Money news, advice and predictions for savers and spenders. This week: protecting your pension.
By Jeremy Gates
There are probably two reasons why the annual pension of around £700,000 awarded to Sir Fred Goodwin, as he sidesteps the wreckage of the Royal Bank of Scotland (RBS), is arousing such fury.
The first is that much of his cash could come from taxpayers, possibly for decades, because RBS pension schemes worldwide already face a near £2 billion deficit. RBS non-contributory pensions are fully guaranteed by the firm.
The second, is that while Goodwin hits the jackpot, some seven million workers in money purchase defined contribution (DC) pensions are seeing their likely retirement income slashed by the credit crunch, despite years of careful saving.
Financial advisor Hargreaves Lansdown thinks the average employee saving £150 per month would take 209 years, allowing for investment growth and inflation, to match Sir Fred's pension pot, which RBS accrued for him since 1998.
Meanwhile, those in DC schemes have seen their likely pension income slashed 20-25% in the past 18 months.
Over-55s, in particular, feel powerless as markets slide because a full recovery before they retire is unlikely. How long will it take to recoup £50bn worth of share values in London one day this week?
To have any hope of a decent payout, workers must stick with pension saving through thick and thin. The eventual payout might be healthier than they fear - or expect.
Even Sir Fred needed a bit of luck at the end: if RBS had gone bust, he would have got a maximum pension of £27,000 a year.
Those who make no private pension arrangements miss out particularly badly, if their employer is willing to pay into a pension on their behalf. Besides the boss's contribution, pensions are helped to grow over the years by tax relief.
The dwindling number still in the private sector final salary pensions, mostly assume they don't have a problem. In fact, their fund may face a rising deficit, so it might be prudent for them to save more through an AVC (Additional Voluntary Contribution) scheme to boost their eventual pension income.
For others outside final salary schemes, an obvious vehicle for extra saving is a SIPP (Self-Invested Personal Pension), a concept devised in the early 90s. Many self-employed workers use a SIPP as their main pension plan.
Laith Khalaf, pension analyst at Hargreaves Lansdown (HL) says a "Bed and SIPP" enables savers to switch unwanted shares into a SIPP, with generous tax relief on top.
"HL figures suggest there are as many as 10m private shareholders, many with shares from demutualisations," Khalaf says.
Basic rate payers putting £1,000 worth of shares into the SIPP get an additional £250 in tax relief, while higher rate taxpayers get up to another £250 back from the taxman.
"Markets and asset values move in a cyclical direction and every 10-15 years, something bad happens. In good times, people happily put money away, and in bad times, they don't.
"We should invest on a counter-cyclical basis. The fact is that Government - regardless of party - will soon raise taxes sharply, particularly income tax and National Insurance contributions, to handle vast debts building up, so it is vital to use the tax shelter which pensions provide.
"At very least, put spare money into a pension pot, to hold it there as cash until you find an attractive investment. In pensions invested in managed funds, you might step up contributions to buy in at the lower price,"Khalaf says.
Malcolm Cuthbert at financial advisor Killik & Co says some savers fatten up SIPPs either by putting in ISA money currently earning a low interest rate, or a lump sum generated by cashing in a poorly performing endowment.
He cites the example of a higher rate taxpayer at 50 moving £8,000 from an ISA into a SIPP who receives £2,000 tax relief immediately, and can claim back £2,000 through his tax return, so a net £6,000 outlay produces an extra £10,000 in the pension.
"Many people around 50 are paying into poorly performing endowments which won't hit their target", says Cuthbert.
"In many cases, that money could do better in a SIPP, to generate a cash lump sum when the pension is taken, and then an income for life."
The average sum held in SIPPs is around £50,000, but Cuthbert says it is important to check each investment inside it to ensure good performance. Switching to a better performing fund might involve no charges.
Next, we come to the State pension: those with a full NI contribution record can count on £90.70 per week, and in many cases will collect more. From 2010, the minimum number of years' work required to qualify for a full basic State Pension falls to 30.
For a prediction on your likely state pension, check with the Department of Work and Pensions at 0845 300 0168 and at www.thepensionservice.gov.uk.
Khalaf says people may be tempted to lessen the impact of this downturn by delaying their pension by two or three years, and living on savings or part-time work in between.
"For them, it is usually best to delay the State pension, which guarantees a 10% increase in income if delayed by a year. Private pension doesn't match this guarantee."
When retirement actually arrives, savers in DC pensions should use the open market option (OMO) to find the most generous annuity, instead of merely accepting the quotation from their pension provider.
Steve Hunt, at Rockingham Retirement, reckons pensioners lose £1.4bn a year by failing to do this.
Figures from the Association of British Insurers (ABI) indicate that 169,000 retirees turned down an annuity offered by their pension provider in 2008 and presumably found something better elsewhere, just over a third of the total annuity market.
"Research shows that those approaching retirement can increase their income by more than 20% by shopping around, compared to the default option," Hunt says.
"We typically increased our clients' income by more than 30% by trawling the market."
Finally, it is worth remembering that the bleaker prospects might appear in the pension sector, the more likely it is that new products will enter the field.
