Savers must set aside a quarter of income for good retirement

Savers must set aside a quarter of income for good retirement

Anyone hoping for more than a basic level of income and lifestyle in retirement needs to be putting aside around a quarter of their salary, according to new analysis

Laura Miller
Thu, 10/31/2019 – 10:59

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To reach what is being called a “full moderate income” in later life, individuals should save £799 a month on average over their entire working career. This represents around a quarter of earnings for someone on an average full time salary. 

For a couple this would be £753 per month split between two individuals.

The figures have been calculated by the Institute of Actuaries (IoA) to warn those who are only contributing the auto-enrolment minimum to their workplace pensions.

This was increased to 8%, with at least 3% paid by the employer, in April, but experts say it is far from enough.

Mark Williams, chair of the IFoA’s Pensions Board, says: “We appreciate that these savings goals are high, and to many, they will appear daunting. 

“Our role to ‘do the maths’ and we believe that it is in the public interest to demonstrate the potential scale of under-saving, and the impact it could have on people’s retirement prospects.”

A “moderate” lifestyle requires around £20,200 a year for singles and £29,100 for couples, according to analysis by the Pensions and Lifetime Savings Association, which the IoA has used for its figures.

For that retirees would have around £46 a week to spend on food shopping, could splash out on a two-week break in Europe every year, dine at fancy restaurants several times a month, and take up more adventurous past times that cost a bit more.

By comparison, the state pension, at the moment £8,767 per year, and current automatic enrolment contributions of around £86 per month from the start of their working life will provide only a minimum level of income in retirement, according to the IoA.

It will give an income of around £10,200 a year, for a single person, and £15,700 for a couple, and mean having around £38 a week to spend on food shopping, maybe a yearly holiday in Britain, going for dinner in a restaurant once a month, and a couple of cheaper hobbies every week. 

To close the gap between this minimum and moderate income level in retirement, the IoA has said employers and the government will need to act.

Williams says: “We urge the government to assess whether the current balance between the levels of employee and employer contribution is appropriate. Individuals alone should not be burdened with the responsibility of closing what could become a significant savings gap unless there is further policy reform.

“Modern workplace pensions require people to take responsibility for their own retirement saving and planning, but in our survey, almost a third of respondents said they did not know what constitutes a ‘good pension pot’.

“There is a shared responsibility between individuals, employers, the pensions industry and the government to give individuals the best possible chance of having enough money in retirement.”

Pensioners take back £3,000 each from over-zealous taxman

Pensioners take back £3,000 each from over-zealous taxman

Pensioners clawed back an average £3,000 each – a record £54 million – from the taxman in the three months to September after they were overcharged on their withdrawals

Laura Miller
Thu, 10/31/2019 – 10:13

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In total, HMRC figures show £535 million has now been repaid to those who have filled out the official reclaim forms since April 2015, when pension freedoms were introduced and over-55s could draw on their money much more flexibly.

Pension freedoms gave savers the right to take any sum they wished from their retirement pot, but a quirk of HMRC’s system meant they were often overcharged tax on their withdrawals.

A one-off large withdrawal would be assumed to be a regular income payment and taxed at an incorrect higher rate. Savers then have to reclaim the overpayment. In the meantime, they risk being pushed into serious financial difficulty

Tom Selby, senior analyst at AJ Bell, says: “Given most people don’t fill out the reclaim forms, this is almost certainly the tip of a sizeable iceberg.

“It is time for the government to accept that, while the retirement flexibilities introduced in April 2015 have been well received by savers, the tax system that sits alongside them is simply not fit for purpose.”

Mr Selby wants a review of how retirement withdrawals taken using pension freedoms are taxed.

“People risk being left short of money as a result of HMRC’s approach and forced to either take out more cash from their pension, potentially paying extra tax in the process, or seeking the funds from elsewhere,” he says.

“The government’s failure so far represents a serious failure of policymaking which will inevitably have caused people distress and potentially significant financial hardship.”

