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Monday, December 6, 2010

Millions to lose Ј41K in two-tier pensions

Some of these pensioners will have retired as little as a day before the planned introduction of a new flat-rate basic state pension, which promises to pay £140 to everyone.

Almost one million workers are due to retire in the two years before the proposed changes are introduced in 2015.

Knowing they will be £41,600 worse off over 20 years than those who retire later, many could be forced to rethink their plans and postpone their retirement.

'This would be a disaster,' says Neil Duncan Jordan, from the National Pensioners Convention charity.

'It would create a new form of pensions apartheid, whereby those reaching state pension age before the changes are introduced will receive a fraction of the pension enjoyed by those retiring after.'

Earlier this week, the Daily Mail revealed that pensions minister Steve Webb wants Britain to have a flat rate £140 basic state pension. This would replace the current payout of £97.65 for single people and the complex system of benefits and credits for poorer pensioners.

The British state pension is one of the lowest in Europe. An estimated five million women pensioners are not even able to claim the full amount.

Even if the state pension rises with inflation, the difference between the old and new pension will be £40 a week. That amounts to £2,080 a year more for those with the new state pension - a total of £41,600 over the 20 years most pensioners will live for after retiring.

For couples, the difference could be even worse. They get £156.15 under the current system: but under the new regime they would get £280 between them - £123.85 a week more. If they were to both live until they were 85, this would mean they were £128,804 better off than those stuck in the old system.

Existing single pensioners would need to have saved £54,000 into a private pension to get a weekly payout of £140, according to the insurer Standard Life. Experts suggest that many of the one million workers set to hit state pension age in the two years before 2015 may consider postponing retirement in order to claim the higher handout.

Sheila Grant, 65, is one of the millions of women forced to rely on her husband for pension income.

Mrs Grant (pictured with her husband, Graham, at their home in ascot, Berkshire) cared for their two daughters and paid the married women's stamp when she returned to work.

This means she now receives a state pension of just £60 per week instead of the full amount at £97.65.

She says: 'It is really unfair that women like me should have to rely on their husband's pension provision just because they took time off work to care for children. Hopefully, the new rules will give women a bit more independence and not penalise carers in the same way.'

Unfortunately, Graham also bought a single-life annuity, which means their income from his private pension will stop entirely when he dies.

'I only have a tiny private pension, so I know my income will be drastically reduced if Graham dies first and that is a big worry,' she says.

They also fear the Government could put in place draconian measures to ensure savers can't do this. More than 1.2 million people have put off drawing their state pension. In return, they will get a higher state pension when they retire.

'I'm sure the Government will clamp down on those who delay their retirement to avoid the new rules,' says John Lawson, head of pensions policy at Standard Life.

Experts also fear another raid on Middle England to pay for the changes, with generous earningsrelated state pension top-ups, which push certain people over the £140 threshold, clawed back.

'we could well see many savers losing some of their entitlement to state pension top-ups, which would, effectively, be a form of tax,' says John Ralfe, an independent pensions consultant.

Ministers claim savings made from cutting means testing and increasing the state pension age will pay for the pension increases. pension credit, for example, costs £54 per person per year to administer, compared with just £5.40 for the basic state pension.

The full details of the reforms have yet to be unveiled, but the Government will still require savers to build up the minimum number of NI contributions to qualify for the full £140 a week.

'This could mean large numbers of women with several part-time jobs who don't pay NI could miss out,' says Dr Ros Altmann, director general of Saga.

A Department for Work and Pensions spokesperson says: 'Our aim will be a simple, decent state pension for future pensioners which is easy to understand, efficient to deliver and affordable.'

Read more: Pension

National pension scheme to go ahead

It comes as part of measures that will see all UK employees automaticaly enrolled into a company pension in two years time.

Yesterday, the Government quashed speculation that it would scrap the nationwide scheme, which is expected to be worth £200bn in the next few decades.

The new auto-enrolment rules will see all UK workers have to opt out, rather than in to, a company pension scheme from 2012.

However, many smaller firms don't offer pensions for their employees all – and would have struggled to set one up in time.

To bridge the gap, Gordon Brown's Labour government had planned to introduce a national pension scheme called 'NEST'. Employers without a company scheme could enroll their employees into this 'low-cost' model, which was to be fully supported by the Government.

But NEST (full name, National Employment Savings Trust) was under threat when the coalition Government came to power. The new administration gave no indication that it supported the proposals.

In yesterday's Spending Review documents, though, the Treasury appeared to throw full backing behind NEST.

