Will your pension support you for the rest of your life?

With average life expectancy at age 65 now about 82.4 years for men and 85 for women (ONS October 2009) and steadily increasing, anyone buying an annuity today faces some pretty tough decisions.

The annuity they are buying will be part of the income they will have to live off for the rest of their lives, which for those retiring at 65 will on average be 17.4 years for men and 20 years for women. All of whom will obviously hope and plan for it to be much longer and for many it will be.

So do you buy an annuity for life which pays the same amount, year after year, with no protection from the ravages of inflation, or do you opt for inflation-linking, which is prohibitively expensive?

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Consumer voice missing from pension reviews

Over the last 20 years, there have been scores of  reviews, commissions and green papers, which have sought to “fix” the UK’s savings and pensions gap, whereby an estimated 7m adults are sleepwalking their way to retirement without making adequate provision for their old age.

In the 1990s, two eminent actuaries, Ron Amy and Tom Ross, undertook a review of the UK pensions system with the aim of designing a blue print to crack  the lack of saving for  retirement. The result? More pension reports and consultations.

A rare example of a tax incentive to save for non-tax payers

As incentives to save have been withdrawn, one gem that has remained surprisingly intact is the rule that provides for a tax relief on pension contributions even if you have no taxable income. Currently the tax relief available is 20 per cent on a maximum contribution of £3,600.

Anyone between the ages of 18 and 75 can contribute and this enables housewives, carers, the unemployed, students and anyone else who is UK resident, to continue paying into a pension during periods when they have no earned income.

So if you are in a position where you have savings but no taxable income;  by transferring savings into your pension, the 20 per cent tax relief means that the amount you actually have to fork out is just £2,880 because HMRC tops up your contribution with  £720.

It is also possible for parents and friends to pay into a pension on  behalf of a child or grandchild.

The rule is one pension per child, so a group of relatives such as parents, grandparents and friends could all contribute, on condition that the amount paid is does not exceed the £2,880 net contribution limit.

Given the current lack of incentives to save and that George Osborne  is known to be keen on cracking down of benefits for middle class and affluent families, the survival of this tax relief is welcome. Let’s hope it remain so.

To the OFT – Banks need a kick up the backside, not guidelines

Am I alone in feeling totally underwhelmed by the OFT’s response to the ‘super complaint’ on cash ISA transfers?

While any improvement in our financial institutions‘ current dire performance would be welcome, the OFT’s recommendations will do little to shake banks and building societies out of their current complacency when it comes to customer service.

The OFT’s recommendation that cash ISAs should show the interest rate payable on statements from May 2012 is quite frankly pathetic. Why can’t banks and building societies do so now, and while they are at it, why not publish the interest payable on all savings account statements, instead of customers having to search the internet to find the correct prevailing rate (and even then it may not always be correct)?

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What was in the budget for savers?

There was little in yesterday’s emergency budget for savers, with its focus on cuts in spending and rises in taxation, but there were a few rays of light on the personal allowance, capital gains tax and pensions front.

The increase in the  personal allowance from £6,475 to £7,475 next April  will leave most basic rate taxpayers £200 a year better off. For an average earner on £25,000, a year it’s equivalent to a cut in the basic rate of income tax from 20% to 18.9%.

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Let’s cut tax and bureaucracy for savers

Savers desperately need policies to encourage them to save, such as an annual tax allowance of £5,000 as called for by Save Our Savers, to lift modest savings out of the tax net.

This would simplify matters and save us all from the huge amount of time and paperwork currently involved with completing tax returns for relatively small amounts of income.

If that is not possible or is not politically acceptable, the current system for reclaiming gross interest from banks and building societies via form R85, should be simplified.

For instance, National Savings & Investments should be incorporated into the R85 scheme, as currently NS&I investors have to claim gross interest from  HMRC and cannot  use the R85 form. … Continue Reading