Responding to the figures, an HMRC spokesperson says: “Nobody will overpay tax as a result of taking advantage of pension flexibility.

“Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days. Anyone who does not claim will be automatically repaid at the end of the year.”

Separate figures published by HMRC show the overwhelming appetite among savers to tax-manage their own pension withdrawals.

A total of £30 billion has been taken ‘flexibly’ from pensions using pension freedoms since they were introduced in 2015.  

The average amount taken out each quarter per person has fallen, however, and now stands at £7,250. 

This suggests people are phasing their withdrawals to minimise the amount of tax they have to pay. 

Withdrawals peak after the start of the new tax year as individuals ‘smooth’ their withdrawals to avoid paying unnecessary tax by taking their money out in a larger lump in a single tax year.

Steve Webb, director of policy at Royal London, says: “There is evidence people are being savvy about the timing of their withdrawals, spreading them over more than one tax year to reduce their overall tax bill.  

“But it remains the case that we need to increase the proportion of people who take financial advice or guidance before making decisions about how much of their pension to withdraw.”

What’s the best strategy when investing cash – all at once or dripping in?

What’s the best strategy when investing cash – all at once or dripping in?

With equity markets at multi-year highs, or in some cases all-time highs, nervous investors sitting on cash, earning little interest, are once again facing a conundrum

Damien Fahy
Wed, 10/30/2019 – 12:29

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Is now a good time to put cash to work, especially as some investment analysts are warning that the stock market is ripe for a correction?

Given that no one can predict with certainty where stock markets will head next, is the best strategy to invest cash all in one lump sum or at regular intervals? If it’s the latter should you drip in monthly, quarterly or even yearly? Is it better to drip in over a longer period of time or a shorter one?

To shed some light on this let’s imagine a couple of extreme scenarios.

In the first scenario we’ll assume that stock markets go up in a straight line, as shown below. The red arrow is the point when a lump sum investor would invest all their money in one go, while the black arrows are when a regular investor invests equal-sized portions of their cash.

Scenario 1

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For the lump sum investor, all of their money has been exposed to the market rally after they invested. For the regular investor, each subsequent instalment of money which they dripped in has been exposed to less and less of the market rally.

This means that the regular investor has made less profit than the lump sum investor. Clearly in this scenario lump sum investing wins. 

In our second scenario let’s assume that markets always fall in a straight line. For the regular investor each dripped instalment loses less and less as the market falls. Whereas all of the lump sum investor’s money (the red arrow) is exposed to the full market sell-off.

The regular investor would win in this scenario. Furthermore, the regular investor will make more profit if the market rebounds back to where it started. In this scenario the regular investor is taking advantage of what is known as ‘pound cost averaging’.

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Of course, real markets don’t move in a straight line, so let’s consider two historical examples of market collapses from all-time highs that echo exactly what nervous investors fear a repeat of today.

The worst five-year time frame for investing

One of the worst five year periods for investing in recent memory was the five-year period after the dotcom bubble high on 30th December 1999. Over the next five years the FTSE 100 lost a total of 30.45%. 

The table below shows the returns an investor in a FTSE 100 tracker would have enjoyed using a range of investment strategies. In each case a total of £12,000 was invested.

Investment strategy Total invested Final value
£12k at start £12,000 £9,668
£2,400 a year £12,000 £12,370
£600 every quarter £12,000 £12,884
£200 per month £12,000 £12,827

The benefit of regular investing vs lump sum investing is plain to see. The lump strategy produced a loss of nearly 20% versus a profit of 7% from dripping money in monthly or quarterly.

What about a longer time frame?

One of the worst ten year periods for equity investors started just before the dotcom bubble burst. From the 4th March 1999 to 4th March 2009 the FTSE 100 (including reinvested dividends) made a loss of 17.79%

The table below again shows how each strategy fared between 4th March 1999 and 4th March 2009.

Investment strategy Total invested Final value
£12k at start £12,000 £9,865
£1,200 a year £12,000 £9,995
£300 every quarter £12,000 £9,892
£100 per month £12,000 £9,921

Regular investing was the best strategy but the outperformance was only marginal given the timescales involved.

