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.

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   2 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

If retirement age rises we need to redefine retirement too

7  October 2014

  • Later retirement is inevitable and can boost personal lifetime incomes as well as the economy
  • Retirement ages now lower than 1950s – but 6 months a year rise can’t last long, only a catch-up
  • If sustained, retirement age would be 80 over next 30 years!
  • But need a whole new concept of retirement – phase of part-time work, not suddenly stopping

DWP forecasts suggesting an increase in average retirement ages by 6 months a year can only be a short-term aim.  As people are living longer, it is inevitable that they will need to work longer too, in order to achieve higher lifetime incomes.  However, a rise of six months a year would mean, over the next 30 years, people would be retiring at age 80!  I’m not sure that’s a realistic policy aim.

Ageing population with falling birth rates can’t sustain ‘early retirement’:  The age at which people retire is already rising, from what will surely be seen in the years ahead as unreasonably young.  The notion of ‘early retirement’ which was meant to represent economic progress is fundamentally flawed, especially with an ageing population and falling birth rate!   The maths don’t stack up.  In an ageing population, with falling birth rates, it is a recipe for economic decline.

Don’t aspire to retire’ in your 50s any more:  Since the 1980s, an expectation had developed that people should aspire to retire in their 50s.  This is simply not sensible or sustainable, especially as life expectancy has risen significantly, general health has improved and the physical demands of most types of work have eased.  Even those in physically demanding jobs can retrain to do other work but often need to be supported to do so.

People are still retiring younger than in 1950s:  In fact, increasing numbers of people are already choosing to work longer.  In the 1950s, the average age of retirement for men was 67.  At that time life expectancy was much lower than it is today, yet people are retiring earlier.  That means their lifetime income is lower (especially as they often start work much later too) and they have less chance to save for a good later life income.  It is clear that change is needed, but we have to manage that change carefully.  The state pension age is already set to rise to 68 (you can calculate your state pension age here .

Not everyone can keep working but good for those who can:  Clearly, if you are not well, or your work requires heavy physical labour, or if you are exceedingly wealthy and choose not to work at all, that is your choice.  Nobody should be forced to work longer if they do not wish to, but most people could benefit from rethinking retirement if they are in reasonably good health.

There is no official ‘retirement’ age any more – individual choice:  The traditional idea of stopping work as soon as you reach a ‘pension age’, whether that be state pension age, or the age at which a private or company pension starts, is now out of date.  There is no official ‘retirement’ age any more, even though many commentators refer to the state pension age as a ‘retirement age’.  In fact, average retirement age for women is just over 63, which is beyond their state pension age although for men it is still a little under age 65.  There can be more individual choice about when to stop working altogether, rather than being forced out by employers or assuming you must stop at pension age.

Redefine 21st Century retirement:  The traditional idea of retirement meaning stopping work altogether needs to change – it is already happening, but there is far more that could be done to help it become a reality.  The 21st century concept of retirement should be a phase of life with less work, rather than no work.  This has the potential to improve millions of people’s lives.  The longer you work, the higher your lifetime income will be, and the better your pension prospects too.  By having a period of part-time work in later life, you can also enjoy a better work-life balance, have time for grandchildren, hobbies or holiday breaks and still be part of the social interaction of work.

Hidden boost to economic growth and individual or family incomes:  By keeping the skills of older people in the labour force, national output and national income will be higher, which can boost economic growth.  At the same time, individual and family incomes will be higher too, which means more spending both now and in future.

Retirement should be an ongoing process, not a one-off event:  This needs changed attitudes among employers and individuals.  The old idea of retirement as a one-off event, rather than an ongoing process over a period of years, should be consigned to history.  Flexible later life work opportunities, which retain the skills and experience of older people as well as enabling them to earn more if they want to, can boost society as well as the economy.

