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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.

Stunning improvements in UK unemployment especially for the young – don’t ignore the over 50s

17 September 2014

Over 50s are being left behind as policymakers focus on the young

Older people also need special help to get back to work and overcome ageism

Subsidised apprenticeships and retraining schemes can help

Sharp fall in unemployment: The latest unemployment figures, just released by the ONS, show a continuing picture of rapidly falling unemployment.  This is great news, however the statistics also confirm that the over 50s continue to lag behind.

Ageism in the workplace continues:  It seems Britain’s older workers are more likely to struggle to find new jobs once they become unemployed.  Improvements for 18-24 year olds have been strongest.  This confirms anecdotal evidence of ongoing age discrimination among employers and recruitment firms, and suggests that the specific focus on younger people by policymakers has had positive effects.

Measures to help the young have really helped:  Indeed, the reduction in unemployment among the 18-24 year olds has been spectacular.  The total unemployment for people age 18-24 was 23.3% lower in the three months to July 2014, than for the same period last year.  This compares with a nation-wide fall in unemployment of 18.8% and an improvement of 15% among those age 50+.

Fall in total UK unemployment May – July 2014 compared with May – July 2013:

Total                      18.8% lower

Age 50+                15.0% lower

Age 18-24            23.3% lower

Long-term unemployment is a particular problem: The situation for long-term unemployed older people is even greater.  Nationally, there has been a 15% fall in numbers unemployed for more than two years, and a stunning 27.1% fall for 18-24 year olds, but for the over 50s there was only a 3.7% fall – and in fact the numbers unemployed for over 2 years in the three months May to July 2014 were 4.7% higher than in the previous three months.

Long-term unemployment May – July 2014 compared with year ago

Change in numbers unemployed for over 2 years

Total                      15.0% lower

Age 50+                3.7% lower (4.7% higher than previous three months)

Age 18-24            27.1% lower

For the short-term unemployment there is a similar picture.  Across the country, the numbers unemployed for less than 6 months were 14.3% lower than the same time last year, but among over 50s there was only a 6.3% improvement.  By contrast, the numbers of younger people unemployed for less than 6 months fell by 18.5%.

Short-term unemployment May – July 2014 compared with year ago

Change in numbers unemployed for less than 6 months

Total:                    14.3% lower

Age 50+                6.3% lower  (unchanged from previous three months)

Age 18-24            18.5% lower

Special help for over 50s can boost long-term growth:  The Government is certainly having success in reducing UK unemployment, particularly among the young, which is clearly of huge importance.  However, I would urge policymakers to intervene with specific measures for the older unemployment as well.  There is increasing evidence that the over 50s are lagging behind in the labour market.  Many are languishing without employment because of ageism among employers and recruitment agencies.  As the numbers of older workers is rising rapidly, special measures to ensure they are not forced to finish work earlier than they need to can also boost long-term growth.

Subsidised apprenticeships and retraining courses:  The more older people who stop working before they need and want to, the worse the economic outlook for all of us will be.  Many over 50s end up giving up and retire early, but this means they will never be able to improve their income and spending power.  Not only do they lose out, so do their families and society.  I would urge the Government to consider incentives for over 50s to help them obtain apprenticeship placements, retraining and updated skills.  This can give them the new lease of life they need to rejoin the world of work.

September 17, 2014   1 Comment

ABI annuity and drawdown sales

11 September 2014

  • Budget reforms drive massive move away from annuities and into income drawdown
  • ABI figures show 50% year on year fall in annuity sales and >50% rise in income drawdown which carries high fees
  • Fall in annuity sales would be even greater if pension firms allowed customers to use the new freedoms properly
  • Pension providers still failing to put customer interests at the heart of their business

The Association of British Insurers has just released figures that show the dramatic drop in annuity sales following the Chancellor’s Budget bonanza for pension savers. The figures show that, when they do actually have a choice, customers do not want to buy annuities.  The Budget moves may help tens of thousands of people obtain better value from their pension funds and allow them to make better use of their savings.

Number of annuities sold falls by nearly half:  Relative to the previous year, the number of annuities sold in the period April to June 2014 was 48% lower than the same period in 2013.  The value of annuities purchased was down 42% (to £1.8bn).

Proportion of drawdown relative to annuity sales value doubles: In the same period, the number of new income drawdown products sold increased by 55% and the value of funds used to buy drawdown rose by 37% year on year.  As a proportion of the value of annuities sold, the value of drawdown products was 37% in Q2 2014, doubling from 16% in 2013.  Clearly, income drawdown has become much more popular for pension savers, as more of them realise they do not have to buy an annuity.