Hidden deep within its Spending Review documents, the Treasury confirmed: 'The Department for Work and Pensions settlement includes funding for the introduction of auto enrolment from 2012 and the establishment of the National Employment Savings Trust, to help individuals save for their retirement and encourage high quality pension provision by employers.'

In a separate statement, Nest chief executive Tim Jones said: 'The work we have been doing over the summer has ensured that NEST is now really taking shape and will be ready to launch in low volumes in 2011.'

Paul Macro, a pensions consultant at Towers Watson, said that talk of scrapping NEST was never very realistic.

He said: 'If the Government wants to require all employers to enrol staff into pension schemes, there has to be a pension scheme to enrol them into.

'If the Government had pulled the plug on NEST, it may have had to exempt small employers from the new laws, leaving a significant part of the workforce without a pension.'

Elsewhere in the pensions industry, the news was welcomed. Ian Naismith, of Scottish Widows, said: 'The insurance industry already provides high-quality pension arrangements for millions of people, but it is not commercially viable for it to serve small employers with lower-earning staff. NEST will provide simple, good value pensions for those who do not currently have easy access to pensions, and will complement existing provision.'

Read more: Pension

Pension cuts hit 100,000 savers

This annual allowance will include money paid in by employers as well as contributions from employees' pay. At present, savers can pay a maximum of £255,000 a year into a pension, although this is complicated by a Labour scheme to claw back higher-earners' tax relief.

The other big change is that the cap on the maximum value of a pension pot will be lowered. The 'Lifetime Allowance' will be trimmed from £1.8m to £1.5m in 2012, though measures will be put in place to protect those whose pension funds are already worth more than £1.5m.

The Treasury estimates 100,000 savers will be caught by the new rules, 80% of whom earn £100,000 a year or more. But experts say this number will increase over time unless the allowances rise in line with earnings.

The new regime is less draconian than had been feared. The Government had initially considered cutting the annual allowance to £30,000. And the rules are far simpler than the complex proposals from the former Labour government that could have raised a similar amount for the Government, but would have been likely to have proved an administrative nightmare. Under rules already implemented, anyone who is earning £130,000 or more has their tax relief capped.

Crucially, savers will get tax relief at their highest rate on every penny paid into a pension. So a 50% taxpayer gets back 50p in the pound. Andrew Tully, pensions policy manager at financial services provider Standard Life, says: 'The Government has listened. These rules are simpler, easier to explain to savers and are cheaper to administer.'

One key concession is the reintroduction of 'carry-forward' rules. These will allow savers to go back up to three previous tax years to hoover up unused allowance, enabling them to pay up to £200,000 into a pension in one go. This will give some protection to the self-employed and those running their own businesses who have irregular incomes. They will be able to pay extra into pensions in bumper years or when they come to sell the business.

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Sarah Lord, wealth planning director at Killik & Co, in Mayfair, central London, says: 'The rules will apply from April, going back to the tax year 2008-09.

'So there is a useful chance for those who held off making pension contributions because of the recession and credit crunch to catch up next year.'

Carl McColgan, a director of wealth manager Ashcourt Rowan in Manchester, says: 'We will be encouraging clients to start their pension saving earlier and work towards the target of saving £50,000 a year, rather than waiting until later and saving bigger sums.'

Peter Owen, 62, is relieved that the new rules will allow him to carry on saving. Peter, who lives near Esher, Surrey, runs his own marketing consultancy and is making up for lost time on retirement saving by paying in as much as he can afford to his Aviva personal pension. He aims to pay in 25% of his earnings, and in a good year even more. As a 40% tax-payer, tax relief makes his saving almost doubly worthwhile.

He was concerned that a lower annual contribution limit, say of £30,000, might restrict his savings and was also worried about any further attacks on pensions relief.

Peter says: 'The proposals are not as bad as had first been thought. I've got the green light to carry on with my saving and try to put as much as I can afford into my pension. The tax relief makes it by far the most efficient way to save.'

Those who are members of a final salary pension scheme will also be caught by the rules. Here, a complex formula will be used to test the annual increase in the value of their pension against the £50,000 limit.

Each £1 of extra pension they are entitled to is treated as £16 of pension contribution. This could see those workers with long service who get a promotion and pay rise suddenly facing a shock tax bill because the value of their pension pot is deemed to have increased by more than £50,000.

Again, the Government has listened to pension experts. It will allow the impact of any pay rise on the pension to be phased in over three years, protecting most workers. Those who retire early with an enhanced pension because of ill-health will also be protected.

But workers whose pensions are boosted as part of a redundancy deal could be hit with a tax bill. And there are concerns that the reduction in Lifetime Allowance could hit those who want to retire relatively young.

