The Retirement Centre Blog

Do Households Need to Face Reality?

Tue, 14 May 2013 10:30:19 +0100

British households have been making significant changes to their budgets in order to weather the current economic environment. However recently, there have been a substantial number of headlines in the press recently indicating that whilst cuts are being made we are only servicing debt rather than reducing the problem.

Mortgage Companies must accept responsibility

Some responsibility of this has to sit fairly and squarely with some mortgage companies who were driven by shareholders to continue to increase the size of their mortgage books. To compete new and innovative mortgage products were created for specialist markets such as people who were self employed and had to certify their own income. The issue with the products have widely been publicised but to cut a long story short the products moved over into the mainstream mortgage market and were made available to anyone.

One of the biggest issues now facing 1.3 million household in the UK actually stems from an old mortgage product which was adapted for recent times. This is the Interest Only Mortgage, as the name suggests only the interest is paid on these loans and none of the capital. Lenders were quite happy to lend people the maximum loan based on affordability to repay just the interest as long as a box was ticked to say that the borrower was making their own arrangements to pay the initial capital back. At the time house prices were rocketing and everyone thought that this would continue (if only!!).

Things then went horribly wrong around the world and people found themselves living in a property worth less than the mortgage that they had secured on it, negative equity. In the long term housing has proved to be an asset that increases in value and I’m sure in 10 years time we will all be in homes that are going up in value.

But where does that leave the 1.3 million people now who currently have an interest only mortgage? According to the Council of Mortgage Lenders the average debt to be paid off is £59,000. For those who aren’t approaching retirement, plans can be made with lenders to convert the loan into a repayment mortgage, whilst this will increase the monthly payment an option to combat this is to extend your mortgage term as this will have the effect of giving you longer to repay your loan and therefore reduce your monthly payment.

Solutions for those over 50

For those over 50 or approaching retirement the situation is very different as many lenders have a maximum borrower age of 60 and despite their being tens or even hundreds of thousands of pounds of equity in the property are no longer prepared to extend interest only loans and often demanding payment, which understandably creates a stressful situation for those involved.

So what are the options for people in this situation who can’t afford to repay the outstanding debt?

Negotiate with mortgage lender
There may be circumstances why you can keep you interest only loan, and until you have approached your lender you do not know what the situation may be, there may be nothing to worry about. Before you call make sure you know what you could afford to pay back each month

Family loan
It may be that someone in your family could afford to lend you the money and agree terms with them for repayment, when the property is sold.

Sell the property
By selling the property the proceeds can be used to repay the loan, then with the remaining funds either being used to purchase another house or rental payments.

Equity Release
There are a wide variety of Equity release products available including one that allows you to pay the interest back on a monthly basis, however at any time in the future you can choose not to and this repayment amount is added to your loan. This provides a great deal of flexibility to how you repay the loan, and even keeps the other options open to you as well. To find out more about this option on our dedicated equity release pages.

Previous Blogs:

Pension Fee’s Axed
Mandatory Retirement No Longer Exists
Most Popular Retirement Destinations
Pension Contributions Increase
Over 50s In Own Business Boom

Pension Fee's Axed

Mon, 13 May 2013 10:28:54 +0100

The Government has banned consultancy charging on company pensions, which will help millions of UK employees grow their pension pots.

It may come as a revelation to some employees, but many companies especially small to medium size organisations who offer staff pension schemes rely on advice from pension consultants to set up and advise on the investment of the funds.

Unknown to many employees of these organisations is that their pension pots are being charged for this advice not the company they are working for, which could be about £450 per employee in the first year. This is all about to change as the Minister for Pensions Steve Webb has banned these charges claiming that the previous Government didn’t do enough to protect employees by not banning this process previously.

However, this does lead to the question of who is going to pay for the advice on the pension schemes in the future. In reality what this may do is mean that the investments are not as actively managed and reviews take place less frequently, which in the long run could affect the performance of the pension fund meaning that an individual’s pension could be reduced.

What are your views, if you had to make the choice of paying an adviser indirectly (with the payment being taken out of your pension pot, not a fee that is paid out of cash) to manage your pension fund and make sure it is performing as it should versus no charge and an ‘average’ performance or the potential not to perform as well as it could have done but no charge on your pension pot, which would you choose?

Previous Blogs:

Mandatory Retirement No Longer Exists
Most Popular Retirement Destinations
Pension Contributions Increase
Over 50s In Own Business Boom
Crazy ISA Season

£144 State Pension Confirmed in Queens Speech

Fri, 10 May 2013 08:49:26 +0100

The Queen in her traditional opening of Parliament today outlined the sweeping reforms to the state pension. As previously reported A new flat-rate state pension will be introduced in 2016 and will be worth the equivalent of £144 in today’s money.

This will replace the existing basic state pension and second state pension. To qualify for the full £144 workers will have to have built up the full 35 years of National Insurance contributions. The new changes announced in the Pension Bill also makes provisions to reduce the number of years contributions that people who have been out of work as a result of looking after children or sick relatives have to make as these will now be included towards the 35 year requirement.