Work has non-financial benefits too, improve national well-being:  There is evidence that stopping work altogether when still healthy can damage health and many surveys also show that people value working for non-financial reasons too.  Many enjoy the social interaction and feelings of worth that are associated with work and others find they enjoy self-employment rather than no work.  Society’s attitude to later life working can change to benefit all of us.  That is the real message we need.  It’s not just about retiring later, or raising retirement ages, it’s about a whole new vision for retirement in the 21st century.  The sooner we can make this happen, the better all our futures will be.

October 7, 2014   1 Comment

The pensions revolution – what does it mean?

30 September 2014

So many people have been asking me about the new pension changes and what they might mean, I have put together a quick Q&A to address some of these with my comments.  Hope you find it of interest.  There are profound implications for pension products and pension savers – as well as for regulators of course, to make sure people understand what this all means for them.

  • If in good health, perhaps you shouldn’t buy an annuity before age 75
  • Look for an annuity with guarantees or value protection
  • Pensions have become the most attractive form of savings
  • This benefits ordinary savers, not just the wealthy
  • More money will go into pensions
  • ISAs may switch to pensions
  • More money will stay in pensions
  • Auto-enrolment more attractive than before
  • Pensions can pass down the generations
  • Guidance must explain the tax benefits and signpost to advice
  • FCA must ensure customers are properly protected

The latest announcement of tax free inheritance for pensions, on top of the Budget reforms already announced, will have profound implications for the future of UK private pensions.  It is not putting it too strongly to say that there is a totally different outlook for pension savers in future.  This has implications for millions of us, young or older, and it is vital that the new environment is properly explained and understood.  So much change has happened which runs entirely contrary to decades of traditional UK pensions thinking that many will find it hard to get their head around the new landscape.  Here is quick Q&A to start the ball rolling and hopefully help you appreciate what this might mean going forward.

1.        Will these reforms make pensions more attractive?

Unquestionably yes.  Pensions are the most tax-favoured and attractive long-term savings vehicle for almost all of us.  You could say pensions have become sexy – even exciting!  With the new freedom and flexibility, you can save in a pension fund, get tax relief at your top marginal rate, all gains you make are tax free and then any money you don’t use from your fund while you are alive will go tax-free to the next generation.  Even your own home suffers inheritance tax, but your pension passes on tax free.

2.       Do the reforms just benefit the wealthy?

Absolutely not.  In fact, that’s part of the beauty of the new landscape.  Pensions are now good for the average earners who can enjoy the kind of freedom and flexibility that used to only apply to the very wealthiest.  If you had huge sums in a pension fund before, you did not need to buy an annuity or be limited by capped drawdown, you could use flexible drawdown to take money whenever you wanted, and you could afford not to touch the fund before age 75 so it would pass on tax free to the next generation.  Those who had smaller amounts were denied these freedoms but in future they will be available to all.  Whether your pension fund is large or small, the Government will not restrict what you can do once you reach age 55 and everyone under 75 can pass on the funds totally free of tax, while everyone over 75 can pass on unused funds to give pensions for the next generation – which will be tax free until they are drawn down and face marginal income tax rates.  This ensures many of the advantages that the wealthiest had can now be enjoyed by every pension saver (assuming their pension company allows them to!)

3.        Does this have implications for auto-enrolment?

Yes, huge implications.  The reforms are likely to mean many more people will stay auto-enrolled and opt out rates should be dramatically lower than previously expected.  It also means we should think about auto-enrolling those earning under £10,000 as well, because they are most likely to need the extra savings. As pensions are now so much more flexible and suitable for savers, with the best tax advantages, the reforms make auto-enrolment a ‘must-have’ for many more workers.  This is likely to mean higher costs to both employers and the Exchequer than previously forecast.  Auto-enrolment is a ‘buy one get one free’ offer.  Each £1 the worker contributes immediately doubles to £2 in their pension – due to the employer contribution and tax relief. This is far more powerful than even higher rate tax relief.

