August CPD Newsbrief — Pensions and retirement planning
Advisers to foot the bill as rate of retirement saving improves
Neil Dickey and Steve Tolley
The number of people actively saving for retirement has reached a five-year high, according to recent research from Scottish Widows.
In its tenth annual Retirement Report, Scottish Widows asked how we as a nation plan for our retirement. The 2014 Report states that the percentage of the survey population adequately saving (‘adequate’ being at least 12% of their income or expecting a defined-benefits pension) is now at its highest level since 2009 at 53% — a significant increase on the 2013 figure of 45%.
This has come about due to a more favourable economic climate and the roll-out of auto-enrolment. Together they have led to an increase in the share of earnings being put aside. The figure is up to 10.2% in 2014, from 9.1% in 2013.
Expectations as to when individuals can retire and how much they can retire on are also becoming more realistic. As a result, the age individuals are prepared to work to if absolutely necessary has crept up from 66 to 67 between 2013 and 2014. Also, in 2013, the average yearly income in today’s money that those surveyed thought they would require in retirement was £24,000, which has now dropped to £22,500 this year.
However, one in three of the population state that they do not know if their retirement savings will meet their required retirement income or not, with a similar number (30%) unsure of how they would use their retirement savings when they reach retirement.
Clearly this all points to the need for more guidance and advice to be provided to consumers. With 40% happy to receive this guidance/advice via online tools and a further 53% wanting face-to-face advice; significantly video calling was rejected by 42%. The government’s solution has, however, provoked controversy.
Advisers to pay towards Budget guidance costs
The government’s proposal is that advisers will pay towards the costs of delivering the government’s Budget guidance through an industry-wide levy.
The guarantee will be delivered by a new organisation, with the intention of creating a national brand of ‘Retirement Pension Guides’. It will not be regulated by the FCA but it will oversee the standards, and in the initial period Treasury will control which organisations can carry out the work. In a short statement, the Treasury confirmed insurers have been blocked from providing the guidance.
The government has decided not to go ahead with a proposed ban from defined-benefit schemes to defined-contribution schemes. But it has caveated this with a requirement that individuals looking to transfer from defined-benefit to defined-contribution schemes have to take financial advice. There will also be new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
There had been widespread concern that if providers were involved in delivering the guidance guarantee it would not be seen as impartial by savers.
Back in March, chancellor George Osborne originally promised the guidance would deliver “free, impartial, face-to-face advice”. The Treasury now says the service will be provided through a “broad range of channels”, including the internet, telephone and face-to-face guidance to individuals or groups.
The FCA has confirmed that consumers will be allowed to use the service as many times as they wish, including face-to-face sessions. The measures are all part of the pensions changes announced in March’s Budget, which will mean from April 2015 savers can take their entire pension pot as cash from aged 55.
Pension product designs gear up for 2014/15
The Budget 2014 proposals for new pensions freedom came like a bolt from the blue. But providers are already starting to adapt to the new world and are turning their focus onto new product design to meet the demands for 2014/15 and the requirements for the new regime from 6 April 2015.
Next tax year, the intention is that people will be able to take whatever amounts they want from their pension funds, whenever they want to. Any money they withdraw will be taxed as earned income, once they have used up their 25% tax-free PCLS. With the promise of new pension freedom just around the corner, those approaching retirement may find themselves in a dilemma over what action to take now.
Those who need to secure an income now and consider that they will do this with an annuity should consider buying one today. To delay would be to lose a year’s income, with the chance rates could go down (or up). But other people might prefer to defer their final decision about what to do. Two providers have recently launched one-year, fixed-term annuities that allow people to take their tax-free cash, but also give them an income for 12 months and then a guaranteed capital return in one year’s time when they can decide what to do — depending on the products then on offer. The downside is that a guaranteed return on the capital costs money and these products can be expensive.
Some critics argue that fixed-term annuities provide a solution for those who want to take income now but are reluctant to go into full-scale drawdown. However, people will have to pay for the flexibility and need to make sure that what they are paying for is of value to them.
They may find taking out drawdown and investing within lower-risk funds — including cash — is less costly.
Auto-enrolment — here come the SMEs
Automatic enrolment has been heralded a success so far, with high employer compliance and a low opt-out rate of under 10%. But as smaller employers approach their staging date, rumours suggest automatic enrolment might be hitting some problems.
Various providers — including NEST — have reported that fewer employers than expected are approaching them, leading to fears that employers may be struggling with their automatic enrolment responsibilities or be late in complying with them.
2014 was always tipped to be a difficult year. Until recently, staging has been confined to relatively large employers with the cash and expert staffing resources to throw at the automatic enrolment ‘challenge’. In contrast, the employers enrolling in the 2014/15 tax year are much smaller, employing between 50 and 250 people.
According to The Pensions Regulator (TPR), up to the end of May 2014, 15,099 employers had confirmed their auto-enrolment scheme details. But up to 1 May 2014, 22,940 employers should have hit their staging dates, leaving around 8,000 missing. The reasons why could be quite simple; many of them might not have registered their scheme yet (they have up to five months to do so).
However, TPR is not worried. Its research shows that 92% of those expected to register in the coming months are on track to meeting their duties. Instead, TPR argues the reason why providers are seeing smaller number of enquiries is that fewer employers are shopping around for a new provider and instead sticking with their existing schemes.
It’s too early to call a problem with automatic enrolment. Hopefully, employers will continue to meet their new duties.
But this is certainly an area TPR has to keep watching, and be prepared to take action if evidence of deliberate non-compliance appears.
CDC and DC schemes — latest developments
Following the announcement in the Queen’s Speech in June, legislation is being drafted to facilitate the introduction of a new pension savings vehicle known as a collective defined-contribution (CDC) scheme, which has also been referred to as a ‘defined ambition’ scheme.
CDCs originated in Europe and are popular in the Netherlands and Canada. They represent an alternative to the traditional defined-benefit and defined-contribution (DC) schemes, which are familiar to UK employees. However, CDCs differ in that all the member’s contributions are invested together in a single pot, in aggregate, rather than individual accounts.
In this way, all members experience the same investment performance and costs are reduced because of increased economies of scale, which may benefit the overall returns. Employers and employees make contributions in the usual way, and members are given a ‘target’ income in retirement, although the target is not guaranteed.
In years when investment performance is poor, members may need to contribute more, while pensioners may face cuts to their incomes. This is similar to the concept of smoothing of returns in with-profits funds, and the process is typically managed by a board of investment managers and unions.
The latest Annual Survey of Hours and Earnings (ASHE) identified a number of interesting statistics about DC pension schemes. The proportion of employees contributing to DC pension schemes was estimated to be 20% in April 2013, and that around 75% of private sector employees held a DC pension, compared with only 5% of public sector employees. The average contribution rate to private sector DC schemes was 3.1% of salary for employees and 6.6% of salary for employers in 2012, while the estimated median average size of an uncrystallised DC pension was £15,000.
The new CDC proposal has attracted a mixed response to date, and is expected to be favoured by larger employers who continue to run defined-benefit schemes.
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