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.
Q2 2014, latest data
Change since 2010 %
Change since 2010 number
Employees Age 16-49
Employees Age 50+
Employees age 50-64
Employees age 65+
Unemployed age 16 – 49
Unemployed age 50-64
- 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
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
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
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.
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 2 Comments
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
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
People will increasingly realise the benefits of redefining retirement
In the past, retirement was not an active decision – it just happened to you, dictated by your employer, a pension scheme or society: Traditional UK retirement was not an active choice, but an event that happened, dictated by outside forces rather than being a positive and considered decision. For example most people automatically stopped work at their pension age or were offered the chance to retire early with a good pension funded by their employer, or believed they must stop when reaching state pension age. Workers were not encouraged to make pro-active decisions about how or when to retire, unless they were in poor health.
Most people retiring now are still fit and healthy – what a waste of resources. Decisions about how, when – and even whether – to retire can increasingly become the choice of the individual. The old days of standard lifestyles that shoehorn everyone into the same mould are outdated. In the 21st Century, retirement no longer needs to be standardised. As people are living longer and are healthier, they do not need to leave the labour force just because they reach a ‘standard’ pension age. The skills and talents of the over 50s are too often wasted, due to outdated stereotypes of poor health and disability. Medical advances enable most of us to recover and live well with illnesses which would have disabled previous generations.
The recent pension changes make flexible working in later life easier: The UK has a tremendous opportunity to revolutionise its retirement and pensions system over the next few years as the restrictions and inflexibilities that have hampered UK pensions are being swept away. This can transform the way we think about retirement and pensions. This pensions revolution is an important part of the social revolution being driven by issues such as increased longevity, improved health in retirement and economic reality.
Pensions and retirement are out of step with people’s lives: As the proportion of people’s lives spent working has fallen so much, the failure to move retirement thinking to match developments in health and life expectancy has left many living on much lower incomes for longer than they need to. In the 1950s, when the current pension system was designed, the average worker would start working at age 15, work for about 50 years and then live for five or 10 years in retirement. That meant most people would be working for around two thirds of their lifespan (50 years out of 75). 10 years of retirement might follow their 50 years of work. In other words, each 1 year of retirement was funded by 5 years of work. Nowadays, people are working for perhaps 45 years and living in retirement for around 23 years, so each 1 year of retirement is funded by less than 2 years of work.
Record numbers already working past pension age: According to the Office for National Statistics, the number of pensioners in work nearly doubled from 753,000 (7.6% of pensioners) in 1993, to 1.4million (12% of pensioners) in 2011. Two thirds of older workers are working part-time, the majority with their previous employer. The longer people can stay economically active, the more chance they have to protect their spending power and increase their future income prospects. Those who work longer will not only have more money immediately, but they will also have more chance to build up savings. Setting money aside for future income needs, even after age 60, can help meet the challenges of longer periods in retirement.
Survey evidence confirms this is already happening: MetLife Survey results, from a nationwide Survey of 2000 adults highlight how attitudes are already changing:
- 71% of workers said they would consider working past state pension age, in order to achieve a higher retirement income
- Only 8% of workers said they would not be willing to work on, even if that meant they had to struggle financially
- Only around 20% of workers believe they are saving enough for retirement.
TABLE 1: Most people expect to be fit enough to work beyond their mid-60s.
Do you think you will be physically fit enough to work in your current job beyond your mid-60s?
|Age 60+||Age 50-59|
TABLE 2: The majority of people will consider working longer, particularly part-time, in order to achieve a much higher retirement income
Would you consider working longer to have much higher retirement income?
|Age 60+||Age 50-59|
|I would consider working full-time past state pension age to have much higher retirement income||24%||27%|
|I would consider working part-time past state pension age to have much higher retirement income||42%||42%|
TABLE 3: There are other reasons for staying on at work, apart from financial, such as giving a sense of purpose in life and social interaction.