Annuity sales still propped up by providers failure to offer customers the new freedoms:  These figures do not give the full picture of savers’ attitudes, however, because pension providers are not yet allowing their customers to take proper advantage of the new pension freedoms that have been introduced.  Immediately after the Budget, the Treasury announced that people would no longer be required to buy either an annuity or drawdown product within six months of taking their tax-free cash out of their fund.  The aim of this was to ensure that people would be able to take their tax free cash now and then wait until after next April to be able to take advantage of the full freedoms if they wished to.  However, pension providers have refused to allow customers to take the tax free cash without immediately transferring the rest of their customers’ funds into an annuity or drawdown.  Therefore, many savers are still be forced to buy annuities even though this may not be right for them.

Trends in enhanced annuities remain troubling:  One particular concern is that the proportion of annuities that reflect people’s health properly has only increased from 25% to 29% of products sold.  The sales of enhanced annuities have increased, but remain only a small minority of products purchased.  For those who fail to shop around and buy from their existing provider, only 8% receive an enhanced rate, compared with 59% of those who buy from an external company.  It is so important that people ensure they buy the right kind of annuity that reflects their own circumstances.

The rise in drawdown forces customers to pay high fees:  The publicity surrounding the Budget changes has helped many people to realise they will no longer have to buy an annuity, so they are increasingly putting their pension fund into an income drawdown policy so they will be able to benefit from either new products or full withdrawal next year.  Ideally, they really would be best to just take tax free cash and leave the rest of the money alone until 2015, but the pension firms are not allowing this.  Therefore, there has been a surge in income drawdown sales which means customers are incurring large costs.  In other words, the inflexibility of the pension providers in denying customers the new freedoms is forcing those that were relying on taking their tax free cash, perhaps to repay their mortgage or for other pre-planned spending, to incur significant charges that they should not need to bear.

Customers really need expert advice before guidance starts – an opportunity for IFAs:  It is vital that, in the coming months, pension firms do make the necessary investments in customer service staff and new systems that can allow pension savers to benefit from the new pension rules.  There is also a significant role right now for financial advisers, who should be able to help people make best use of the opportunities available to them.  There is no free guidance in place yet, so the need for advice is even greater for those who are reaching pension age in coming months.

When will pension companies really put customer needs at the heart of their business?:  It is very disappointing to see that UK pension providers have not been willing or able to allow their customers to benefit from the freedom and flexibility that the Chancellor intended them to enjoy.  If the industry really wants to restore its credibility, it needs to invest in the systems that will ensure customer needs and wants are catered for properly.  There are worrying indications that firms are failing to cope with customer calls and this is a clear indication of the systemic failure to put their customers at the heart of their business.

Table 1:  Changes in annuity sales and drawdown sales

Q2 2014

Q2 2013

% change year on year

Annuity sales – number

46,368

89,896

-48%

Annuity sales – value £bn

£1.8bn

£3.1bn

-42%

Average fund size

£38,600

£34,500

+12%

 

Income drawdown sales – number

9498

6132

+55%

Income drawdown sales – value

£669m

£487m

+37%

Average drawdown fund value

£70,500

£77,700

-10%

Drawdown value as % of annuity sales

37%

16%

doubled

 

Table 2: Trends in enhanced annuities

Q2 2014

Q2 2013

% of annuities bought from existing provider

55%

49%

% enhanced annuities out of total annuities

29%

25%

% enhanced annuities bought externally

59%

47%

% enhanced annuities bought internally

8%

7%

 

September 11, 2014   Leave a comment

Public sector workers and graduates have best pension coverage

11 September 2014

  • Best chance of a pension is having a degree or working in the public sector
  • Low paid workers, self-employed and women lose out on pensions
  • Auto-enrolment will help but concerns remain about lowest paid and the young

Huge differences in pension coverage: The ONS has just released interesting statistics which expose the poor pension coverage for low paid workers and those without qualifications. The figures relate to years 201-2012, so they do not reflect the spread of auto-enrolment, but they nevertheless have some interesting findings. The groups most likely to have pensions are public sector workers and university graduates, while pension coverage for private sector workers or the self- employed, people without qualifications, care workers, call centre staff or in manual labour are much less likely to have a pension.

Far fewer women than men have pensions, unless they are graduates: Across occupations and all age ranges, men are more likely to have pensions then women, although there is very little gender difference for graduates.

Public sector are in privileged position relative to private sector workers: The occupational differences are enormous – with more than 90% of those working in Public administration, defence or social security belonging to a pension, while only 5% of those in service industries like food or accommodation paying in.

Less than 10% of under 25s have a pension: The youngest workers are least likely to be covered by pension savings – only around 10% of people aged 16-24 have a pension yet). Many will not be earning yet, but even those who do may need to repay student debts or prefer to save for a house if they can, rather than contributing to a pension. This may be the right choice for them however the employer contribution is only available for pensions, not other forms of saving. It will be interesting to see how pension coverage changes once auto-enrolment spreads further in coming years.

State pension reform and increased pension flexibility enhances attraction of private pensions: As the state pension will entail much less means-testing and there will be more freedom and flexibility for pension savers, the attraction of private pensions has increased significantly and almost everyone would be better off in later life if they can save in a pension scheme. It will be in the interests of low-paid workers to try to join their company pension scheme if they can.

