Two Pennies Worth

Make pension saving more interesting and we’ll all be better off

Consumer champion Sam Dunn calls for someone to spark a serious interest in saving so we don’t all retire poor.

Bouquets or brickbats? Praise and encouragement versus punishment and fear of failure have long been minted as two sides of the same coin: how best to motivate an individual to succeed?

Which suits you most comfortably is rather less simple, of course.

However, sometimes you won’t even have the choice – when it comes to saving for a pension, it’s the bogeyman approach or bust.

The scale of the pensions shortfall

Last week, a fearful report by the Chartered Insurance Institute estimated the UK's overall retirement savings deficit – the chasm between what we will retire with and what we really need for a decent income in old age - stood at a jaw-dropping £9 trillion.

Earlier this year, a mournful survey from insurer Aviva warned that a fifth of the current over-55s owe £65,000 on average while trying to save for a pension – and heaven help those whose debts hover at the higher end of this sad scale.

Separately, the OECD, who work to improve the economic and social well-being of people around the world, recently noted that, on average, UK pensioners only manage to take home less than a third (30 per cent) of their pre-retirement salary when they stop working. The OECD found that much needed to be done to avert a crisis.

Other industry reports continue to underline the mountainous task facing us: for a £25,000-a-year pension, your pension pot must currently aim to top a staggering £500,000.

Are we getting the message?

These are undoubtedly big sticks and they do a good job of beating us around the head about the sheer size of the problem. Yet how much do they actually achieve? Precious little, might be one conclusion given the low retirement savings rates.

Some 12.5 million employees aren’t even members of a company pension scheme while nearly 2 million UK pensioners are officially in poverty. And worryingly, six out of 10 single pensioners in Britain take home an annual pension of less than £10,000 – that’s way below half the national £26,000 average salary.

Heartless hectoring of the UK’s workforce about their poor pension provision isn’t exclusively to blame, naturally. Plenty of deep-rooted factors are at play here: small salaries, ignorance, huge personal debts and mistrust of the UK financial services industry (and who can be surprised after countless mis-selling scandals?) to name just a few.

Each of these carries an emotional charge which in turn complicates the matter for pension providers trying in vain to make a more general connection with the population at large and encourage saving.

However, it’s horribly evident the message is being scrambled.

A better approach

So instead of the scaremongering, perhaps it’s time for a subtler, softer – nay, smarter – approach to encouraging saving for retirement.

Rather than spout blood ‘n’ thunder about the dangers of not saving enough, why not introduce – via Citizens Advice, financial advisers or even product literature - a more positive “can do” approach along the lines of “Save £50,000 over a lifetime and this is how much you can expect to have in retirement; save £75,000 and it’s this; £100,000 and you’ve this; and so on”?

Or why not – this time through a Government agency - harness the vast company pension databases to throw up some more encouraging statistics such as the number of new savers and their average contribution size, and how much it’ll likely give you assuming 5 per cent annual growth, say?

Could a pension lottery do the trick?

Although the soon-to-arrive semi-compulsory national pension scheme (nicknamed NEST) is part of a long-wished for radical rethink on pensions, a subtle change in the way savers are talked to is arguably as important.

Ros Altman, director-general of Saga and a respected pensions specialist, has gone so far as to suggest renaming pensions and even introducing a monthly £1m lottery prize to reinvigorate interest. Gimmicky, yes, but still one hell of an incentive likely to spark some serious interest in saving.

I’d suggest a key caveat, though: at least half of the windfall must be kept back for the winner’s pension. 

How much do you love your partner?

Confused.com columnist Sam Dunn says couples should tread carefully when considering a financial union.

I don’t pry out of excessive prurience, of course, rather from genuine concern for your cash.

When any couple make a commitment to each other, it’s not too long before their finances draw closer together too – a joint credit card often pops up first, followed by savings, then a current account and mortgage.