Why would you want to keep working past state pension age?
|Age 60+||Age 50-59|
|I can’t afford to retire||32%||44%|
|I enjoy working and don’t feel ready to retire||47%||21%|
|Work gives me a sense of purpose in life||34%||29%|
|I would miss the social interaction of work||20%||31%|
|I want to save more for my retirement||20%||19%|
Working longer brings significant income and capital benefits. Every extra pay cheque means higher lifetime income, larger potential pension fund and pension savings have to last for fewer years. Staying at work can also keep people healthier – both physically and mentally.
Many people find retirement disappointing: Retiring while fit and healthy has been disappointing for many, who find they are bored or miss their work colleagues, do not have enough money and little structure to their lives. Some may have sufficient income to travel the world, participate in their hobbies and do voluntary work without any financial concerns, but they are a minority. The ideal is to work part-time for a while, before retiring altogether. This would give them a better work-life balance, help provide more income and enable a more gentle transition to full retirement. The retirement of the future will be one where people cut down work gradually and work part-time before finally stopping altogether.
July 15, 2014 3 Comments
Older workers can be the key to economic growth
Over 700,000 people may retire each year – helping them stay at work means more income to businesses and individuals
Working just one year longer would add 1% to economic growth for the nation
I am delighted to have been appointed as the Government’s Older Workers Champion. Having worked on the issues surrounding rethinking retirement and extending working lives for many years, I am delighted to be able to play a more direct role in this social revolution that is already underway. I believe passionately in the value of staying in the labour market, ideally part-time in later life, and see this as an all-round positive development for society.
Individuals will have higher incomes and will therefore be able to afford better pensions. A continuing income stream also means that their pensions won’t need to fund as lengthy a period of non-earning in later life. Instead, those who go on working – whether full-time or part-time – will increase the potential growth of the economy as well as continue to be, and feel, valued. Too many people retire when they are still capable of making a strong contribution to society and to the workforce. The talents and experience accumulated throughout working life don’t suddenly stop being valuable at the age of 60 or 65.
Nobody should be forced to keep working, but equally, those who can benefit from staying economically active should be encouraged and enabled to do so. At each age from 50 and older there are at least 700,000 people who may stop working every year. To put this in context, less than 200,000 immigrants come in to the UK each year. Retirement means mean lost income to many individuals, both now and in future, and lost output to the economy. As well as the financial implications, though, those who have already retired often miss working, not just because they have such reduced incomes, but also because they miss the social interaction, daily structure and positive feelings that derive from work.
Employers often have ageist attitudes which mean they fail to make the most of the knowledge and skills of their workforce, and challenging these attitudes will benefit businesses as well as employees. The number of over 50s will be soaring in the coming years, and it is vital that we ensure they have opportunities to earn and save more, as well as continuing to contribute to the growth of the economy as a whole.
For many years, I have been highlighting the need to consider retirement as a ‘process’ rather than an ‘event’ and to enable people to leave the labour market more gradually, by enjoying a period of part-time work before stopping altogether. Until now, retirement has often been an irrevocable step; a more gradual move will make the transition easier to manage both financially and personally. But most people are no longer ‘old’ in their 60s. Societal attitudes are changing and staying at work for longer needs to reflect those changes and become the norm. Just as we have redefined work for mothers with young children over the past 30 years or so, we can now redefine work for older people.
This will bring benefits to the individual and also to businesses who retain experienced staff for longer. In addition, all of society will benefit from the additional production and income generated in the economy as well as from the health and wellbeing benefits that working longer can bring. If everyone works just one year longer, this would boost UK economic growth by at least one per cent – which is at least an extra £16billion a year. That can offer a permanent boost to economic activity and will help both older and younger generations. It’s a win-win, let’s help make it a reality.
July 14, 2014 1 Comment
29 June 2014
- Right to request flexible working for all starts tomorrow
- Government giving green light to redefine retirement – encouraging flexible working in later life
- A win-win-win – better for older people’s health and wealth and better for the economy
All workers can request flexible working: From 30th June, the Government is giving all workers the right to request flexible working. So far, parents and carers can ask their employer to allow them to work flexibly, but now all workers will be able to. Employers have been agreeing to over 70% of such requests, so it is likely that increasing numbers of older people will be able to work part-time in future.