Auto-enrolment will help, but won’t cover lower paid or self-employed: Obviously, the auto-enrolment programme will radically change some of this and by 2017 all employers will need to provide pensions for their staff. However, the lowest paid (those earning below the income tax threshold of around £10,500 a year) and the self-employed are excluded, so they may continue to be left out of pension coverage and have to rely on other resources of the state.

September 11, 2014   Leave a comment

We need tax breaks for care saving, not more means-testing

4 September 2014

  • More means-testing and tax increases will disincentivise private income and could worsen looming care crisis
  • We need incentives to encourage people to save for care – Care ISAs and tax-free pension withdrawals, plus inheritance tax exemption for care savings
  • Health and social care budgets must be integrated to provide fairer system

Radical reform of social care is required: I welcome the report released today by the King’s Fund, which highlights yet again the flaws in our system of social care.  It is absolutely clear that radical reform of the care system is necessary to address the need for dignified care as the numbers needing care are set to soar in coming years.

Need fair partnership between state and individual:  The King’s Fund report is right to raise the debate about how to fund social care fairly in future, but the proposed solutions could make the situation worse, rather than better, in the longer term.  We need a fair partnership between the individual and the State. A proper review of how to integrate health and care spending is needed, to identify the priorities for public spending and how to fund this fairly. This would allow for an increase in early intervention and more at home care, which can reduce the numbers needing more costly NHS interventions as a result of avoidable falls.

Reform state pension and increase age of eligibility for benefits rather than more means-testing:  However, the King’s Fund proposal to take away pensioner benefits and limit them only to Pension Credit claimants is not a solution.  Indeed it could increase the taxpayer costs of care as it is like cutting the state pensions of those who have saved and penalising those who try to be self-reliant.  Increasing the age of eligibility is an issue to consider, and integrating the free benefits into the state pension would also make sense, so that they become taxable, but extending means-testing is dangerous.  Trying to provide free social care and funding this by more means-testing within the current health and care framework is like sticking a plaster on a wound that is getting worse underneath. Covering up the issue will not really solve it.

Need savings incentives urgently:  It is really important to help people save for later life care needs – there are absolutely no incentives in place for this at the moment and no specific products either.  By extending means testing, those who save for care are simply going to be penalised further which will result in fewer people saving and more  needing taxpayer support.  Nobody is saving to cover care needs and no new products are available – by offering tax incentives such as more ISA allowances, or inheritance tax breaks, savings for care could be kick-started.

Care ISAs and tax-free pension withdrawals:  I have been calling for the Government to introduce a new Care Savings Allowance for the over 50s to allow tax free savings towards care for themselves or their relatives. A ‘Care ISA’ allowance, or tax-free pension withdrawals to pay for care.  Even if care funding is radically reformed, individuals will still have to fund a portion of their care costs themselves so it is vital that we help families put money aside just in case.

NHS cannot cope with the costs of care:  This issue is not just about looking after older or disabled people. It will affect families up and down country and ultimately all of us, because the NHS will be unable to keep picking up the pieces of our broken social care system. Getting social care right, helping people plan and prepare properly and look after themselves will ultimately save money and resources in the NHS. Failure to reform care will end up costing us all far more when the NHS safety nets break down.

Need to integrate health and care budgets and ensure tax incentives for private saving:  Without the additional funding that would come from proper integration of our health and social care systems, plus incentives for people to save for their own care, our increasingly ageing population will still be at risk. Inheritance tax breaks, ISA incentives and encouraging people to use the new pension freedoms in ways that ensure they leave some money in their pension wrappers in case they need to pay for care, would finally start a savings culture for care that is long overdue.

September 4, 2014   1 Comment

Over 50s find it harder to get back into work as labour market improves

14th August 2014

  • Unemployment has fallen far less for over 50s than for younger workers as ageism in workplace remains
  • Under the coalition, unemployment for 16-49 year-olds has fallen 19%, but only 5% for over 50s

The latest ONS employment figures show that the UK unemployment rate has fallen far faster than previously expected and now stands at 6.4%, the lowest level since Q4 2008.

The figures also show that, under the Coalition Government, rising numbers of older people are remaining in work, with record employment levels for over 65s – a 291,000 increase since May 2010, up 36% over that period.

However, unemployment among those aged 50-64 has fallen much more slowly than for younger workers, suggesting that the over 50s are finding it far more difficult to get back into work and suggesting a need for further action to help re-employment for older workers.  Employers and recruitment agencies are often focussed on hiring young people and overlook the older jobseekers.  However, these groups have valuable experience and life-skills which can add value to many businesses, alongside younger workers.  I hope to be able to identify any significant barriers and help more over 50s stay in or return to work if they wish to.