Naturally, two wallets are better than one: a step-up in spending firepower; more generous savings for a smarter car; a bigger mortgage for a larger property.   

Yet your heavenly match could also leave your money in hell if it all turns sour.

For starters, your credit rating could collapse.

Or you could end up forking out for your partner’s profligacy and bad card debts.

And how about paying every penny of a joint home loan because your ex-partner is either bad-tempered enough to refuse to pay or has fallen on hard times and can no longer keep up?

Double trouble

The problems are twofold. First, very few of the lovestruck bother to stop and carefully question the risks of hitching their personal finances to those of another.

Second, and rather more delicately, even fewer would ever dare suggest a solution to the risks of bigger joint financial decisions such as a mortgage or pension: a neat legal document detailing what would ever happen in the event of a split.

Unfortunately, passion killers don’t get any bigger than two sets of lawyers’ bills so to spare you such humiliation, here are crucial pointers about knowing when to best pool your finances - and when you’re better off pulling apart.

Home is where the heart is

Doubling up has its greatest impact with a mortgage as you can usually borrow a larger sum than when going alone by adding your salaries together; an income multiple of three or four times a combined £60,000 tends to buy you a swankier pad than one with a solo £30,000.

Yet make no mistake, when you sign the mortgage forms, you become jointly and severally liable for that monthly sum; if the relationship heads south and either you or your ex can’t – or won’t – pay, the bank or building society can legitimately hound either or both of you for the money.

This same principle can sour joint credit cards or loans (and even utility bills) too: if your personal circumstances deteriorate, the debts must be settled. And if one party defaults or is unable to pay, the other half remains liable.

Banking issues

What about a joint current account? While it at least relieves a couple’s administrative burden by corralling payments for all bills, it also poses a credit rating risk by creating a financial “link” between the two of you noted by credit reference agencies (a joint mortgage will alert them too).

So if you or your other half hit the skids financially, the poor money management can be contagious if it damages your joint account and make it harder to obtain fresh credit.

A joint life insurance policy might sound like a simple money saver – a £500,000 payout for less than the price of two separate £250,000 policies – but carries particular risks all on its own.

If you were to split years down the line, that joint cover would need an instant junking in favour of a likely very expensive replacement (to pay for dependent kids, say) since you’ll be older with less robust health.

Similarly, even if still together and one half sadly dies, the survivor will benefit from the larger payout but any new subsequent life cover would likely cost more if many years have passed.

Get saving and avoid tax

At least joint savings offer a brighter vision of financial unity: two incomes channelling spare cash into an emergency fund will generate a bigger savings pot much more swiftly than one.

You’ll also qualify for double the usual £85,000 guaranteed protection in the event of a bank crash – cash in joint accounts counts as a half each, so together you can save £170,000 without fear of loss.

And if one partner earns significantly less than the other – or nothing at all – they can cannily avoid higher tax bills.

By parking as much in the way of joint savings in the name of the lower-earning partner, they can make use of the £7,475 tax-free personal income allowance (if under 65) and lower savings tax rates to legitimately keep as much interest as possible. 

Rip-off Britain is here to stay

Consumer champion, Sam Dunn tells Confused.com warns us that the most common day to day rip-offs are here to stay.

If you took the reins of a major UK company, would you instinctively hustle your customers?

I only wonder because every month or so, another swathe of the British public falls victim to hucksterish rip-offs.

Last week, Consumer organisation Which? filed a so-called “super complaint” with the Office of Fair Trading (OFT) in a bid to kibosh "rip off" surcharges levied by companies on debit and credit card transactions.

Teams of Which? researchers discovered that, while the cost to companies for processing a payment by debit card hovers around 20p and is no more than 2 per cent of the transaction value for a credit card,  companies regularly charge far higher fees.

Egregious examples included train-ticket booking site the Trainline slapping on a £3.50 charge for credit card payments while Eurostar laid it on extra thick at £4.