4.        What does this mean for annuities?

There are several implications for annuities of the new pension landscape.

·         More annuities with guarantees, so money can pass on tax free on early death

·         More annuities with value protection, as previous sales were hampered by the 55% death tax

·         People who are in good health should perhaps delay annuity purchase to age 75

·         Standard annuity sales will fall sharply – more impaired or underwritten annuities.

Annuity sales should fall sharply, many will be better to wait till age 75 and the providers will need to offer more guarantees or value protection.  Clearly, the reforms will mean the sale of standard annuities, that has dominated the Defined Contribution pensions market for many years, should decline sharply.  This is long overdue.  Annuities have been sold to people who should never have bought them, or who bought the wrong type of product and the Regulator failed to protect customers properly.  The tax system now favours income drawdown and, because of the tax advantages of inheriting pension funds if the saver dies before age 75, there will be a real incentive to delay annuitising until later ages.

5.        Won’t people just rush out and spend all the money as soon as they can get their hands on it?

Of course, there is that risk, but firstly I trust people who have been responsible enough to save for their retirement to be responsible enough to manage their funds in later life too.  Secondly, with the latest announcement of the scrapping of the 55% inherited pensions tax, there is a real incentive now for people to leave their money inside their pension fund for as long as possible.  While any funds passed on were taxed at the penal 55% rate, there was a penalty on keeping money in pensions.  Now, in contrast, there is a real reason to hang onto your pension money as long as you can.  It grows tax free while in the pension, it’s there if you need it, but if you don’t spend it can pass on tax free.

6.        Are there implications for care funding?

Yes, there is now a much more realistic chance that pension funds can help pay for later life care needs, for which no funding has been put in place and which many more people will require.  There is a looming crisis in the funding of elderly care, with neither the state, nor the private sector having prepared for this adequately.  These pension reforms could kick-start care funding by encouraging people to leave money in their pension funds and then, if they need care, they have the money to pay for it.  The state will not pay and cannot pay for all.

7.        Does this have implications for ISAs?

Actually yes.  The fact that pensions have become so much more tax favoured now suggests many people could benefit from switching ISAs into pensions.  The ISA is not free of inheritance tax, it does not get tax relief up front, there is normally no employer contribution and the freedom to spend ISAs has now been at least partially extended to pensions.

8.       Will this benefit families?

Yes, this new pensions landscape means people can pass their pensions onto their loved ones and pension savers will know that their hard earned savings can benefit the next generation if they don’t need or use that money themselves.  The Government is providing real incentives for people to help their children and grandchildren and improve inter generational wealth sharing.  The old system would see insurance companies pocketing the unused funds of most pension savers.  Now their families can benefit instead.

9.  What does this mean for products?

We will need new types of product – annuities sold from a later age and with more guarantees, so they can be passed on to loved ones.  Different products for accumulating pensions, rather than current lifestyle funds that just assume savers will buy an annuity at a preset age.  The default will be drawdown, or keeping money invested in the pension fund, rather than buying an annuity so providers need to help savers with better returns for longer periods of time.

10.  What about the implications for guidance and regulation?

The new landscape makes guidance even more important than ever.  Explaining the tax implications of the pension saving, the implications of taking money out too soon, the tax benefits on death, the benefits of doing nothing and of leaving money invested if still working will all need to be understood.  The guidance should signpost people to full advice too.  In addition, the Regulator must make sure that customers are properly protected.  These reforms are great, but only if people can take advantage of them.  Providers must not be allowed to mislead customers into buying unsuitable products, as has too often been the case in the past.

September 30, 2014   4 Comments

55% pension tax abolished – more good news for pensions


28th September 2014

The good news on pensions just keeps on coming

Chancellor abolishes draconian 55% pension death tax – no inheritance or income tax if funds passed on as pension

Now pension savers will be able to leave all their funds tax-free to next generation

Another nail in the coffin for annuities, but more money could be available for care

Pensions to pass to next generation tax-free:  The Government has now announced the final piece of its pension revolution – and it is yet more good news for pension savers.  The current 55% tax penalty payable when pension funds are passed on after death is being swept away.  In future, pensions can pass on tax free.