Summary Table:

Category

Q2 2014, latest data

May 2010

Change since 2010 %

Change since 2010 number

Employees Age 16-49

21.56m

20.84m

+3.5%

+722,000

Employees Age 50+

9.03m

8.09m

+11.6%

+945,000

Employees age 50-64

7.94m

7.29m

+9%

+654,000

Employees age 65+

1.09m

0.8m

+36.4%

+291,000

 

Unemployed age 16 – 49

1.71m

2.1m

-18.8%

-390,000

Unemployed age 50-64

0.35m

0.37m

-5.3%

-19,000

  • Over 50s have not been squeezing young people out of the job market. Rising numbers of older workers are also associated with rising numbers of younger workers.
  • The number of over 50s in employment has been steadily rising. The total number of workers in the UK rose 5.8% between May 2010 and Q2 2014, with employment for the over 50s increasing faster than for younger workers
  • The number of unemployed over 50s has not declined at a rate comparable with the number of younger unemployed.  Unemployed people aged 16-49 fell 18.8%, while for those aged 50-64 it fell by only 5.3%.
  • Economic activity for 50-64-year-olds has been gradually rising compared to economic activity for 18-24-year-olds, which has been relatively stable. In Q2 2014:
    • 71.4% of 50-64-year-olds were economically active.
    • 71.0% of 18-24-year-olds were economically active.
    • 85.9% of 25-34-year-olds were economically active.
    • 87.1% of 35-49-year-olds were economically active.

 

August 15, 2014   1 Comment

Advice so that widows do not lose their husbands’ pensions

12 August 2014

It is certainly a problem that many people lose track of old pension entitlements and, especially if husbands have passed away, widows will often be left without anything from their husband’s pension unless they are aware of what his entitlement was.

If husbands have died relatively young, a defined benefit pension scheme would provide some money for the widow and a defined contribution scheme could pay out a tax free sum, but widows would need to to notify the scheme that their husband has passed away and  make a claim for their entitlement.

What can people do:

1.  Keep track of all old entitlements.  It is very important for people to keep track of their old pensions and this is vital even before you reach older ages, just in case of accidental death.

2.  Consider merging old pension entitlements together in one place so they are easier to keep track of. Ideally, people might consider moving their old entitlements with them when they change jobs or start with a new pension provider, but with old defined benefit schemes that is usually not possible.

3.  Keep a list of all your pension entitlements and latest statements.

4.  Every time you move house, notify all your pension providers of your change of address so they can contact you.

5.  Keep your ’expression of wish’ form up to date so your pension provider knows who should inherit your pension if the worst happens.

6. Trace all lost pensions – there is a Government-run pension tracing service which can help you track down old pensions https://www.gov.uk/find-lost-pension .  Telephone: 0845 6002 537.

7.  If you have lost track of an old pension, try contacting your previous employer but if the firm you worked for has merged or changed its name you will need to try to find out what happened to the company.  The same would apply if you had an old pension policy that is not sponsored by an employer but was a personal pension arrangement – your compnay many have merged with another one and changed its name, so you will need to look up what has happened to the firm and then contact the administrator of the existing company that has taken over the old business.

8.  If you are a widow whose husband has already passed away, consider writing to any past employers you know your husband worked for to ask if they have a pension scheme and if they have any record of him having been a member.  Trustees are often keen to trace former members so you could be helping them by contacting them anyway.

August 12, 2014   Leave a comment

Do we need a Lifetime ISA now that pensions coverage is set to rise?

Lifetime ISA might have been useful in the past but is not necessary now

Pensions auto-enrolment and flexibility will increase pension coverage

New ‘Lifetime ISA’ product proposed, to replace pensions and ISAs:  The Centre for Policy Studies is calling for a new savings approach – the Lifetime ISA – to be introduced in the UK.  This would replace the separate ISA and pension systems we currently have.  The idea is unveiled in this paper http://www.cps.org.uk/publications/reports/introducing-the-lifetime-isa/?utm_source=Michael+Johnson+contacts&utm_campaign=1f6f756838-FTT_chown_lawson&utm_medium=email&utm_term=0_d781b4fd08-1f6f756838-303592833 by Michael Johnson, whose ideas are often worth listening to.  Michael is very well-connected in policy circles and has been working on this for several years.  The proposals are designed to increase savings levels in the UK, following the dramatic decline in long-term savings, particularly among younger workers.

Pensions coverage will start rising again:  It is true that pension coverage has plummeted to record lows in the past few years, and the flexibility of ISAs has proved more popular than inflexible pensions.  However, the policy of auto-enrolment under which every worker is joining an employer pension scheme and the new flexibility for pensions introduced in the recent Budget are likely to increase pension coverage significantly in future.  The success of auto-enrolment, which relies on behavioural economics to ‘nudge’ people into pensions, coupled with increased flexibility, mean the need to join ISAs and pensions together is significantly lower now.

