men, numbers contributing to pension
Tax year end: % of self-employed men  contributing
2006 37
2010 25
2011 25
2012 24
2013 22

6. New pension rules will make pensions more attractive in future:  The 2014 pension reforms could well herald a significant increase in pension participation by the self-employed. By removing the inflexibility of pensions, it is likely that the self-employed will look more seriously at contributing again, rather than using ISAs. Indeed, they may decide to switch some of the ISAs into pensions, due to the tax advantages. Many of those who are self-employed are perhaps also relying on selling their business to fund their retirement, however having a pension in place may be a useful diversification of their risks. The state pension reforms will give the self-employed better pension rights in future, but they will still need more than this for a decent standard of living in later life. It will be interesting to see how the trends in pension membership develop as the pension reform programme progresses. Watch this space!

October 30, 2014   1 Comment

Whole new world for pensions

14 October 2014

  • A giant challenge to the pensions industry – give customers the freedoms allowed by law
  • Pensions can become like bank or building society accounts – take money when you need it
  • This isn’t just for the wealthy, it gives everyone the same freedoms as wealthiest already had
  • New pension system could help fund care needs

Everyone to have choice about how to spend their pension savings:  The Government is today laying legislation in Parliament that will enable ordinary people to have complete flexibility and control over their pension savings in later life.  From age 55, the aim is that everyone can have a choice about how to use their pension funds.  These freedoms were announced in the Budget but they will only work if the pensions industry changes the way it serves customers.

Extends flexibility and freedom to everyone, not just the wealthiest:  Up till now, the UK has had a most inflexible pension system – only those with tiny or huge pension funds were able to just out take money as and when they needed to.  The law required most of us to buy one of two products – an annuity or income drawdown – and as soon as you wanted to take any money at all from your fund, you were caught by this inflexibility. Pension companies had it easy – they just sold annuities or drawdown products without really needing to worry about what was best for their customers.

Law won’t force you buy annuities or drawdown any more:  In future, the law will not force you to do anything other than wait till age 55 before touching your fund.  Thereafter, everyone will be trusted to use their pension fund as they decide is best for themselves.  Under the old rules, only the wealthiest were able to take money out of their pension fund flexibly (paying tax at their marginal rate on all but the 25% tax free lump sum).  Now that freedom should be open to everyone, regardless of how well-off they are.

This is a huge challenge to the pensions industry:  Instead of having captive customers coming along and buying annuities (which were often unsuitable for them or poor value) or income drawdown (often with high charges), everyone should be able to take their money out when they need it and leave the remainder invested.  But currently, pension companies don’t let you do this.

Pension providers penalise or prevent taking money out freely:  At the moment, you are likely to find that your pension company stands in the way of allowing you the freedoms that Government wants you to have.  If your provider does not offer you the option of taking some of your money and leaving the remainder behind, you will need to find another provider to move to.  This can entail costs and penalties.

I call on pensions industry to put customer interests at heart of their products:  I am calling on the pensions industry to put customer interests centre-stage and allow people to use these new freedoms.

Let’s have pensions that work like bank or building society accounts from age 55:  We need new products that operate like pension bank or building society accounts, allowing you to withdraw funds when you need them. Why should the pensions industry dictate what’s best for you.

Time to trust people with their own money, industry doesn’t know best:  Of course those used to the old ways are railing against the new freedoms. They are warning of a disaster if ‘ordinary people’ are allowed free choice over how to use their pension funds.  They say people can’t be trusted to manage their own money.  They say people will not realise how long they are going to live and run out of funds.  They want to tell people what to do just as before.   Of course there are risks and some people will be irresponsible, but I do not believe that will be the majority.

Need guidance – or preferably advice:  I think most people who have been responsible enough to save for their retirement, will also want to manage their money responsibly during retirement too.  The old system was unfair and inflexible and worked brilliantly for the wealthiest, but not for the majority.  The new system extends the freedoms enjoyed by top earners to those lower down the income scale.  However, they will need help to decide what’s best for them and the new ‘Guidance Guarantee’ will give free help to all those nearing their pension age.  This impartial guidance can help them understand more about the new rules and products, but most people could also benefit from taking professional paid-for advice to ensure they do the best for themselves.

Abolition of 55% ‘death tax’ means more money should stay in pensions for later life:  The new reforms to the pensions ‘death tax’ will also protect against people spending their pension too early.  Now that any unused pension can be passed on free of all taxes (at least after 2016) and inherited pensions will only be taxed as income for recipients, the money in your pension fund should be the last money you spend in your life.  ISAs are subject to inheritance tax. Other savings are also usually taxable, as is your house when you pass away, but your pension passes on tax free.

New system gives better chance of having money for care:  This has major benefits.  Firstly, people have a good reason to decide only to spend their pension money when they really need to.  Secondly, there is more likely to be money left in later life, if you live a lot longer than you expect.  Thirdly, if you reach later life and need long-term care you are more likely to have money left to pay for it, rather than relying on the state (which only provides care once your needs are ‘substantial’ and only at a basic level).  In addition, if you don’t use all your pension fund yourself, you can pass it on tax free as a pension fund for future generations.  This spreads the benefits of pension savings across families.

October 14, 2014   3 Comments