Money news, advice and predictions for savers and spenders.
By Jeremy Gates
Many of the 12m private sector workers who see themselves as lucky to belong to final salary pension schemes probably shrugged their shoulders when the Government changed the rules which determine their pension payout.
From January 2011, says pensions minister Steve Webb, final salary pensions will have to rise each year in line with the consumer price index (CPI) rather than the retail price index (RPI).
The Government had little alternative: there is an estimated £239bn 'black hole' in final salary pension schemes, the shortfall between what is in the funds and what might eventually be due to members. BT, a £10bn company, has pension commitments to its staff of £40bn.
The new guideline is only a minimum requirement - if their scheme is sufficiently well-funded, pension trustees can continue to allow annual rises in line with RPI.
But weaker pension funds are likely to adopt the Government guidance as soon as possible - and there is little doubt, among independent experts, that pensioners will soon feel the pain.
Laith Khalaf, pensions analyst at financial advisor Hargreaves Lansdown (HL), says: "Millions will have to fill holes in their retirement income by making additional private savings of their own.
"Based on the historic rates of RPI and CPI, a pensioner retiring now on a £5,000 final salary pension could expect an income of £9,737 in 20 years' time, if it was uprated in line with RPI; it would be worth £8,497 (13% less) if it is uprated in line with CPI.
"Over that 20 year period, the pensioner would have missed out on £10,367 in income, in total. The longer the pensioner lives, the worse the effects will be."
Since 1988, says Laith, RPI has averaged 3.6%, against CPI at 2.8%.
The gap has big implications for pensioners. Because CPI does not take council tax into account, for example, pensioners on the lower pension could be badly exposed to massive annual bills from the town hall.
Older people, in any case, are more vulnerable to inflation: new Alliance Trust Research Centre (ATRC) figures indicate that 50-64 year olds face the highest rate of inflation, at 4.5%, which is 41% higher than the official headline rate of 3.2%.
Last month, says ATRC, over-75s were the hardest hit as their inflation rate climbed from 3.3% to 3.6%.
At financial advisor AWD Chase de Vere, technical pensions director Param Basi is equally critical: "It is grossly unfair to those who contributed in good faith toward their retirement to now change the measure by which their income in retirement will increase", he says.
"The argument that CPI is a more appropriate measure does not stand up when you consider that pensioner inflation is recognised as being higher than RPI anyway. This change will have a double whammy impact on pensioners' real incomes.
"This is yet another in a long line of messages which have gone out to the public over the years, effectively telling them not to trust pensions.
"It is therefore little wonder that, as a nation, we are not saving enough for retirement."
Leading accountants KPMG thinks pensioners could lose £45bn from the Government's rule change. It sees the move as hardest on deferred pensioners - who hold pensions with previous employers, but have yet to draw them.
It seems only 40% of these pension schemes have RPI specified in their rules as the index to be used to upgrade deferred pensions, until they are taken. The rest will see a smaller annual increase applied to their pension until it is drawn.
Most workers already drawing pensions will see their income rise less slowly, unless they are lucky enough to be in funds with tight rules which demand rises in line with RPI.
However, as HL's Laith Khalaf points out: "The Government is well-intentioned. It is trying to prop up final salary schemes by reducing their liabilities."
Pensioners who see their annual rise cut from 2011 might reflect it is better to have a pension scheme still up and running. If it collapses, they will be at the mercy of the heavily indebted Pension Protection Fund (PPF).
How can pensioners best protect their interests?
Patrick Connolly, at financial advisor AWD Chase de Vere, suggests a four point strategy:-
*Ask your Pension Scheme Administrator if your scheme offers any protection against a change from RPI linkage to CPI.
Lawyers could have a field day as pension fund members try to prove schemes must stick to RPI.
*If a move to CPI is unavoidable, assess the likely reduction of retirement income.
*Consider other saving schemes to make up that shortfall.
Obvious candidates are an extra pension through Additional Voluntary Contributions (AVC) if an employer provides such a scheme, ISAs (invested in shares, or cash nearer retirement) to build an alternative savings pot, or perhaps a low-cost stakeholder pension to generate a second annuity.