Tax relief replaced by 50p in £ incentive up to £8000 a year:  The proposed Lifetime ISA policy would also mean the end of pensions tax relief, with all savings receiving a 50p in the £ boost from the Exchequer instead (this extra 50p would have to be repaid if money was withdrawn before age 60).  A proposed annual allowance of up to £8000 would benefit from this savings incentive top-up, meaning that higher earners would lose out significantly, while the rest of the population received more incentive.  In social terms, this makes sense, since one would be redistributing the savings incentives from the highest earners, who presumably need less incentive to save, towards the rest of the population, who probably need incentivising more.

Auto-enrolment offers £1 extra for each £1 contributed, funded mostly by the employer:  Tax relief on pensions costs a huge amount – somewhere around £30billion a year – and I suspect the success of auto-enrolment could enable the Treasury to reduce the Exchequer cost of savings incentives in future, while still seeing an increase in pension saving.  Indeed, auto-enrolment represents a far more powerful savings incentive than the proposed 50p in the £ for a Lifetime ISA.  The auto-enrolment minimum contribution levels offer a ‘buy one get one free’ deal, with an extra £1 going into each worker’s pension fund for every £1 they contribute themselves.  Employees put in 4% of their qualifying earnings, the employer contributes a further 3% and 1% more is added by basic rate tax relief, so a 4% contribution immediately doubles to 8%.  It is not clear, therefore, whether a 50p in the £ policy is the necessary.

Pension savings can be increased further by auto-escalation:  Further ‘nudge’ measures could also be introduced to increase pension savings in future. For example, ‘auto-escalation’ which would encourage people to increase their pension contributions beyond the minimum level, by dedicating a portion of any pay rise to increased pension contributions.

I proposed a Lifetime Savings Account (called ‘LifeSaver’) in 2001 but things have moved on now:  Over 10 years ago, I drew up plans for a Lifetime Savings Account, similar to the Lifetime ISA suggestions, which would cater for all a person’s savings needs throughout their lifetime.  This is an example from a Paper published in the Journal of Financial Services http://www.rosaltmann.com/pdf/LifetimeSavings_JournalFinServicesJan2003.pdf . I originally suggested that this should be seeded by the Child Trust Funds, which were the forerunner of Junior ISAs.  The idea was to ensure people would always have a savings account at every stage of their life.  Things have moved on now however.  With auto-enrolment, most people will have a pension account once they start work and will also receive extra money from their employer if they contribute.  Those who do not save in their workplace pension scheme will forego the employer contribution.  The need for a lifetime savings account has therefore diminished and the ability to access pensions flexibly will increase their coverage.

Consider using auto-enrolment for incentivising other types of saving, not just pensions:  However, I do think it worth considering allowing workers to use their savings for purposes other than pensions.  For example, repaying student debts or saving for a house is a socially valid form of saving, but those who cannot afford to fund debt repayments or house purchase as well as pensions will lose their employer contribution.  This seems somewhat unfair.  My suggestion is that anyone who saves will receive an employer contribution, but the worker’s own money could be used for purposes other than pensions, while their employer contribution and the basic rate tax relief stay locked until later life.

This would mean everyone saving for their future in some form, with the help of their employer, rather than only offering employer assistance for a pension product and nothing else.

In summary, I am not convinced that we need a new Lifetime ISA.  I believe pensions coverage will increase significantly as a result of the policy changes already underway.  However, I do believe there is merit in extending the savings incentives to cover other forms of savings beyond just pensions.  Those saving for a house or who want to repay student debts should still receive an employer pension contribution, but this employer money and basic rate tax relief should stay locked until retirement, while the worker can access their own savings if needed.

August 4, 2014   1 Comment

Man with cancer gets his money back after annuity mis-selling

4 August 2014

  • Standard annuities assume purchasers are in good health - selling them to someone with heart trouble and cancer is unjustifiable.
  • Treating Customers Fairly requires protection against such annuities mis-selling.
  • I challenge providers and regulators to justify selling annuities without clear risk warnings or suitability checks.

The case of Mr. Wayne Davies vividly highlights the injustices of the UK annuity sales process.  It is the worst case I have seen of the UK annuity system failing its customers.  While battling cancer, he emailed me in desperation, after both his pension provider - Royal London - and the annuity company it had a tie-up deal with - Prudential - denied responsibility for selling him an unsuitable product.  I want to make it clear that annuities can work well for some customers, but the current sales process fails to ensure the right type of products are sold to the right people.

Urgent action is needed to remedy the failings.

What happened?:
In March 2013, Mr. Davies, now 62, was in poor health and needed his pension after being made redundant.  He was undergoing tests for cancer, had a history of heart trouble, was partially disabled by polio and had smoked for forty years.  He was sent many pages of paperwork by his pension provider, full of terms he had not come across before.  He had saved £27,000 with Royal London, which does not itself offer annuities.

Instead of sending their customers to a service which would help them choose the right type of annuity at a competitive rate, it had a tie-up deal with Prudential, under which it received 2.5% commission on each annuity sale.  The terms of the deal did not require the Pru to offer annuities which catered for people in poor health, nor ensure competitive rates for the standard annuities.  Mr Davies did not understand annuities and was offered his tax free cash plus a standard single life annuity at a 4.4% rate - giving him around £17 a week.  He was in such poor health that this cannot be considered a suitable sale, yet there are no regulatory controls to protect customers such as this properly.