Interestingly, if you continue extending the time frame over which you invest/drip money in to the market the odds of the lump sum investor winning keep increasing until it is actually the most likely outcome.

It’s more about time than timing

For nervous investors with shorter investment time frames looking to enter the market now, regular investing still makes sense. As does reducing the frequency of any regular investing to either monthly or quarterly as opposed to annually.

But the more historical scenarios you run the more it becomes apparent that a range of factors determine which strategy is ultimately successful including the price you bought at, the frequency of your investment and the market environment.

Yet the biggest factor determining which strategy is most profitable is your investment time frame, especially if the stock market collapses.

The shorter the time frame the less time a lump sum investment has to recover from a severe market fall. As your investment time frame starts to increase the benefits of dripping are quickly eclipsed by the benefits of time in the market, thanks to the power of compounding.

What this means is that investors deciding how to deploy cash shouldn’t just be pondering whether markets are more likely to fall or rise from here but also their investment time frame.

Damien Fahy is founder of Money to the Masses

11 million shoppers victim of online fraud as new safety measures postponed

11 million shoppers victim of online fraud as new safety measures postponed

Millions of online shoppers are losing out to fraud while regulators drag their heels on introducing rules to protect them

Laura Miller
Wed, 10/30/2019 – 11:57

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One in every five UK consumers have fallen victim to fraudsters when shopping online, according to findings from secure payments solution Shieldpay – around 11.5 million people. 

Shoppers are defrauded by an average £683, but one in 10 lose more than £1,000. Scammers often target victims more than once; where this happens individuals have on average £1,400 stolen. 

Consumers were promised more protection from online con artists with new European regulations called the Strong Customer Authentication (SCA) rules, which are designed to reduce fraud and make online payments more secure. 

The rules will ensure electronic payments are performed with multi-factor authentication, to increase the security of electronic transactions. Initially scheduled for introduction last month, the tougher requirements will now not be in force until 31 December 2020, because financial firms and retailers have said they need more time to prepare.

A spokesperson for UK Finance, a trade body for the financial sector, says: ““Two-factor authentication will add an additional layer of protection for online card transactions, and the industry is working hard to implement these changes in a way that balances both convenience and security.” 

Online fraud is often associated with older people but Fraud Tracker research has found victims are often younger and lose larger sums. 

A quarter of aged 18-34 year olds have been defrauded while shopping online at an average cost of £767. Nearly one in six (16%) have handed over more than £1,000 to fraudsters. 

Tom Clementson, director of consumer at secure payments solution Shieldpay, says: “It takes just moments for fraudsters to target unsuspecting consumers and their methods are becoming more advanced. Initiatives like confirmation of payee and strong customer authentication have been kicked into the grass to the benefit of retailers but to the detriment of consumers.  

“People must take their online safety into their own hands. Simple steps like only shopping on trusted websites, checking the website is secure and never clicking on links in unexpected emails go some way to keeping money safe.”

The UK Finance spokesperson adds customers should check their bank and credit card statements regularly and if they spot any unfamiliar transactions, contact their bank or card company immediately. 

“Always remember to follow the advice of the Take Five to Stop Fraud campaign and take a moment to stop and think before parting with your money or information in case it’s a scam.”

Consumers are protected against unauthorised fraud losses on a debit or credit card.

Housing raffle in trouble for withholding £650,000 London flat

Housing raffle in trouble for withholding £650,000 London flat

Players in a lottery that promoted winning a £650,000 flat in London were misled by adverts suggesting winners would actually receive a property, it has been ruled

Laura Miller
Wed, 10/30/2019 – 11:08

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Raffle House advertised its scheme across emails, a website and sponsored posts on Facebook during summer 2019, telling ticket buyers “A £650,000 London flat yours for £5”.

Details of a “previous winner” were given, who, a Facebook post said, had “her life changed through Raffle House”, asking “Will you be next?” and stating “Live in London for a tenner”.