Next week (March 9), Prudential launches its New Income Choice Annuity, available for clients with pension pots of at least £10,000 after tax free cash has been taken. It will enable savers to select a starting income which can be varied over time.
By linking the new annuity with its £66bn with-profits fund, Prudential wants to ensure that pension income can keep growing, while giving the guarantee of a minimum secure level of income. Pensioners entering the scheme are quoted a minimum and maximum income level and those starting at a lower level have most to gain if the with-profits fund continues to deliver.
Prudential's Karin Brown says: "This innovative yet straightforward annuity is suitable for those considering a conventional annuity, coming out of drawdown or maybe AVC funds. It marks the beginning of a new phase in retirement options for millions in the UK."
If Prudential's new product catches on, rivals will respond. As the older population grows, pensioners have a bit more bargaining clout than they realise.
:: INFORMATION: Hargreaves Lansdown (0117 900 9000 and www.H-L.co.uk); Killik & Co (0207 337 0520 and www.killik.com); Prudential (0845 606 0630 and www.pruadvisor.co.uk).
Rockingham Retirement (0800 1444 144) recently scrapped its standard £195 admin fee to convert all pension funds of £20,000 and under into an annuity.
POUNDNOTES
:: After the latest base rate cut, savers will try even harder to find bank/building society accounts offering a decent rate on their money. Andrew Hagger at www.Moneynet.co.uk says there is invariably a catch behind a high headline rate.
For example, Barclays' Monthly Saver paying 6% AER fixed on £20-250 per month saved, sees the rate fall to 3.03% in any month when a withdrawal is made, while Abbey's Fixed Monthly Saver (paying a fixed 4% on £20-250 per month saved) sees the rate cut to 3.67% for the year if you make one withdrawal. The rate also drops to 0.10% in months when you pay in less than £20 or more than £250.
"When you see a rate out of line with the standard return, there is usually a hidden nasty - either a penalty for breaking certain conditions or perhaps you have to switch over your current account," Hagger says.
For instant access accounts, Moneynet.co.uk's best buys include ICICI Bank HiSAVE (2.95%), Yorkshire BS (2.75%), Norwich & Peterboro' (2.75%), Barnsley BS (2.75%), and AA Internet Saver. All these rates are variable on minimum £1 deposit.
:: The new Abbey Credit Card, offering 0% on balance transfers for 15 months, 0% on purchases for three months and a highly competitive ongoing APR of 15.9%, will appeal to people looking to transfer an outstanding card balance to a 0% rate.
Michelle Slade at Moneyfacts.co.uk says: "Personal debt continues to increase in the UK, and this new Abbey card is a real option for those looking to get their credit card debt back in order.
"While other providers reduce or withdraw balance transfer deals, it is great to see Abbey bucking this trend. The combination of 0% interest for 15 months, with a below average APR of 15.9%, is likely to send this card to the top of the best buy tables."
Moneysupermarket.com cards expert Peter Harrison says: "This is the best card in its class, meaning Abbey will be able to cherry pick customers."
:: As Bank base rates sinks to 0.5% with the latest Bank of England cut, Abbey is quick to respond with a two-year fix at 2.99% for new borrowers, with a best buy five-year fix at 3.95%, both with maximum LTVs of 60%.
Abbey's Nici Audhlam-Gardiner says: "We wrote nearly one in three mortgages in 2008 and these two competitive deals enable new borrowers to guarantee the security of monthly repayments."
Abbey enquiries: 0800 389 98990.
:: Despite the plunge in London shares, small punters keep on dabbling. Angus Rigby at brokers TD Waterhouse reckons the number of customers buying shares almost doubled this week, while some banks seemed to be heading dangerously close to the rocks.
The list of top 10 buys for this week from TD Waterhouse is headed by Lloyds Banking Group, followed by Barclays, Royal Bank of Scotland, BP and HSBC Holdings, which sank this week on the back of a £12.9bn right issue.
However, the top three sells are Royal Bank of Scotland, Lloyds Banking Group and Barclays, so a few dabblers might be suffering from scorched fingers.
TD Waterhouse enquiries: 0845 607 6001 or tdwaterhouse.co.uk.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Abbey 0800 234 6060 4.01% (F) Fixed Rate Savings Bond 01/04/11 £30,000 Yly
ICICI Bank UK www.icicibank.co.uk 3.90% (F) HiSAVE Fixed Rate 12 Month Bond £1,000 OM
Secure Trust Bank 0121 693 9111 3.52% 60 Day Notice Issue 2 60 Days £1,000 Qly
West Bromwich BS 0845 3300 622 3.50% High Income Over 65 90 Day (D) £5,000 Mly
FirstSave www.firstsave.co.uk 3.45% 90 Day Notice 90 Days £100 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.89% for term 80% £799 Yes
HSBC 0800 494 999 2.95% for term 60% £799 Yes
Hanley Economic BS 01782 255 000 3.39% for two years 80% £799 Yes
Market Harboro' BS 01858 412 250 3.49% for two years 75% £595 Yes
Co-Op Bank 0800 633 5286 3.64% to 31/03/12 75% £995 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