The Regulatory system and pension companies leave it up to each individual to know what to do.  Two weeks after he bought the annuity, he was confirmed as having cancer.  He immediately wrote to Royal London but was not told that he could have undone the annuity at that time within the ‘cooling off period’.  He subsequently realised that this annuity was not right for him and went to his MP, who wrote to Royal London and the Prudential but each blamed the other and he received no redress.  A complaint to the Financial Ombusman has also delivered no result.

Power of the media:
Following his email to me, I looked at his paperwork and passed his details to Jo Cumbo at the Financial Times, who took up his case and he has now received an apology and his money back.  I am delighted that the pressure from Jo Cumbo at the Financial Times resulted in the return of Mr Davies’ pension fund, but this media intervention should not have been necessary.  How many more have not had such help?

This is not an isolated case:
Mr. Davies’ situation is not an isolated case, although it is most dramatic example I have seen.  Over the years I have received countless emails from distraught widows left penniless after discovering that their very ill husbands had died relatively soon after buying a standard single life annuity which assumes the purchaser is in good health. Nobody was required to make it clear this was an unsuitable annuity for them but these widows were not willing to speak to the Press for fear of suggesting their husbands had somehow done wrong.  Mr Davies is the only living customer to have contacted me and was willing to speak to the media.

Around 1000 people a day buy annuities without clear risk warnings or suitability checks:
Every day, on average around 1000 people lock their pension savings into annuities, without clear risk warnings or suitability checks before they buy.  Many are unwell, yet their pension provider does not normally know about their health – they cannot possibly know because they are not required to ask.  There are still no safeguards in place to stop this happening.  I hope others who have been sold standard single life annuities when they were seriously unwell will contact their company for redress.

I challenge pension providers and the FCA to justify this:

Can pension providers and regulators explain how selling standard annuities, which assume good health, without actually asking any specific health questions, comply with regulatory requirements of ‘treating customers fairly’? Without clear risk warnings of suitability, customers are not being given a fair chance of buying a suitable product.

Annuities are irreversible, so pre-sale checks are vital:
Annuities can work well for some customers, but they are complex products that should be sold with more care.  Giving customers a fair chance of doing the right thing, taking account of their own health and personal circumstances, is particularly important because annuities are a unique financial product – once purchased, they can never normally be changed. Customers must therefore understand firstly whether they actually need to buy one or not and then what type suits their circumstances.  The reams of paperwork sent to customers fail to make clear how annuities work and do not help people understand how to find the right type of annuity or best rates. Just writing about ‘open market options’ and the availability of other types of annuity, does not explain the basic principles of annuities, nor ensure customers find the help they need with these complex products.

Customers don’t understand annuities:
Like so many others who have contacted me, Mr Davies simply did not understand the language of annuities.
  Even the most cursory of checks would have revealed that a standard single life annuity was not suitable for a smoker with heart trouble, currently undergoing tests for cancer.  With just a five-year guarantee, he was highly likely to lose three quarters of his pension fund as a result of this purchase, but, because nobody had to explain how the annuity worked, he did not realise that the rest of his fund would go to the Prudential, not his family.  The wording of the paperwork is unclear.  It is written by people who deal with annuities daily, while customers have never come across these products before.

What should be done? - Require suitability checks and clear risk warnings to explain annuities:
The free at retirement ‘guidance guarantee’, which could help people understand their pension options, will not be in place until next April.  In the meantime people with serious health problems will continue to lock into unsuitable annuities that mean they lose much of their pension fund.  I am, therefore, calling on all pension providers and the FCA to address the shortcomings of this process immediately.

The ideal is to have an independent financial adviser to go through all the relevant options and recommend their best course of action, but there should also be immediate changes to the way annuities are sold.  Basic suitability checks should be made mandatory now, so that annuity firms cannot sell standard annuities to customers in poor health.  Customers should be automatically offered impaired life or enhanced rates if they are not in perfect health.  Absolutely clear risk warnings should explain that the balance of their pension fund will stay with the insurer after they die, and not be paid to their family, unless they specifically cover a partner.

I challenge providers and the FCA to explain how the current sales practices are fair to customers. 

August 4, 2014   3 Comments

Guidance Guarantee could be a golden opportunity for IFAs

25 July 2014

The Guidance Guarantee - a whole new industry of impartial guides?

Important for customers to understand that ‘Guidance’ is not ‘Advice’

Great opportunity for the advice sector

This week, the Treasury released more details of its plans for every DC pension saver coming up to pension age is offered free, impartial financial guidance on their pension options.  The Service will be funded by a levy on financial firms, who have an interest in its aims of ensuring customers are better informed about their retirement finance options before committing to buy any product. The Guidance will be entirely separate from any provider of at retirement financial products or services and focussed on financial education and financial planning.  Guidance will be available for each pension pot, so people with more than one pension fund will be entitled to more than one guidance session.

