Pension Pots

More than ten million pots are being left largely unmonitored

Individuals are living longer, meaning that savings have to fund a longer period of retirement. However, there has been a well-documented decline in pensions saving over time. Many people do not think about retirement as they consider it’s too far in the future, and almost two thirds (63%) of over-45s who are not yet retired admit they pay little or no attention to their pensions, leading to more than ten million pots being left largely unmonitored[1].

The findings form part of research from Aviva which also highlights that two fifths (41%) of over-45s never spend any time planning and reviewing their pensions, while almost a third (29%) spend just one day a year or less doing this.

Failing to dedicate any time

Those who are further away from retirement are most likely to spend no time reviewing their pension, but a quarter (25%) of those retiring in two years or less still fail to dedicate any time towards doing this.

Among those with more than one pension, just 27% manage them all very closely while 34% ignore their secondary pots completely – including a worrying 24% who ignore their main pension pot too. Even among those who have just one pension pot, 33% do not pay any attention to it.

Unclear about the types of pensions

The majority (61%) of over-45s with a personal pension scheme have only joined one scheme, although more than a quarter (28%), have started two or more. A similar proportion (29%) of those with the most common type of company pension – defined contribution – has two or more.

However, many over-45s aren’t sure how many pension schemes they have started. Overall, 6% don’t know how many personal pension schemes they have, rising to 7% who are unclear on the number of defined contribution schemes and 9% who don’t know how many defined benefit schemes they have. This may suggest that some savers are unclear about the types of pensions they have and/or are not closely involved in managing them.

Too late to make any improvements

Half (49%) of over-45s do nothing about the routine information they receive about their pension, including one in ten (12%) who don’t even read it. Only a third (37%) use the information to check if their pension savings are on track and act upon it. An even smaller proportion (7%) discuss this with a professional financial adviser.

One in ten (11%) over-45s ignore their annual statements because they say they don’t know how to manage their pensions, while the same proportion believes their pensions are so small they aren’t worth bothering with. 8% delay looking at them until they are ready to retire – when it could already be too late to make any improvements on their financial situation.

However, people tend to make more effort to monitor their pensions the closer they are to retirement – for example, only 7% of those retiring in two years or less believe their small pension pots are not worth the effort, compared to 11% who are retiring in six to ten years.

Multiple pension schemes

Just 14% have consolidated their pension pots or intend to do so in the future. A fifth (17%) will keep their multiple pension schemes separate, and 13% are waiting for their pension provider to contact them before deciding what to do with their pots. More than one in ten (14%) prefer to keep things simple by having just one pension pot and don’t intend to change this in the future.
Of those who have consolidated their pots, 21% did so because they took the advice of their professional financial adviser – however, nearly the same proportion (19%) did so because they found it easier to manage.

Source data: The Real Retirement Report is designed and produced by Aviva in consultation with ICM Research. The above findings are based on an online survey carried out among more than 1,500 over-45s who have not yet retired.

[1] ONS Pension Trends Chapter 7 (October 2014) estimates there are 8.1 million active occupational pensions and 8.2 million active members of private pension schemes. 63% of 16.3 million = 10,269,000.

*Please note that the information included in this article is based upon findings generated in previous years and therefore may not apply to the current market. If you seek further information on this topic, please contact a financial adviser. This is not to be taken as advice or sales and Virtue Money takes no responsibility for any information provided within the links from this site and the information contained within these links should not be regarded as advice from Virtue Money.*

Pension Credit

Cuts for people who go abroad for over a month

People who go abroad for over a month will no longer be eligible for pension credit. At present, housing benefit and pension credit recipients can go abroad for up to 13 weeks while continuing to receive payouts.

The spending review says: ‘The benefits system should not subsidise those on benefits to go abroad for extended periods. This reform will ensure the benefits system is not paying the rent of people who go abroad for more than four weeks at a time.’

Basic State Pension increase

Rising in line with the highest out of CPI inflation, average earnings increase or 2.5%

The basic State Pension increased in tax year 2016/17 by £3.35 to £119.30 per week. Chancellor George Osborne stated this will make pensioners £1,125 a year better off.

Meanwhile, the ‘triple lock’, which ensures the State Pension rises in line with whichever is highest out of CPI inflation, average earnings increase or 2.5%, will be maintained.

New State Pension rate

Higher rate than means tested benefits for the lowest earners in society

The full State Pension rate for people reaching their State Pension Age from 6 April 2016 will be set at £155.65 pw. Mr Osborne says this is a higher rate than means tested benefits for the lowest earners in society.

People who contracted out of the top-up S2P and Serps schemes over the years may get less than this.

State Pension – what you need to know

The basic State Pension took rise to £119.30 from April 2016 (applies to those reaching their State Pension age before 6 April 2016). It is currently topped up by additional State Pension entitlements – S2P and Serps – accrued during working years.