Older workers can benefit from easing into retirement more gently: This will help to redefine retirement. Rather than retirement meaning stopping work completely, it can increasingly mean cutting working hours first, before stopping altogether. Already, more than 1 million people in the UK are working past age 65, the majority part-time, and this is likely to extend to many more in future.
Rethinking retirement is better for the nation’s health, wealth and growth: Retirement will become more of a process than an event, and longer working lives is a win-win-win for all of us, especially as the population is rapidly aging. Most people in their 60s nowadays are still fit and strong and capable of working, although they may prefer to work less than full-time. Having the chance to stay in work offers the opportunity to earn more money and also to build up a bigger pension. But working longer does not just increase wealth, it will also improve health. Studies show that people who retire suffer a deterioration in their health, often become more lonely and miss the social interaction of working life. With increasing numbers of baby boomers reaching their sixties, keeping more of them in work will improve the economy and create more growth for all of us.
Older workers are a precious national resource: Helping older people stay in work allows the whole economy to benefit from the huge range of skills, talent and experience that they have gained during their working years. If too many suddenly stop work and have low pension income, the outlook for growth will deteriorate, whereas keeping them in work on a part-time basis will increase their income, should increase their eventual pension and also contribute to economic output.
Flexible working can improve the lives of millions in future: The right to flexible working marks another advance for older people who can benefit from a better work-life balance as they get older, without having to stop working altogether when they are still in good health and have twenty or thirty years ahead of them.
June 29, 2014 Leave a comment
23 June 2014
- Budget pension reforms could help kick-start saving for social care
- New tax breaks will help savers build up care savings funds - could be with pensions or ISAs
- My Budget consultation response highlights urgency of addressing social care funding crisis
In my response to the Chancellor’s 2014 Budget on pension reforms, I have included a section explaining how the pension freedoms could be used to help kick-start a culture of care saving. This probably needs to be incentivised with further tax breaks. However the cost to society of failing to ensure money is set aside for future social care needs could be unaffordable and there are already signs that the pressure is proving damaging to the NHS. The real crisis is still some years away, but as baby boomers reach later life, the numbers needing care will soar. Something must urgently happen to head off a disaster that is clearly on the horizon.
The new pension fund freedoms introduced by the 2014 Budget could pave the way for exciting new approaches to solve the crisis in social care funding - which will inevitably follow the pensions crisis. Official estimates suggest that perhaps 80% of the population over age 65 will need some care and support in later life. Half are likely to need to spend around £20,000 and one in ten will spend over £100,000.
But there is no money set aside for care: Even though the demographics and medical advances obviously point to a dramatic rise in the numbers of older people needing long-term care, as the millions of baby boomers currently reaching their 60s will be likely to need care in the coming twenty years or so, there is almost no money set aside to pay for the care they will require. The Government has not set aside any money for this huge looming cost, so no one has actually prepared for this.
Government needs to urgently design new tax rules to encourage saving for social care
People need to plan to meet such costs - guidance could help: It will be important to ensure that guidance or advice on retirement planning includes consideration of having to pay for care. Materials that help people understand the risks of facing very high costs if they or a loved one needs care, can help educate people who are currently totally unaware of this issue.
Current products to help people cover care costs are expensive and poorly understood: There are various products on offer to help people pay for care, each of which has advantages and disadvantages. These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans (which are often unavailable in most cases nowadays), other savings such as ISAs or insurance bonds and perhaps some health or illness insurance. New products and approaches, together with new Government incentives, are likely to be required.
Possible new approaches to paying for care - with proposed new tax incentives:
Potential new products for care funding
Using pensions for care
Tax free pension withdrawal - allow pensions to be withdrawn tax free if used for care
Care ISAs - incentivised by allowing them to pass on free of Inheritance Tax
Family Care Saving Plans - incentivised by allowing them to pass on free of Inheritance Tax
Workplace care savings plans in auto-enrolment
Using pensions for care: Until the latest Budget changes, pension savings could not be easily accessed to help pay for care. Many people reaching retirement will have some tens of thousands of pounds in their pension funds but once they buy an annuity, this capital could not be directed to pay for care. Now that the annuity requirement is removed, pension funds could potentially be used for care. Those who do not require extra income from all of their pension savings, might be interested in a savings or investment product that would be specifically earmarked to pay for care - perhaps for themselves or for a member of the family. Each couple may have a one in two chance of needing long-term care, although they do not know which one of them or when, the Government could use the new pension reforms to kick-start a culture of saving for long-term care. Even without new incentives, people may benefit from the opportunity to use their pension savings to pay for care. However, if any money withdrawn is taxed, the amount available will be reduced by 20-45%.