Will help deter people from spending pension funds too soon:  This will encourage more people to keep more money in their pension funds for longer.  This should benefit them in later life, especially if they need to pay for care.  It will deter people from spending their pension money straight away, since money withdrawn will be subject to income tax.

Another reason not to buy an annuity:  These new measures are also another nail in the coffin for annuities.  Any money that has been used to buy an annuity cannot normally be passed on to the next generation (unless there is a guarantee attached) whereas funds in drawdown can pass on free of tax in future.

55% pension death tax being abolished:  Anyone who passes on their pension fund to their loved ones on death will no longer face the prospect of a 55% tax penalty.  All their money can pass on to the next generation free of tax, as long as it is in a pension fund.

Currently, if you die after age 75, pensions are taxed at 55% – in future it is tax free if kept in a pension:  Under the existing rules, anyone who dies over age 75 can only pass on their pension fund after a draconian 55% tax charge.  In future, all inherited pension funds will be free of tax if they are kept as pension savings.  If the heirs then take money out of the fund, they will just pay income tax at their marginal rate, which is far lower than the current 55% of course.

Currently, if you die before age 75, you can only pass on pensions tax free if untouched:  If people pass away before age 75, they can only currently pass on their pension fund tax free if it has not been touched.  If they have taken out tax free cash and the fund is in income drawdown, then the 55% tax is still charged.  Under the new rules, these funds will all pass on tax free, whether or not the pension saver has already used some of their pension money.

Only the wealthiest can usually afford not to touch their pension before age 75, so this is good news for ordinary savers:  This is good news for ordinary savers, who often will not be able to afford to leave their pension funds untouched until age 75.  The existing rules disproportionately benefitted the wealthiest, but now every pension saver, regardless of their means, will know that their hard-earned savings can pass on to their loved ones without the current unfair tax penalty.

Only tax free if kept as a pension – otherwise will be subject to marginal tax:  The pension funds will only stay tax-free if the money is kept in a pension fund.  If those who inherit the funds want or need to spend the money, for example to help them onto the housing ladder, repay large debts or fund education, they will just have to pay tax at their marginal rate on any amounts taken out.

Will encourage more money to stay inside pensions:  This will encourage more people to keep more money in their pension funds for longer.  There has been much concern expressed about the recent pension reforms encouraging people to spend their pension funds too soon, leaving them in poverty later on.  These tax changes will provide a significant incentive for people to keep their money in the pension fund, where it can earn tax free returns, until they really need it.  This will help them if they live longer than expected, but could also provide a source of funding for care needs in later life, should this be required.

Summary of the changes:


Die before age 75

Old system

Die after age 75

Old system

Die before age 75

New system

Die after age 75

New system

Pension fund passed on (as a pension) if no money yet withdrawn

Tax free

55% tax


Tax free


Tax free

Pension fund passed on (as a pension) if tax free cash taken or in drawdown

55% tax

55% tax


Tax free


Tax free

Tax payable when funds passed on are spent rather than kept in a pension (unless taxed already)

Tax free if pension not touched, 55% if in drawdown

55% tax


Tax free for anyone


Marginal Income tax






September 28, 2014   1 Comment

Why are so many older workers rejecting free money?

28th September 2014

Huge numbers of over 60s are opting out of pensions auto-enrolment, losing their employer contribution

Budget pension reforms make pensions a no-brainer for most older workers as they can simply take the cash if they want to

Need for financial education and advice greater than ever


Figures just released show that nearly all younger workers are remaining in their employer pension scheme‎ after being auto-enrolled, but many older people are opting to leave.