Naturally, the retailers themselves contend that they’re trying to recoup the cost of charges levied to them by banks and card issuers.

The Which? salvo is just the latest in a frankly ludicrous litany of criminal charges and rapacious rip-offs that continue to leave the average UK punter blinking in a state of incomprehension.

What could go wrong with council tax band valuations? Easy: estate agents drove down streets in second gear and wrongly valued some 400,000+ homes leaving many overpaying thousands since the early 1990s.

Or how about the sale of over-priced payment protection insurance on credit cards and personal loans?

And don’t forget monstrous personal pension mis-selling in the late 1980s where providers creamed the fattest of commissions for their own pay packets while convincing retirement savers to swap a secure final salary scheme for the vagaries of the stock markets.

Then there’s endowment mortgages (cheap interest-only home loans were an easier selling point than complex stock market-related endowments), high-risk precipice bonds for elderly savers, door-step selling, split cap investment trusts….

It would all seem to suggest that being a modern-day mountebank is either too lucrative to ignore – hang the inevitable penalty fines that ultimately come with it! - or that it doesn’t take much to swindle the ordinary British customer.

But I wonder how much of it is vanquished victims and the rest middling mugs?

Part of the problem is that enough of us, when faced with outrageous card charge hikes or preposterous sales pitches, still plough ahead and buy anyway.

In worst-case scenarios, many won’t have a choice because of lack of income or poor knowledge – especially among the vulnerable and elderly – and that’s a nasty exploitative situation we can all do without.

However, it’s also the case that many more who do have a choice will be complacent and won’t think to cast even a fleeting glance at small print; won’t blink at a spiralling credit card charge because they can afford it; or are simply too trusting to ever balk at a particular charge and say ‘Excuse me, did you just say that would cost me X? I’ll have to think again.’

Of course, there’s greed too: barrelling headlong into a financial arrangement – take your pick from store finance to hire purchase or credit card promotion – simply to get your hands on favoured goods is nobody’s fault but our own.

Unfortunately, all these flaws favour those with money over those without: and if enough of the former carry on with their daily financial routines like this, it’ll simply get worse for the latter.

Rip-offs thrive in such adverse conditions as, when consumers don’t all pull in the same direction, their overall protection remains stunted.

Until this changes, all manner of snake oil salesmen, profiteers and traders seeking to make a fast buck – whether dressed up in corporate suits or flogging fakes in back streets - will continue to creep into our lives.

So look lively: the rip-off is here to stay for a long while yet.

Some respite for savers... at last

Loyal savers may finally have something to cheer about as one building society promises to stop offering preferential treatment to newer customers. But will others follow suit? Confused.com’s Stephen Jones certainly hopes so.

When talking about Britain’s savings culture, I find it very difficult to avoid the word ‘crisis’. One scary statistic I often tend to cite is that, in the first quarter of 2008, the UK household savings ratio went negative for the first time since 1958. That means, over three months, the whole of the British public actually spent more than they saved. That’s a whole nation spending beyond its means.

One of the reasons behind this is undoubtedly that savings just aren’t sexy. Getting a decent return on our nest eggs has been made difficult for us for far too long, as we’re forced to jump through hoops to get the best rates.

I’ve long been bemoaning the punishment regular savers are subjected to by banks and building societies. Whether we’re talking about the often farcical delays on ISA transfers or preferential rates that are preserved only for new customers, the industry ethos of “treating customers fairly” hasn’t always rung true in practice.

Thankfully, the financial services sector is at last taking notice. Nationwide, the UK’s third largest savings provider, has just announced a set of promises that could put an end to the shameful mistreatment of loyal customers.

Most noteworthy are the promises to not only stop offering ‘brand new customer only’ savings products but also to give exclusive deals to existing savings customers.

For years, savers have been frustrated that their custom is taken for granted as soon as they are signed up, so to prioritise those who have already been proven valuable customers is not only fair, but makes business sense, too. If others were to follow suit, we might actually start to see an environment where saving is seen as really worthwhile once again.