Tax free pension withdrawal: Given the social importance of funding social care, it makes sense for the Government to consider tax-exempting pension withdrawals that are used to pay for care needs. A specified sum of money might be allowed to be taken out of a pension fund tax-free if spent on care. This might encourage people to leave money in their pension funds for later life, closer to the point when they might need it, in the knowledge that there are tax advantages if they do spend it on care. While the money stays in a pension wrapper, it does not incur tax on investment returns, and then allowing it to be withdrawn tax-free if paying for care, might encourage more people to leave it there unless they really have an important reason to spend it.
Care ISAs - IHT free: Another possibility is for the Government to introduce a specific annual allowance for any ISAs that are earmarked to pay for care. This could be to pay for care for oneself, or for another family member, but as long as the money is used for care, people might be offered a special tax concession. This could allow ISAs to be used as a care saving plan. Investment returns would be tax free and if the fund was not needed for care it could be exempt from inheritance tax as long as the funds passed on are themselves set aside for future care funding. These special ‘Care ISAs’ would help signal the need for people to save for care. Even if only those with larger amounts of saving will benefit most at first, introducing special tax allowances to encourage care saving, could help more people realise the need for this kind of saving, which is important because most are currently unaware of the issue.
Family Care Savings Plans - IHT free: Another possibility is for families to save collectively for the care needs of their loved ones. For example, parents, siblings or children might join together to put in money each year, to build up a fund in case one of them needs care. The probability is that one in four people will need care, but nobody knows in advance which one. Again, the Government could offer tax breaks to incentivise this kind of saving. People could perhaps use the tax free lump sum from their pension, with these plans being free of all inheritance tax as long as they stay earmarked for care spending. These savings plans might also include some ‘catastrophe insurance’ that would pay out if more than the expected number in the group actually need care.
Workplace benefits for care saving: Alongside auto-enrolment, it might also be helpful to ensure that employers consider offering the option for people to save in a workplace savings plan that is set aside specifically for care. This could be set up by the employer, and perhaps offered as part of a flexible benefits package, or offered to older workers who have some pension savings, but have not yet saved for care. These could be tax advantaged savings products, offered as a workplace benefit, or ordinary savings accounts which receive an employer contribution.
Why Dilnot reforms will not solve the care crisis: The £72,000 cap, based on Dilnot’s proposals, is not a solution to the problem of inadequate social care funding. It is not an actual maximum and represents only part of the amount people may need to actually spend on their care.
- £72,000 cap excludes £12,000 a year board and lodging costs which must still be paid
- Cap only covers spending when care needs assessed as ‘substantial’, ignores moderate need care spend
- Cap only covers spending up to local authority basic rate
- Only starts from 2016, any spending before that won’t count towards the cap
- Even after cap is reached, people must still pay £12,000pa for care home accommodation
The cap is much too high to allow an insurance solution to care funding: The £72,000 cap is too high to allow insurance companies to offer insurance solutions for care funding. Because of the exclusions, someone would probably have needed care for about 5 years before they reach the cap, and even then they will need to spend thousands more. The average care home stay is 2-3 years, so most people will simply not reach the cap and never be able to claim on the insurance. Thus, insurers will be reluctant to offer such a product and the bottom line is that people will have to find money to pay for care. As there are no savings currently set aside to pay for the huge looming costs of social care for an aging population, a new source of money must be found which will need to be based on savings, not just insurance. The sooner we can start to help people save for later life care needs - for themselves or their loved ones - the better.
Pension reforms are a start, but more tax incentives are required: The Chancellor’s pension reforms could help to raise awareness of the issue and, if coupled with further tax incentives, could form the basis for starting care saving that is so urgently needed.
Here is a link to my response to the Budget Consultation questions on social care funding
June 23, 2014 Leave a comment