This two-tier system will change from 6 April 2016 and be entirely replaced for those reaching their State Pension age on or after that date by a ‘flat rate’ pension. George Osborne announced that the starting rate will be £155.65 a week.

Workers need to have 30 years of qualifying National Insurance contributions to get the current full State Pension, but will need 35 years of contributions to get the full flat rate State Pension in future.

Even if you paid in full for a whole 35 years, if you contracted out for some years, it might still reduce what you get.

Rises in the State Pension are presently calculated on the basis of what is known as the ‘triple lock’. This means that payouts always increase by whatever is the highest of inflation, average earnings or 2.5%.

*Please note that the information included in this article is based upon findings generated in previous years and therefore may not apply to the current market. If you seek further information on this topic, please contact a financial adviser. This is not to be taken as advice or sales and Virtue Money takes no responsibility for any information provided within the links from this site and the information contained within these links should not be regarded as advice from Virtue Money.*

Pensions and Life-Long Ambitions

For many people, retirement now represents an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs. Since pensions freedoms, you now have more options than ever before to help you find a solution.

Save now to accumulate the right sum for your future

We all want to save enough to ensure that we have a comfortable retirement. But the challenge is to know just how much income we’ll need as a pensioner – and how to work out how much we’ll need to save now to accumulate the right sum.

Be honest about how you want to live in retirement

It’s important to make realistic estimates about what kind of expenses you will have in retirement. You need to be honest about how you want to live in retirement and how much it will cost. These estimates are important when it comes to calculating how much you need to save in order to comfortably afford your retirement.

Estimate your retirement costs by looking at your current expenses

Part of the process is to estimate your retirement costs by looking at your current expenses in various categories, and then estimate how they may change. For example, your mortgage might be paid off by then – and you won’t have commuting costs. Then again, your health care costs are likely to rise.

To achieve the retirement income you require, you need to know the answers to these questions:

  1. What is the value of your pension pot?
  2. What are your other sources of retirement income likely to be worth? (These include the State Pension, Individual Savings Accounts, property, and other savings and investments)
  3. How long will your money need to last?
  4. How much will you require to achieve your essential and additional income needs in retirement?

It’s important to make a distinction between essential income needs and additional requirements.

Essential income needs: the minimum level of income for basic lifestyle needs.
Additional requirements: these could include travel, hobbies, starting a business or helping younger generations onto the property ladder.
Unexpected costs: healthcare costs, family emergencies.
Leaving a legacy: passing on an inheritance.

Give yourself the best chance for a happy and secure future

Whether your retirement is fast approaching or decades away, many people are unable to retire when they’d like to because of their financial situation. With careful planning, you can avoid this predicament. Planning ahead for retirement allows you to decide when and how you will retire, and whether you will continue to work. Even if you have not begun to plan, you can still start preparing yourself at any time – it is important to give yourself the best chance for a happy and secure future!

*Please note that the information included in this article is based upon findings generated in previous years and therefore may not apply to the current market. If you seek further information on this topic, please contact a financial adviser. This is not to be taken as advice or sales and Virtue Money takes no responsibility for any information provided within the links from this site and the information contained within these links should not be regarded as advice from Virtue Money.*

Pension Consolidation

Most people, during their career, accumulate a number of different pension plans. Keeping your pension savings in a number of different plans may result in lost investment opportunities and unnecessary exposure to risk. However, not all consolidation of pensions will be in your best interests. You should always look carefully into the possible benefits and drawbacks and, if unsure, seek professional financial advice.

Keeping track of your pension portfolio
It’s important to ensure that you get the best out of the contributions you’ve made, and keep track of your pension portfolio to make sure it remains appropriate to your personal circumstances. Consolidating your existing pensions is one way of doing this.

Pension consolidation involves moving, where appropriate, a number of pension plans – potentially from many different pensions’ providers – into one single plan. It is sometimes referred to as ‘pension switching’.

Pension consolidation can be a very valuable exercise, as it can enable you to:

  • Bring all your pension investments into one, easy-to-manage wrapper
  • Identify any underperforming and expensive investments with a view to switching these to more appropriate investments
  • Accurately review your pension provision in order to identify whether you are on track

Why consolidate your pensions?
Traditionally, personal pensions have favoured with-profits funds – low-risk investment funds that pool the policyholders’ premiums. But many of these are now heavily invested in bonds to even out the stock market’s ups and downs, and, unfortunately, this can lead to diluted returns for investors.

It’s vital that you review your existing pensions to assess whether they are still meeting your needs – some with-profits funds may not penalise all investors for withdrawal, so a cost-free exit could be possible.

Focusing on fund performance
Many older plans from pension providers that have been absorbed into other companies have pension funds which are no longer open to new investment, so-called ‘closed funds’. As a result, focusing on fund performance may not be a priority for the fund managers. These old-style pensions often impose higher charges that eat into your money, so it may be advisable to consolidate any investments in these funds into a potentially better performing and cheaper alternative.