Perhaps an even more pleasing development is the pledge that, from 4 January 2010, all ISAs transferred to the mutual will start accruing interest from the day of the application. I’ve already argued that the lengthy process for ISA switches could and should be cut – at least with this commitment, customers will not be forced to lose out as a result of their provider’s sluggish transferring process.

Here’s hoping that these and several more welcome moves from Nationwide set a standard – really this should only be the start if we really want to become a nation of savers again.

Are you a loyal saver? What are your views? Let me know by commenting below.

Can we make pensions simpler? Please?

As he navigates a workplace pension for the first time, Confused.com reporter Stephen Jones shares his experiences, and why he thinks it could be made easier...

When I first started writing about personal finance, the one area that filled me with dread was pensions. As a green young journalist fresh out of university, the whole area was one that seemed full of confusion and a sense of something near taboo. My parents had gone through the still-fresh embarrassment of trying to explain the birds and the bees to me, why not touch upon pensions too?

A couple of years later, and thankfully the subject isn't quite the source of fear that it once was.I'm now in a position where I can start looking at my own retirement options with less anxiety and start to make my own – if modest - contributions for the first time.

At 23 years of age, it might seem early, but in my job I'm acutely aware of just how poorly many Brits are preparing themselves for old age because our culture promotes spending and debt above prudence and saving. Starting early is likely, I hope, to mean that I'm not left with a panic later in my career when I might also have commitments to think about elsewhere.

Furthermore, almost every expert I speak to tells me that failing to take up a defined contribution scheme from my employer would be equivalent to throwing away a pay rise. Of course, they're absolutely right - with the average employer contribution standing at just over 6 per cent, and the added tax bonuses of saving into a pension scheme, you're wasting a significant amount of money if you don't opt in.

So why aren't more people saving for retirement?

Given all of this, the obvious question seems to be why more people aren't making the right provisions for later in life. Recent government statistics showed that around 60 per cent of workers don't currently contribute to a workplace pension. The answer, to me, has to stem back to my very first feelings about pensions two years ago.

Pensions need to be made simpler. The coalition government recently made inroads into making the state pension more straightforward by announcing plans for a flat rate, universal basic state pension. However, we are yet to see anything like this simplicity in the realm of private pensions.

In 2012, all employers will be forced to auto-enrol their workforce in a workplace pension scheme, and this, many think, is likely to improve the number of people saving. However, it doesn't solve the problem of public confusion about pensions, or encourage people to take a more active interest in their investments – something which could make a huge difference by the point of retirement.

When starting up my pension, I found myself asking questions and taking a keen interest in what I was investing, but this was largely down to the fact that I read about pensions on a daily basis through my work. Even then, it still took me some time to digest exactly where my money was going and what it meant in terms of returns.

My biggest concern is that the majority of people wouldn't feel confident about doing this, with many having little prior experience with pensions and some likely to be afraid to ask questions at the risk of feeling stupid.

That is as much the responsibility of employers, pension providers and financial advisers as it is the government, and there have been a number of suggestions as to how investing can be made easier to understand.

But we also need to appreciate that, as pension saving becomes more and more our responsibility, we need to take control and invest some time into thinking about where and how we invest our money.

Have you recently joined a pension scheme? Or have you been offered one and failed to join? What are your reasons? I want to hear your thoughts and stories – comment below or email me on stephen.jones@confused.com.

More pensions pain on the way

As the government announces changes to the ways that private sector pensions are indexed, Confused.com’s Stephen Jones explains what it means and how it could affect your retirement income.

This week, new pensions minister Steve Webb stood up in Parliament to announce a change to the way final salary pension schemes will be indexed. While this at first might seem a relatively minor move, estimates suggest that it could have a dramatic impact on those affected.