*Take independent advice: financial advisors typically charge £100-£300 per hour for consultations.
"A final salary scheme is still a pretty good thing to have, even if it loses a little of its lustre, but members need to save more to boost pension income which is likely to rise more slowly", says HL's Laith Khalaf.
As a rough guideline, workers who start paying into a pension pot early in their careers should save around 10% of their salary, to get a pension in the region of half their final wage. Those starting at 40 should pay in 20-25% of their income to get anywhere near a decent pension.
:: Information: Hargreaves Lansdown (0117 900 900 and www.h-l.co.uk); AWD Chase de Vere (0845 140 4104 and www.awdchasedevere.co.uk).
The website Unbiased.co.uk says over a third (36%) of consumers seeking independent financial advice in June sought guidance on personal retirement planning.
Poundnotes
:: The British make 17m visits a year to Spain and many see their European Health Insurance Card (EHIC) as a replacement for travel insurance.
But the website insurewithease.com warns that EHICs only cover treatment in state hospitals. It says Spanish health authorities, including in the Balearics and the Canaries, increasingly refuse to treat European visitors under the EHIC.
Sarah Findlay, of insurewithease.com, says: "EHICs don't cover repatriation, flight cancellation, lost or delayed baggage or missed departures. They don't cover GP consultations or pharmacy prescriptions. An uninsured repatriation could cost £45,000, a sum most could not afford without a loan."
:: Since January 2010, the average ISA saver holding a savings pot of £8,171 has seen its value shrink by up to £89 13p, says finance website moneysupermarket.com, which means savers nationally have lost a collective £1.6bn.
The website's Kevin Mountford says the best ISA currently pays 2.75% tax-free, which means that not one account of 93 for balances of the maximum £5,100 annual allowance pays enough to counter the effects of inflation.
Providers are making it worse - the average easy access ISA rate is down from 1.44% in April to 1.38%.
:: Savers seeking income might try their luck in some of the fastest growing economies, says David Barron of fund manager JP Morgan Asset Management, which is launching a Global Emerging Markets Income Trust.
Although emerging markets are usually seen as a growth story, Mr Barron thinks emerging market companies have weathered the global financial crisis well, with low debt levels and robust balance sheets, and the new fund aims to deliver a gross yield of 4% gross.
With capital growth too, investors will be delighted.
Fund prospectus available at www.jpmglobalemergingmarkets.co.uk.
:: The end of the Child Trust Fund (CTF) means friendly societies can devise other savings schemes for youngsters, says Neil Armitage of the Foresters Friendly Society.
The Foresters intend to upgrade its Child Tax Exempt Savings Plan (TESP), which enables parents and grandparents to invest a minimum £15 per month in an account for a fixed term between 10 and 15 years. The chosen maturity date can be a 21st birthday or graduation.
The new product will combine the best features of the existing TESP and the Foresters' Ethical Child Trust Fund.
Foresters Friendly Society enquiries: 0800 783 4162 and www.forestersfriendlysociety.co.uk.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
ICICI Bank www.hisave.co.uk 4.75%% (F) HiSAVE Fixed Rate Five Year Bond £1,000 Yly
Yorkshire BS via branch 4.60% (F) Fixed Rate Bond 31/08/15 £100 Yly
Aldermore 0845 604 2678 4.56% (F) Fixed Rate Account Five Year Bond £1,000 Yly
Close Savings 0207 392 1772 3.15% Premium Gold 180 Day 180 days (B) £10,000 Qly
Stroud & Swindon BS 08457 252423 2.90% 90 Day Notice 90 Days £1,000 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 1.99% for two years 70% £999 Yes
First Direct 0845 610 0100 2.29% variable for term 65% £99 Yes
ING Direct (UK) 0845 603 8888 2.60% disc to 31/08/12 70% None Yes
Yorkshire BS 0845 120 0874 2.99% to 31/07/12 75% £995 Yes
Hinckley & Rugby BS 0800 774 499 3.49% for term 75% £795 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).