Tim Stalkartt, head of financial planning at London adviser Bestinvest, says that the amount of pension a £1.5 million pot can buy is surprisingly low. At current annuity rates, a man aged 60 with a wife aged 57 and a £1.5 million fund would be able to buy an inflation-protected income of £2,121 a month after tax, once the couple have taken the maximum tax-free cash of £375,000.

Those with small pensions will be protected. Current rules allow for those with a pension worth one per cent of the Lifetime Allowance - £18,000 - to take the whole pot in cash, rather than being forced to buy a token annuity. The £18,000 limit will remain, despite the lower Lifetime Allowance.

Read more: Pension

10,000 Equitable Life pensioners miss out

The decision has sparked outrage among pressure groups representing annuitants, who claim that the Government has turned the payment of compensation into a 'lottery'.

The Treasury confirmed on Friday that with-profits annuities taken out before September 1992 are excluded. But those who set up policies later – about 37,000 customers – are included.

The September 1992 cut-off date has been imposed because the Treasury claims annuitants who bought earlier did not make investment decisions that were affected by the Government's maladministration of Equitable Life, leading to the mutual's near-meltdown in 2000.

The £1.5bn package is compensation for the relative losses suffered by policyholders as a result of the failure of previous governments to regulate the mutual effectively.

Peter Scawen of pressure group Equitable Life Trapped Annuitants says the cut-off date is 'unfair and unreasonable' because all with-profits annuitants have been victims of maladministration.

'Once bought, these annuities could not be exchanged, so every annuitant has suffered from the consequences of regulatory failure, irrespective of when they took them out,' he says. 'The decision is illogical and I'm appalled.'

Scawen also says the Treasury's cut-off date ignores the views of Parliamentary Ombudsman Ann Abraham and Lord Chadwick, who in the past have both made recommendations on the extent of Government compensation.

He adds: 'Even Chadwick, who came up with a much financial smaller overall compensation package than the £1.5bn now on the table, said that pre-1992 with-profits annuitants should not be excluded. A review of this crass decision must be made urgently.'

One with-profits annuitant who will get no compensation is Tony Fisk, 79, from Southend-on-Sea, Essex. Tony, a former businessman who used to run his own toys and games agency, bought a with-profits annuity in late 1989.

Since 2000, Tony and his wife, Pamela, 66, have seen the value of this annuity plunge in value by 63%. He now receives just below £6,900 a year, instead of the £18,800 he was getting in 2000.

'I hoped that last week people like me would finally get justice,' says Tony. 'But we haven't and we've been left empty-handed. What is awful is that those people who have been excluded are all in their late 70s and 80s and all have been hardest hit by the Equitable Life debacle.'

On Friday, Tony wrote to Chancellor George Osborne asking for the compensation injustice suffered by early with-profits annuitants to be reversed.

Paul Braithwaite of the Equitable Members Action Group says the Government's compensation package has turned into a lottery.

'Some with-profits annuitants will do fine, others are excluded on questionable grounds, while 600,000 other victims of regulatory failure will barely get back 20% of their losses,' he says.

Read more: Pension

Friday, December 3, 2010

The Graying Work Force

The New York Times, November 30th, 2010

My 73-year-old father is retired, sort of. He works as a greeter in a grocery store in Calgary, Alberta, juggling shifts at work with caring for my young niece, who stays with my parents after school until my sister finishes work. You’ve likely seen someone like him in action — an elderly man or woman who says hello when you walk in, steers you to the right aisle and wishes you good day on your way out.

My dad, who puts in about 20 hours a week, stands on his feet for hours and sometimes works late shifts until midnight. Every now and then, he deals with shoplifters trying to sneak past his post. And yet he says this is the best job he’s ever had.

Until recently, working after retirement sounded like an oxymoron. Aren’t those years supposed to be devoted to volunteering, traveling and visiting grandchildren? But a recent report by the Families and Work Institute and Boston College’s Sloan Center on Aging and Work found that a growing number of people continue to work for pay following their official “retirements.” And while they may be motivated by money, many like my father are finding their late-life jobs unexpectedly fulfilling.

Older workers “expect they have to, and they want to, extend their labor force participation,” said Marcie Pitt-Catsouphes, director of the center and the study’s co-author. In fact, 75 percent of the participants over age 50 in the center’s study said they expect to have jobs after they “retire.” Already, roughly a quarter of older workers switch occupations after age 50, according to Richard Johnson, a senior fellow at the Urban Institute in Washington, D.C.

The federal Department of Labor estimates that between 2006 and 2016, the number of workers over age 55 will rise 36.5 percent. That increase will create the grayest labor force since the government began tracking this data, Mr. Johnson said.