Guidance is not ‘Advice’:  Guidance can help people consider the important questions they need to ask before making decisions at retirement – something that should have been in place long ago.  However, it will not provide the answers - customers will be left to make their own decisions - so many may need expert independent financial advice to help them.  It is really important to understand that this Guidance is not the same as regulated advice. If the Guidance Session is run properly, customers will realise the complexity of the decisions they face and may be more likely to consult a regulated independent financial adviser for individual help to ensure they are making the right choices.

Is MAS up to the task?:  The officially approved guides will be required to operate to consistent, robust, well-enforced standards, overseen by the FCA.  An expert team at the Treasury will work with TPAS (The Pensions Advisory Service), MAS (Money Advice Service) and an advisory board of experts to decide how best to provide the information and guidance.  However, I agree with Andrew Tyrie of the Treasury Select Committee that there are big question marks over the ability of the Money ‘Advice’ Service – which does not actually give ‘Advice’, only Guidance – to deliver a sufficiently high-quality service for customers.  Certainly, the MAS annuity engine and information system has fallen woefully short of even the most basic standards of adequacy for customer needs.  MAS took weeks to update its information after the Budget, its annuity quote system contains only a very few providers and the system does not contain any warnings on its single life quotes that partners will be left with no pension.

Guides will not FCA-authorised – will customers be sufficiently protected?: The Guides will not be authorised by the FCA.  For the initial phase, the Treasury will control the approval of firms or organisations to carry out the work.  In order to ensure this Guidance is useful, the FCA is consulting on what the guidance should cover.  It needs to be comprehensive enough to equip people to make decisions and also to help them understand the benefits of paying for professional advice if they are not sure what best to do.

Government wants this new National Retirement Guidance Service to become a strong trusted brand:  The intention is to build up a new, national brand of ‘Retirement Pension Guides’ who consumers will trust and be happy to go to before making retirement decisions.  Building trust is vital.

A range of channels will be offered including phone, on-line and face-to-face:  The Treasury suggests everyone reaching pension age will be signposted by their pension provider to a centrally-run telephone number and on-line service.  Providers must inform their customers about the guidance 4 to 6 months before pension age and again 6 weeks before.  Individuals will call or register on-line and can choose whether they want to just use web-based, telephone-based or face-to-face sessions.  Many will not want to actually meet a Guide in person, so offering a range of different channels is sensible.

What will the guidance cover?  The guidance will be tailored to the individual’s specific circumstances and will cover their options at retirement.  Individuals will be asked to come to a guidance session with essential information on their pension fund and personal circumstances, in order to ensure the session can be tailored to their own needs.  Pension providers will have to give all customers standardised information about their pension savings - any guarantees, the value of the funds and any special features.  The Guidance should explain the tax implications of any choices they may make, take account of their other income and dependants’ needs and also consider whether they are still working and therefore help them realise that they may not need to touch their pension at all.

What will the guidance not cover?  The guidance will not tell anyone what products to buy, which providers to use or which adviser to go to.  For individual product recommendations, people will be told they may need to consult an independent financial adviser.

Could be great for financial advice industry:  The new Guidance sessions could be a fantastic opportunity for the financial advice sector.  At last, individuals may start to understand the difference between a free guidance session, which tells you the important questions but doesn’t give you any answers, and professional, expert advice which you need to pay for, but which then ensures you make good choices.  With a decision as important as retirement, people may increasingly want the reassurance that they have used their pension savings wisely.  In the past, too many people believed financial advice is ‘free’.  Why should experts be expected to work for nothing?  Having clarity on the difference between guidance and advice could hand advisers a golden opportunity to demonstrate their value.

 

July 25, 2014   2 Comments

Quick Guide to the New Pensions Landscape

The table below summarises the changes confirmed today, what the system was like before the Budget, how it

works in the interim period up to April 2015 and what is planned when the full flexibility starts next April:

Policy Before Budget Interim changes up to April 2015 Full flexibility from April 2015
AGE: when you can access your pension fund Age 55 Age 55 Age 55 – rising to age 57 from 2028
WITHDRAWING SOME MONEY: The rules on taking some money out of your pension fund from age 55 If you took any money at all out of your fund, you had to ‘secure an income’ within 6 months i.e. buy an annuity or drawdown policy, otherwise you faced 55% tax You only need to ‘secure an income’ within 18 months, so technically don’t need to annuitise (though providers aren’t allowing it!) No requirement to secure an income

i.e. nobody forced to buy an annuity, can choose how much to take each year

CAPPED DRAWDOWN RULES Annual income taken out of your fund cannot be more than 120% of standard annuity (GAD) rate.  Any income above that is taxed at 55% Annual income withdrawn cannot be more than 150% of standard annuity (GAD) rate.  Any income above that is taxed at 55% No cap on income, all withdrawals taxed at marginal rate.  Existing capped drawdown policies protected and if withdrawals don’t exceed 150% of GAD rate, retain full £40,000 Annual Allowance for future contributions
TAX ON DRAWDOWN FUNDS INHERITED: 55% tax deducted from drawdown funds passing on to beneficiaries unless taken as a pension No interim changes Tax rate will be lower than 55%. Exact details to be announced in Autumn Statement 2014
CASHING-IN SMALL FUNDS: The rules on cashing in small pension funds as a lump sum from age 55 ( ‘trivial commutation’) Can only cash in and take small funds as a lump sum if:

- your total pensions are worth <£18,000

- or you can cash 2 funds worth up to £2,000.

