: Update on pension reform The issue of saving for retirement has never been more relevant. In an environment of falling annuity rates, low interest rates and dwindling support from the state for an ageing population, the government is introducing a range of pension reforms. The imminent arrival of NEST (National Employment Savings Trust) has been well documented, and is intended to encourage individuals to take responsibility for financing their old age by automatically enrolling qualifying employees in a suitable pension scheme unless they choose to opt out. In the March 2012 Budget, the Chancellor of the Exchequer announced additional plans designed to simplify the state pension system, based around on a singletier state pension of £140 per week, and a mechanism to align increases in state pensionable age with longevity. However, the Department of Work & Pensions (DWP) recently announced a delay in the publication of these plans. The government’s White Paper containing the detail was due for release earlier this year; however, according to pensions minister Steve Webb, the government is “still working on the details” and an announcement is not now expected until the autumn. The planned reforms are intended to bring “muchneeded clarity and simplicity” to the UK pension system. However, the National Association of Pension Funds (NAPF) commented that “the time for talking should be over by now”, adding: “Our state pension is one of the most complicated and least generous in Europe. People need to know that it pays to save for their old age, and that they won’t see their saving meanstested away.” The NAPF warned that the delay in announcing the detail could endanger the introduction of automatic enrolment, saying: “Defined benefit pension schemes need time to prepare for the end of contracting out. The government must give them enough time and give them clarity as a matter of urgency.” On the other hand, Saga’s directorgeneral Dr Ros Altmann, highlighted the importance of ensuring that the changes are “effective and not rushed”. Looking ahead, regardless of the finer detail in the White Paper, the state pensionable age is set to continue its rise, and many of us will have to save harder or work longer. Ultimately, the best approach is to get started as early as possible. Pension saving remains one of the most taxefficient ways to save for your retirement and, the longer you save, the more time your contributions will have to grow.
Autumn 2012
Welcome to the Autumn 2012 addition of the Wells Financial newsletter, our update on the development in the world of financial services. Please contact us if you would like to discuss any of the articles in this issue or have any other financial requirements.
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Making a sacrifice Previously a director’s perk, salary sacrifice schemes are increasingly offered by employers as a way to mitigate tax pressures and allow employees more flexibility in how they choose to receive their remuneration. Under such arrangements, you can trade part of your salary for benefits, such as pension contributions or even childcare vouchers. Having part of a salary or bonus paid into a pension scheme has particular tax advantages. If you sacrifice, for example, £100 of gross salary every month and have this paid into your pension scheme, you save tax at your marginal rate plus national insurance (NI) contributions. Salary sacrifice will also benefit the employer, who saves its own NI contributions – and, in rare cases, may even rebate this back to the employee. The maths for investing in pensions is compelling. Higherrate taxpayers would get £100 of investment at a net cost of just £59, while lowerrate taxpayers would get the same for just £69. Salary sacrifice might also prove tax efficient for other benefits, because employees receive some at the gross value (subject to the rules over benefits in kind). However, employees must be careful not commit to a salary cut they cannot sustain. Pensions tie up your contributions until at least the age of 55, which other investments do not. Salary reductions will also have knockon effects for other assets – for example, mortgage applications, deathinservice benefits and income protection. Finally, you need to ensure your employer’s pension merits an additional investment. If the scheme is weak or inflexible, it may not be worth it.
Olympic effect further skews In financial markets, August tends to be characterised by low trading volumes and a dearth of news but, in the UK this year, numbers were set to be further skewed by the effects of the London 2012 Olympic and Paralympic Games. Overall, the FTSE 100 index rose 1.4% during August and, as expected, volumes were relatively muted, with this trend further exacerbated by the Olympics. The performance of mediumsized and smaller companies outstripped that of their larger counterparts – the FTSE 250 index rose 2.5% during the month, while the FTSE SmallCap index rose 4%.
The eurozone – still a work in progress With no clear resolution to the eurozone’s ongoing financial woes, UK investors continue to avoid European equity funds. European Commission president Jose Manuel Barroso believes the Eurozone should evolve into a “democratic federation of nationstates” in order to address the region’s economic problems. Meanwhile, the European Union has proposed a new supervisory mechanism for the Eurozone’s banks, in which every bank would be under the direct supervision of the European Central Bank (ECB) instead of its own national regulators. As a whole, the eurozone’s economy is not yet in recession.