However, the new flat rate will also mean the abolishment of the ‘married persons’ allowance this will see husbands, wives or civil partners unable to claim up to £66 per week as a result of their partners level of National Insurance contributions. This means that when implemented in 2016 there is the potential for a number of retirees who would have been relying on their partners NI contributions who will lose out under these new proposals as they haven’t made the required level of contributions in the past, can’t afford to ‘top up’ their National Insurance and don’t have enough time to rectify the situation.

Other Pension Changes announced

Whilst the new flat rate pension is the headline announcement for the Pensions Bill there are a number of other key areas contained within it. The most impactful of these is the confirmation of the plan to increase state pension age to age 67 between 2026 and 2028, this is eight years earlier than first announced. Future pension ages can automatically be increase in line with increases of rising life expectancy.

Another part of the proposed Pension Act will impact existing workers, if you change your employers and have a pension pot of less than £10,000 this will automatically follow you to your new company pension scheme.

You can read about the Pension Bill in detail and follow the changes as it progresses through parliament on the parliament website

Previous News stories:

Tesco Shopping For An Annuity
2013 Budget Areas of Interest for Over 50s
Use Equity Release Says Lords Report
Granny Tax Protest Reaches 109,000 Signatures
Wide Scale Annuity Changes Launched Today

Tesco Shopping for an Annuity

Tue, 23 Apr 2013 13:34:07 +0100

Tesco supermarket has announced that it is to extend their shopping comparison tool into the annuity market.

The announcement comes on the back of disappointing financial results, which has led to the supermarket giant to withdraw from the United States. It appears that the supermarket is now making a renewed effort to utilise the customer data that it holds on 16 million of us in the UK through their club card.

People still aren’t shopping around for their annuity

The Annuity market has been under pressure in the last 12 months as a result of the economic conditions and how the Government is releasing money into the economy which is depressing annuity rates. However, approximately half of the thousands of people purchasing an annuity are doing this with their pension company rather than shopping around with any annuity provider to see if they can receive a increased income. This means that people haven’t shopped around may have reduced their income by as much as 40% for the rest of their lives as they were not aware that they could purchase their annuity elsewhere.

Annuity market already under investigation

The Financial Services Authority has already announced it is to investigate the annuity market to explore this issue, and the Association of British insurers has already brought in a new code of conduct for its’ members to ensure that they are highlighting the option to shop around, these announcements may have led to Tesco with the huge amounts of customer data that it holds feel that it is an ideal position to capitalise on the annuity market.

Tesco has not announced a launch date for this service as it is still waiting for regulatory approval. TheRetirementCentre.com welcomed the news of the launch of the service.

Managing Director, Dominic Fraser-Smith said “Whilst no specifics about the Tesco proposition have been released yet, we understand that it will be an online tool. Without more information about the pricing it is difficult to see how beneficial this will be for customers.”

He then went on to say “However, the market should be encouraged that a big name like Tesco will be entering the market because it will further draw attention to people in the UK that they are not tied to their pension provider for an annuity and just by shopping around they could receive up to 40% more income for the rest of their lives. Just by entering the market Tesco will raise awareness and encourage people to shop around, so this has to be a good thing for the UK consumer who is approaching retirement.

Previous News stories:

2013 Budget Areas of Interest for Over 50s
Use Equity Release Says Lords Report
Granny Tax Protest Reaches 109,000 Signatures
Wide Scale Annuity Changes Launched Today
Pensioners Failing to Claim Benefits

Mandatory retirement no longer exists

Tue, 09 Apr 2013 17:44:44 +0100

Following a survey into mandatory retirement in UK companies only 3% of companies have a compulsory retirement policy in place. This compares to 69% two years ago when the same research was carried out by law firm Eversheds.

A law was introduced two years ago by the Government which commenced the abolishment of the Default Retirement Age (DRA). The abolishment of the DRA meant that it would be illegal to end someone’s carrier as a result of their age, thereby removing some key age discrimination in our country.

Retirement not currently attractive for some

However, this has come at a time when retirees are suffering financially as a result of the economic climate through depressed Gilt yields which are reducing annuity income combined with a low interest rate environment for savings.

The consequence of this is that more and more people are choosing not to retire with the aim of continuing to earn a salary whilst hoping that the economy will turn round in order that they can finance the retirement that they had always wanted.

Unintended consequences of not retiring

Whilst this is happening it also means that as people are not leaving firms to enjoy their retirement, it also means that the vacancy that this would create is not available and therefore people are not getting promoted and perhaps more alarming there are fewer job vacancies meaning that it is even harder for schools leavers and graduates to find employment.

A large percentage of companies want the DRA reintroduced

Of the firms that had responded to the survey 48% said that they wanted the Default Retirement Age to be reintroduced citing differences with succession planning and increase costs for the organisation.

It is unlikely that this will happen as it is understood that the removal of the DRA was one of the first policies agreed with the Coalition parties, even if there was a general election and a different party leading it is unlikely that the DRA would ever be implemented as this would send the wrong message to the older voters in the country an reintroduce age discrimination.

What do you think of the removal of the Default retirement age and the fact that it is meaning there are less opportunities for school leavers – would you keep it back in? Let us know your thoughts.