Can cash in and take small funds as a lump sum if:

-  your total pension savings are worth  <£30,000

- 3 funds up to £10,000 each

Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
CASHING-IN LARGE FUNDS FLEXIBLY: Rules on cashing-in large pension funds as a lump sum from age 55 (‘flexible drawdown’) Those with large pension funds can access their money flexibly in flexible drawdown and cash in if they wish as long you already have minimum lifelong pension income of £20,000

 

You can cash in your fund if:

- you already have minimum lifelong pension income of £12,000

 

Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
TAX AVOIDANCE PROTECTION: The rules on contributing to future pensions once you have taken as much money as you want from your pension fund Once you have used flexible drawdown to access your pension savings, no further pension contributions are allowed (£0 annual allowance) – in order to prevent tax avoidance of large ongoing pension contributions Minimum lifetime pension £12,000pa

No further pension contributions (£0 annual allowance)

No minimum pension income required – all drawdown is flexible.

Allow extra pension contributions – £10,000 annual allowance [BUT can retain full Annual Allowance if cash in 3 pots up to £10,000 each or unlimited small occupational pots]

ANNUITY DESIGN: The rules for annuities – what limits on product design? Inflexible.  Income must remain same or increase every year, never fall. Maximum 10-year guarantee for ongoing income after death.  Money-back guarantee (value protection) is available but funds inherited on death are taxed at 55%.  Can’t take lump sums if need to pay for care. No interim changes Will allow variable income stream.  Will allow lump sum payments up to £30,000 (if specified at time of purchase). 10-year maximum guarantee removed, unlimited guarantees to allow more fund to pass on at death. Funds up to £30,000 can be paid as lump sum rather than ongoing income
ANNUITY SALES: Rules governing sale of annuities and information given to customers before pension fund converted to income No requirement for suitability checks before annuity sales.  No control on value for money or commission deducted at sale.  Pension providers must send information on pension fund (‘wake up pack’) around 4-6 months before pension age and again 6 weeks before and must offer an annuity.  Must inform of ‘open market option’ but no requirement to check suitability or warn of risks. Still no requirements for suitability checks, providers must inform of open market option Providers will have to provide standard information for customers to use in Guidance session.  Will have to inform customers of how to access the free Guidance – this applies to each pension pot.  May lead to ‘Pensions I.D.’ card or ‘Passport’ and eventually hope to have commonality for multiple funds all in same format
GUIDANCE AT RETIREMENT: No actual personalised guidance offered at retirement. No personal information taken into account when communicating with customers other than age and pension fund size.  Relevant questions on health, other options not asked Still no guidance Guidance Guarantee starts April 2015.  Free, impartial, tailored guidance to go through options, warn of tax implications, signpost to more information or professional advice.  Guides must not have connection with products or providers.  Will not be FCA regulated but will be authorised and approved by Treasury.  Funded by levy on all financial providers
TRANSFERRING DC PENSION FUNDS: You have the right to transfer to another provider up to one year before pension age No interim changes You can transfer at any time, including at pension age if desired (to ensure everyone can take advantage of flexible access)
DB TO DC TRANSFERS: Transfer from DB (final salary-type) schemes to DC schemes Transfers permitted for non-pensioner members.  Taking advice before transfer is only an actual requirement if transfer instigated by the employer.  Trustees have power to delay timing of transfer and to reduce value to reflect scheme under-funding but many may not be fully aware of this power No interim change All funded DB scheme non-pensioner members will be allowed to transfer to DC.  Safeguards strengthened so every member must have independent advice from an FCA-regulated adviser before transfer a pension worth over £30,000.  Guidance for trustees strengthened to ensure they know they can delay timing and reduce transfer values to reflect scheme funding level.  Unfunded public sector schemes (e.g. NHS, teachers, civil servants) will not allow transfers except in exceptional circumstances but funded public schemes (i.e. local authorities and MPs)will allow transfers
FUNDING SOCIAL CARE: No incentives to save for social care.  Capital in pension funds or drawdown  ignored for purposes of means-test, use a notional income, but no encouragement to set aside pensions or other savings for care No interim change No new incentives to save for social care, however money that remains in pension fund without being annuitized could be used if required.  The Guidance must explain issues of social care funding to increase awareness and discourage withdrawals

 

July 21, 2014   1 Comment