EU insurance ruling: some are more equal Europe’s Gender Directive originally outlawed gender discrimination back in 2008 but at the time, the UK was granted an optout for insurance premiums. However, a ruling by the European Court of Justice (ECJ) has decided this is discriminatory and against the principle of equality – despite the significance gender plays in insurance claims. So, from December 2012, women will no longer benefit from lower car insurance premiums than men. The cost of annuities and protection will also change – an area where in some cases, men have benefited over women. Principal losers therefore will be the young female drivers, who are statistically less likely to have accidents than their male equivalents, and older men approaching retirement, whose annuity income has traditionally been higher than women because women tend to live longer. The Association of British Insurers (ABI) described the ruling as “disappointing”, emphasising that including gender allows for greater accuracy in pricing. The National Association of Pension Funds also described itself as “disappointed”, warning that the ruling would negatively affect many retirement incomes. Research from the ABI in 2010 indicated that, if gender were removed from the equation, men approaching retirement would receive up to 8% less money, while women could receive 6% more. For life insurance, women’s rates could rise by up to 20%, while men’s rates could fall by 10%. Meanwhile, those careful young women drivers could be forced to absorb an average rise of up to 25% in their car insurance premiums.
Living to 100 It has long been accepted that improvements in medicine, lifestyle and an understanding of the effects which habits such as smoking can have on our health means life expectancy is increasing. Future generations are likely to enjoy much longer and healthier lives on average than their predecessors. However, figures released in April 2011 by the Department of Work & Pensions illustrate more accurately exactly what that means. These figures suggest, of the under 16s already alive today, over a quarter are going to reach the age of 100 – and already, the average newborn female is going to live to over 90. As Steve Webb, Minister for Pensions, commented at the time, this means that millions of people will spend over a third of their life in retirement. However, as the DWP were quick to point out, this news also coincides with a period during which pension savings are in serious decline. An ageing population is putting our welfare system under significant pressure as more people need not only pension income but also healthcare, incapacity support and help within the home. You can therefore have little expectation that a State Pension will provide anything other than a safety cushion when the time comes. If your retirement plans include holidays, visiting relatives and treating yourself on occasion, then its time to take control of your savings and start building up a retirement fund of your own.
Time for a portfolio healthcheck Once a financial plan has been put in place, it is tempting to believe the paperwork can simply be tucked away in a drawer and forgotten. However, like a wellkept garden, a financial plan needs regular tending to ensure it is still on track. ‘Weeds’ can spring up or you may just like to grow something new. What should a financial healthcheck comprise? A financial plan should be regularly reviewed to check it is still fit for purpose. The original financial plan will have been matched to an investor’s goals – to retire at 60, say, to fund education for children or whatever. A review will first look at whether these goals have changed, perhaps with the birth of another child, or a change of job or a surprise inheritance. It should consider whether investors need to save more or switch to different types of investments to achieve their goals. A review will also look at an investor’s progress towards their goals. It may be a portfolio has performed particularly well and it is no longer necessary to take as much risk – or the opposite might be true and an investor needs to take on more risk. A financial health check will also examine whether the underlying investments are performing in line with expectations. Fund managers will have good and bad periods. A run of bad performance may mean their style is out of favour – for example, they may target larger, dividendpaying stocks while the market currently prefers small companies – but your financial adviser will be able to judge whether this is expected or whether it is a sign of a deeper problem. It may be a manager is losing their touch, has left their employer or there are problems within the investment house. In this case, it may be worth switching to another manager. A portfolio will also need to be tweaked according to the wider economic environment. The 2008 financial crisis changed the
Getting on the ladder Despite house prices falling recently, they are still very high in terms of affordability. So, does it make sense to sit on the fence in the hope that they will fall further or do you get on and get in to somewhere you can afford now? For those who have held off buying in the hope of a tumble, it has proved a long wait. Coupled with this, the credit crunch means getting a mortgage for those needing higher income multiples or high loans tovalue is harder than it was. However, what these limitations do ensure is that those who might once have overstretched themselves are now prevented from doing so which will perhaps help to make prices more affordable for everyone as the market settles down.
Issued by Wells Financial Ltd. which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions we suggest you seek advice from a profession, impartial adviser.