The Advertising Standards Authority (ASA) found these claims and offers were misleading, however, as the previous winner had not in fact received a property, or a reasonable equivalent.

They had instead been given a cash prize of £173,012.93, less than 27% of the advertised property’s value and less than 43% of the total amount generated by the competition. See the original advert below:

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In its defence Raffle House, founded by entrepreneur Benno Spencer and supported by Brian Mattingley, chairman of gambling brand 888, said the cash prize was won at significantly better odds than described for the property jackpot prize, and so was a reasonable equivalent.

It claimed it was clearly displayed on the website’s home page and elsewhere that the ticket sales threshold had to be reached to award the property, otherwise the prize was one of cash.

Raffle House added customers were informed how many entrants were required to guarantee the property as the main prize throughout the competition, and in one of the complained about adverts, which stated 6,500 more raffle players would guarantee it as the jackpot.

The ASA disagreed and upheld the complaints it had received about the promotion and Raffle House.

In its decision it stated “we considered the incentive for entering the promotion was winning the £650,000 flat in London”, and as such that is what Raffle House should have delivered.

“Given the number of references to the property, we did not consider that [the cash prize] overrode the impression created that the purpose of entering the competition was to be in with a chance of winning the property,” it continued.

In a warning to other similar schemes the ASA added: “We considered that any promoter who needed to generate sufficient revenue from the competition to fund the advertised prizes was likely to breach the Code if they failed to sell the requisite number of tickets.”

Raffle House has been ordered by the ASA to ensure in future that they award the prizes as described in their marketing communications or reasonable equivalents, “and that their future advertising did not mislead by exaggerating the value of a prize that had been previously awarded”.

Moneywise approached Raffle House for comment. Mr Spencer says: “We’re now less than 20,000 entrants away from our 60,000 ticket threshold and confident that we’ll be awarding our current property in three months.

“Following our first competition, where we awarded a life-changing £173,000, we’ve taken steps to ensure that our more than 40,000 users have the chance to win the £500,000 London flat currently on offer for £10, as well as our weekly £1,000 cash-prizes, all the while continuing to raise money for our homelessness charity partners.

“Our winners’ list continues to grow and we can’t wait to add a homeowner to it soon.”

The company is not the first to get in trouble for offering a misleading property lottery to hopeful ticket buyers.

A Moneywise investigation this year found rising numbers of homes are being raffled rather than sold through conventional means, but entrants are often left disappointed.

In the 18 months to April, competition website Loquax had listed 50 house competitions. Only two of these resulted in anyone winning a property, one of which was a community project in Ireland.

In more than 70% of cases a cash prize was awarded, usually worth far less than the estimated property value. In some cases, the winner receives just a few thousand pounds because the raffle didn’t sell enough tickets.

Speaking to Moneywise in April, Mr Spencer said of Raffle House: “It looks shambolic and badly planned, but we are committed to awarding a property. The business would struggle to do anything again if we didn’t. We hope to be a UK first.”

When things go wrong, ticket buyers are often left unable to contact the raffle organisers, with the company behind the scheme vanishing.

Consumers can complain to the ASA, which can order the promoter not to repeat a breach, but otherwise consumers have little recourse to get their money back.

The ASA told Moneywise it has seen a rise in property raffle grievances and found many in breach of the Committees of Advertising Practice code for changing closing dates, adjusting Ts&Cs, withholding the prize advertised or offering significantly lower-value cash prizes.

Complaints have been upheld against Homeraffler.com, Real Hot Property, HMV Competitions and Win Your Dream Home.

Many companies have been discontinued, dissolved or struck off Companies House for not providing annual accounts after failing to sell enough tickets.

Images courtesy of the Advertising Standards Authority

Pension tax driving half of doctors to retire early

Pension tax driving half of doctors to retire early

Doctors are retiring earlier than planned to avoid pension tax bills of tens of thousands of pounds, according to new data

Laura Miller
Wed, 10/30/2019 – 09:48

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Complex pension taper rules introduced in 2016 are sending doctors to an early retirement, putting the NHS at risk of greater understaffing and patients facing higher wait times.