Currently, increases in pensions are linked to the Retail Prices Index (RPI), a measure of prices which includes mortgage interest payments among other housing costs. However, the government now proposes to switch this to the “more appropriate” Consumer Prices Index (CPI) for defined benefit pensions, as well as those paid through the Pension Protection Fund and the Financial Assistance Scheme.

Though the coalition is presenting this as a move that better represents pensioners’ needs, it is in fact a pretty transparent method of saving businesses money. According to analysis from actuaries Hymans Robertson, this could potentially result in pensioners receiving only around three quarters of the increase they would have got under the previous method.

Of course, we have seen a spate of well-publicised pension deficits among major British employers in the last few years, from BA all the way to dear old Auntie Beeb. This move alone is estimated to close that gaping private pensions gap by around £50 billion.

Something does need to be done, and the government certainly doesn’t want to see these black holes result in companies collapsing. It is, however, worrying that pensioners – a group already seriously under the cosh – are being forced, yet again, to pay the price.

Will the move affect you? What are your views on the government’s changes? Let us know by commenting below.

Are we facing pensions meltdown?

In amongst the continuous talk about public deficit reduction, unemployment levels and repossessions, one ongoing area that no political party seems to have all the answers to is how to solve a British pension crisis that appears to be getting worse. Just this week, official figures have shown that only half of employees in the UK are now covered by pension schemes run by their employer.

HMRC statistics also showed that the amount of money paid into personal pensions has fallen by 5 per cent during the recession. All this is despite constant reminders that the state pension is insufficient to live on in retirement (in case you didn’t know, government records show that close to one in five pensioners live in poverty).

The cause of the crisis

So what’s wrong with our pension system? Well, at the risk of oversimplifying, the major problem is caused by demographic shifts (I know that sounds dull, but stay with me).  The so-called ‘baby boomers’ are now in retirement or reaching retirement age, which, added to growing life expectancy, means the over-65 population has increased rapidly in the last decade and is estimated to swell to more than a fifth of the overall population by 2025.

Of course, this creates an ever-growing burden on the state, as well as on those companies paying out on ex-employees who are now living longer than ever. With this in mind, more and more responsibility has been put on individuals since the 1980s to maintain their own retirement income. Examples of this include the removal of the link between earnings and the state pension, and the gradual phasing out of final salary schemes in place of the now more commonplace defined contribution schemes.

This is fine, to a point. However, one problem with this is human nature – many people are simply going to underestimate how much they need to save. Throw in a global recession which caused equities and house prices to take a dive, and you’ve got the explosion of a pensions crisis – meaning millions are now approaching retirement with a fraction of the savings they might have been counting on a few years ago, or simply need

The options? Retirees are increasingly having to find ways of topping up their retirement income through methods such as equity release or are simply having to work longer.

The solution

So, it’s clear that the incoming coalition government has a fine mess to sort out when it comes to retirement provision – not helpful when you’ve got a public deficit to shred. Already, indications are that the rise in the state retirement age to 66 will be brought forward, although the government has promised it will not be sooner than 2016 for men and 2020 for women.

At the same time, the new government  is expected to go ahead with auto enrolment, a pension reform  which will see  eligible workers  automatically opted in to a workplace pension scheme from October 2012– a move which, it is hoped, will create a much-needed change in public attitudes to early pension provision.

There is, however, much more work to be done to fix this broken pensions model. The coalition government has indicated that it will simplify pension rules to encourage people to invest in personal pensions. This is very welcome, but as many approaching retirement will tell you, the key is stability - too many rule and taxation changes in the last decade have led to a general mistrust of pensions as a savings vehicle.

It may only be the start of the radical reform necessary, but the government’s first priority must be to obliterate public apathy towards retirement saving by introducing simple, workable rules that will last.

Did the recession ruin your retirement plans? Are you worried about your pension savings? If you’ve got any thoughts on the UK pensions crisis, leave us your thoughts below.