Economic and market movements 
It’s also worth taking a close look at any investments you may have in managed funds. Most unit-linked pensions are invested in a single managed fund offered by the pension provider and may not be quite as diverse as their name often implies. These funds are mainly equity-based and do not take economic and market movements into account.

Lack of the latest investment techniques
The lack of alternative or more innovative investment funds, especially within with-profits pensions – and often also a lack of the latest investment techniques – mean that your pension fund and your resulting retirement income could be disadvantaged.

Significant equity exposure
Lifestyling is a concept whereby investment risk within a pension is managed according to the length of time to retirement. ‘Lifestyled’ pensions aim to ensure that, in its early years, the pension benefits from significant equity exposure. Then, as you get closer to retirement, risk is gradually reduced to prevent stock market fluctuations reducing the value of your pension. Most old plans do not offer lifestyling – so fund volatility will continue right up to the point you retire. This can be a risky strategy and inappropriate for those approaching retirement.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.
THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
*Please note that the information included in this article is based upon findings generated in previous years and therefore may not apply to the current market. If you seek further information on this topic, please contact a financial adviser. This is not to be taken as advice or sales and Virtue Money takes no responsibility for any information provided within the links from this site and the information contained within these links should not be regarded as advice from Virtue Money.*

Pensions and the Younger Generations

Defined Pension Schemes

If you are in your late 40’s to 50’s there is a good chance that you have worked for a Company that operated a Defined Benefit Scheme sometimes also known as a Final Salary Scheme.

Defined pension schemes pay their members a secure income for life which increases each year.

The pension income, if you are lucky to be a member of one of these types of schemes, is normally based on your pensionable service (the number of years you’ve been a member of the scheme), pensionable earnings (this may be your salary at retirement or an average over a set number of years) and the Accrual Rate (the proportion of your earnings you’ll get as a pension for each year in the scheme (commonly 1/60th or 1/80th)).

Unfortunately, as these schemes are incredibly expensive to administer they are being phased out by employers in favour of Defined Contribution Schemes.

Defined Contribution pensions work by building up a pension pot using your contributions and your employers (if applicable) plus the investment returns and tax relief. If you are a member of a scheme through your workplace, then your employer usually deducts your contribution from your salary before it is taxed.

For our children and grandchildren this is the type of scheme that they will likely be enrolled in when they begin their working lives.

According to a recent Daily Express article sponsored by Key Retirement, 7 in 10 younger workers will experience a shortfall in their expected pension income because they are not saving enough.

Those around 30 years of age typically said they thought they’d need an income of around £23,000 for a comfortable retirement – this was based on a survey of 5,300 people.

However, when they looked at what would be the expected retirement income based on the amounts that people in this age bracket were saving it showed that they would be short by about £8,000 as the yearly income would typically be £15,000.

The report advised that if a 25-year-old wanted to achieve retirement income of £23,000 a year then they would have to look to start saving almost £300 each month into their pension.

Helping the Younger Generation and Pensions

As the younger generation may be struggling to save for their retirement due to Student Debts they may be paying back and saving for and buying their first home this is clearly a problem that must be addressed.

Perhaps for this generation the help that we can offer with regards their pension is minimal with them perhaps looking toward money they’ll receive from their grandparents and/or parent’s estate to fund their retirement.

We can however help their children and although it seems like a strange idea to arrange a pension for someone who still might be in nappies the argument is compelling.  Parents or other family members can invest in a self-invested personal pension (SIPP) for a child, up to a maximum of £3,600 each year.

Thanks to the tax breaks that come with saving in a pension, this means investing £2,880 annually -or £240 each month – with the balance being automatically reclaimed from the HM Revenues and Customs.

The benefit of compound growth over the long term is key so the sooner you start saving the better.

There is no minimum age for a junior SIPP, so it can be started the day that the child is born.  The pension fund is outside the estate for inheritance tax purposes, so this could become a valuable exercise if you need to reduce your estate.

For the here and now everyday emergencies or situations that our children find themselves in, the Bank of Mum and Dad or increasingly Gran and Grandad never seem to close, charges an incredibly favourable interest rate and rarely call a debt in.

Saving for your child’s or grandchild’s pension whilst their retirement is a lifetime away may turn out to be one of the best investments you ever make for them.

*Please note that the information included in this article is based upon findings generated in previous years and therefore may not apply to the current market. If you seek further information on this topic, please contact a financial adviser. This is not to be taken as advice or sales and Virtue Money takes no responsibility for any information provided within the links from this site and the information contained within these links should not be regarded as advice from Virtue Money.*

This article is intended to provide a general review and opinion of certain topics and its purpose is to inform but not to recommend or support any specific investment or course of action.