Almost half (45%) of doctors surveyed by the Royal College of Physicians and its Scottish counterparts say they have decided to retire younger, with 86% of them citing pension concerns as one of their reasons, 

The survey of 2,800 doctors nearing retiring age found in the last two years 38% of clinicians aged 50 to 65 reported having had an annual pension allowance tax charge due to exceeding their pension threshold.

Tax bills for pension allowance breaches are becoming much more common since rule changes in 2016 cut the amount savers can put away each year.

Most individuals can squirrel away up to £40,000 annually, but this amount is tapered away for higher earners to as little as £10,000.

The complexity of the taper makes it hard for savers earning over £110,000 to work out their allowance and stay within the rules.

Members of defined benefit schemes, such as doctors in the NHS pension, are particularly hard hit because their contributions are the result of largely hidden calculations about the future value of their pot.

Breaches to the annual allowance must be paid immediately on money that may be tied up in a pension for decades.

Doctors have reported these bills can exceed their annual salary, resulting in many of them seeking early retirement or reduced hours to avoid the complications and cost.

Of the senior clinicians surveyed by the Royal College, 62% said pension tax rules meant they now avoided extra paid work such as waiting list initiatives or covering for colleagues. A quarter have reduced the number of programmed activities they work.

More than a fifth (22%) reported having stepped down from a leadership or other role with extra remuneration that would trigger a pension tax charge.

One survey respondent says:“As a consequence of taking up a role as deputy medical director, I received £85,000 tax charge. I work harder than ever, took up a senior role and have this. 

“Thankfully I could pay with [pension] scheme pay otherwise I would have had to sell my house. I believed in the NHS, worked ridiculous hours as a junior, believing in a greater good but now I feel so unvalued and as though it was all an utter mistake.”

Another respondent adds: “I received a £92,000 tax bill due to receiving an ACCEA award, running a regional specialist service and undertaking a leadership role.

“I have had to come out of the pension scheme in my 40s due to punitive projected tax costs and I now work the equivalent of two sessions per week unpaid. I intend to leave the NHS at the earliest opportunity.”

Royal College of Physicians president Professor Andrew Goddard said the findings of the survey demonstrate the need to urgently reform the pensions system in this current tax year to prevent additional pressure on the NHS.

“We simply cannot wait until the next tax year for a solution, every week the issue remains more hard-working doctors will reduce their hours, driving up waiting times for patients and driving down staff morale,” he says.

A government consultation is underway to make the NHS pension scheme more flexible, with changes intended to be implemented in April 2020 that would allow staff to lower their contribution rates to stay within the limits.

This could pave the way for more widespread reforms across other sectors facing similar problems of hefty annual allowance tax bills.

Graham MacLeod, financial planning director at wealth manager Tilney, says: “Such tinkering, while welcome, is unlikely to resolve the crisis without the scrapping of the tapered annual allowance. 

“The costs of addressing this will ultimately need to be offset against the tax receipts to the Treasury arising from these pension tax charges.”

“But with the 6 November 2019 Budget now pulled and a new Budget unlikely until 2020 following a General Election, the opportunity to hit the nail on the head and address this issue head on has effectively evaporated for many months, a period when the NHS pension crisis will rumble on, risking rising waiting lists for surgery.”

Key changes proposed for the NHS defined benefit pension scheme

  • Choose a personal accrual level and pay correspondingly lower employee contributions. For example, 50% accrual with 50% contributions, 30%:30% or 70%:70%
  • Fine tune this during the pension year, updating the chosen accrual when clearer on total income.
  • Ancillary benefits such as ‘death in service’ life assurance and survivor benefits would continue in full.
  • Phasing the ‘pensionability’ of large pay increases for high-earners.
  • Make the impact of pension ‘scheme pays’ for tax bills clearer by including the pension debit on annual pension statements so that members can see the adjustment to their pension at retirement.
  • Provide access to high quality education and information