According to NEST (the National Employment Savings Trust) 28% of over 60s are opting out of auto-enrolment, while only 5% of under 30s are turning away from pension saving.


As this week marks the second anniversary of the start of auto-enrolment, it is certainly encouraging that so many are staying in, however it is worrying that the older workers, who will benefit soonest from their pension savings, are not taking advantage of the free money from their employer.


So why are so many older workers deciding to opt out?  I can suggest some possible reasons:


  1. Fear it’s too late to put money into pensions: Many older workers may not have any pension savings at all and may feel they have left it too late.  Perhaps they have always heard that it is best to start saving early, so they feel they cannot benefit, while younger workers still have many years of saving ahead of them.  However, it’s never too late to save and auto enrolment is a very attractive proposition for most people.  Indeed, especially for those who do not yet have much pension saving, staying in auto-enrolment should be beneficial.
  2. Don’t realise that auto-enrolment means ‘free’ money:  Under the terms of auto-enrolment, every £1 that workers contribute to their pension immediately doubles to £2 (less charges) – with the extra £1 coming from their employer and the Inland Revenue tax relief.  There is no other savings product which doubles your money on day one.  Those who opt out are rejecting ‘free’ money.
  3. Don’t realise the Budget reforms mean they don’t have to buy an annuity and can spend the money freely:  Perhaps the over 60s don’t realise that the Budget changes mean they can double their money and then should be able to take the cash out and spend it after April 2015.  As they will no longer have to buy an annuity, or drawdown, they will usually be better off if they stay in
  4. Fear of means-testing penalties:  Some older people may be concerned that having money in a pension will affect their ability to claim means-tested benefits.  Certainly, before the pension freedoms announced in the Budget, this could have been an issue, but under the new regime anyone affected should be able to take their money out and spend it, and they will also have the employer contribution to spend as well, which would otherwise be lost to them, so they are better off staying in.
  5. Already have good pensions:  Perhaps many of the over 60s think they already have good pensions in place, so they don’t need any more.  However, even if they have other pensions (unless they have reached or are close to the £1.25million lifetime limit), they would normally be best advised to stay in as they are turning away free money by opting out.
  6. Distrust pensions: Perhaps the older workers distrust pensions so much, after hearing about or experiencing some of the scandals in recent years and this has put them off pensions altogether.  Younger workers may be less directly affected by these.  It is also the case that new-style pensions are much better value than many older pensions.
  7. Can’t afford pension contributions:  Some older people may feel they need every last penny of their salary and cannot afford pension contributions, however, it is difficult to imagine that so many more older people are struggling than the under 30s, where opt out rates are so much lower.  Therefore, this is unlikely to explain the large age differential in opt out rates.
  8. Don’t believe the reforms will last:  Maybe the older workers are more cynical than the young and don’t trust the Government to leave the pension reforms in place, fearing that the freedoms will not last.  They may be afraid of being unable to take the money out, or being forced to buy particular products again in future, having seen so many pensions policy changes in the past.


So, if they don’t trust pensions, or don’t trust Government policymakers, this could explain the high opt out rates.  It will, therefore, be important for Government and employers to help their older workers understand the benefits of pension saving and the risks of opting out of auto-enrolment if they want  to reach those coming up to retirement soonest.  Improving financial education would clearly help too.  Of course, anyone who is unsure about their position would benefit from taking independent financial advice, but for most older workers, the employer contribution coupled with the Budget pension reforms make pension savings a ‘no-brainer’.     Assuming nothing else changes!


September 28, 2014   1 Comment

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




Annuity sales – value £bn




Average fund size





Income drawdown sales – number




Income drawdown sales – value




Average drawdown fund value




Drawdown value as % of annuity sales





Table 2: Trends in enhanced annuities

Q2 2014

Q2 2013

% of annuities bought from existing provider



% enhanced annuities out of total annuities



% enhanced annuities bought externally



% enhanced annuities bought internally




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