Which Pension? As bond bubble hits pension savers

About four million employees are members of DC defined contribution pensions such schemes, and 86% of them are paying their money into so-called "default" funds. These tend to be partly invested in UK government bonds, in some cases heavily so if an individual is close to retirement.

In recent years the price of UK government bonds has had its very own bubble. "There has been a big inflation of government bond prices, which may not be over, and it may be some considerable time until they deflate, but at some point they will have to come back down to earth," says Laith Khalaf, pension investment manager at fund supermarket Hargreaves Lansdown.

"Gilts are seen as a very safe asset, but actually at their current prices there is a potential for capital losses."

There are three related reasons bond prices have risen. Both here and abroad, governments have cut interest rates to try to stave off recession. This has had a knock-on effect on UK government bonds, known as gilts. As the Bank of England base rate has fallen to 0.5%, the fixed rate of interest paid by the gilts has become correspondingly more valuable and their prices have risen.
Gilts have also been seen as a "safe haven" by foreign investors who have been buying them during the turmoil in the finances of the Eurozone.

If you are trying to make sense of your pension our experienced Independent Financial Advisor's at Enable would be able to talk you through your options.

Getting IFA on your pensions works...

A recent report from Unbiased and Standard Life shows that taking independent financial advice could provide a retirement income boost of more than £2,780 a year on average as much as £232 a month. Consumers who have taken pension advice contribute over one third more to their pension pots than those who have not and those who have received independent financial advice are financially better protected than consumers who have not. Enable’s IFAs know that they can help people make the most of their pension.

The report also demonstrates that the current average pension pot for consumers who have been advised on their retirement planning is £74,554.30, double that of those not seeking advice (£37,277.10) -those who have taken advice put nearly a third more a month (£167 v £108) into their pension plan. On average those who had not taken advice put, 9% of their total salary away, compared to the advised group who think people should be aiming for 11.4%.

Karen Barrett, chief executive of unbiased, stressed the importance of relaying the value of advice to customers: "It's vital to that they know that when people are planning their finances, they should consider taking independent financial advice. Our joint report shows that those who have taken advice are far better positioned for retirement than those who haven't. Consumers are currently faced with delayed retirement ages and rising life expectancies - we are an ageing population and we need to be putting the right preparations in place for this."

Halifax figures house stability

The average UK house prices was £163,803 in March, almost identical to the £163,765 in July 2011, says the most recent Halifax data.  Halifax’s monthly house price index showed house prices increased 2.2 per cent in the month, following February’s 0.4 per cent fall showing that prices continue to fluctuate month on month as transactions levels remain historically low.

However, Halifax’s monthly house price index revealed that house prices in the three months to March were 0.1 per cent less than in the previous three months. Prices in the first three months of 2012 were 0.6 per cent less than in the same period last year. This was the smallest fall in prices on this measure of the annual rate since October 2010. The data showed there were signs of a pick-up in house sales. The number of completed house sales has increased to its highest levels since late 2009. The proportion of house purchasers who are first-time buyers increased between the final quarter of 2011 and the first quarter of 2012.

Martin Ellis, housing economist of Halifax, said: “The underlying trend therefore indicates broad stability in UK house prices.  “Efforts by first-time buyers to beat the expiry of the stamp duty holiday at the end of March have probably increased sales in recent months and may have helped to support prices. “We continue to expect little overall movement in prices this year provided that the UK economy does not suffer a pronounced weakening.”

Where ever you are on the housing ladder our experienced IFA’s at Enable of Bishop’s Stortford can help you take that next step.

Bond basics

With much talk of Eurobonds it’s been hard not to know more about them than you might want to but if you are still not sure Enable’s IFA’s can take you through the basics. Governments borrow money by selling securities known as bonds to investors. In return for the investor's cash, the government promises to pay a fixed rate of interest over a specific period - say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt. Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

Once a bond has been issued - and the government has the cash - the investor can hold it and collect the interest every year until it is repayable. But investors can also sell the bond on the financial markets. The price of the bond will fluctuate as the outlook for interest rates changes. So, for example, if the markets think that interest rates are going to rise sharply, then the value of a bond paying a fixed rate of 4% for the next 10 years will fall. Bond prices will also fall if investors think that there is a risk of the government that issued the bond not being able to make the annual interest payment or repay it in full on maturity . The key thing to remember is that bad news drives down bond prices, which pushes up bond yields.

What to do with your savings

Some campaigning groups reckon news of a savings gulf between Britain and stronger world economies comes after analysts at the National Institute of Economic and Social Research warned that the UK is in the midst of recession again. In stark contrast, China's economy clocked up 8.9 per cent growth in the final three months of 2011. Germany, Europe's largest economy, grew 3 per cent last year. It is expected to grow 0.7 per cent in 2012 in spite of the Eurozone debt crisis plaguing the continent.

Rose, of Save Our Savers, says: 'For three years savers have been sacrificed to prop up people who have borrowed too  much money - this sort of short-term political expediency by almost completely blind politicians is putting at risk everyone in the country. 'He says MPs and power-brokers at the Bank of England, which has held rates at an all-time low 0.5 per cent since 2009, must do more to stimulate saving in Britain. This might include suspending income tax on savings, boosting the tax-free savings limit, or hiking rates.

Savers can put up to £5,340 a year into an Isa and earn interest tax-free. The best return is 4.5 per cent from Bank of Ireland. But this still doesn't keep the cost of living, which is rising at 4.8 per cent a year. The effect is to eat away the value of cash over time. If you are worried about the state of your economic affairs Enable IFA's of Bishop’s Stortford can help you work through your options.

Need to make sense of changes to pensions?

The Department for Work and Pensions has amended the Pensions Bill and has redefined money purchase schemes and defined benefit schemes as a result of a recent High Court case.

According to John Lawson, head of pensions policy at Standard Life,” the case focused on dividing the line between DB and DC schemes”. The scheme at the centre of the challenge, Home Decor Pension Scheme, was, according to the DWP, promoted in the “same way as a money purchase scheme but it did not have any means to fulfil its promises”.

The DWP argued that it was a money purchase scheme, which the scheme denied. The Supreme Court found in the scheme’s favour. Mr Lawson said: “Money purchases schemes such as personal pensions [and/or] DC occupational schemes where funds go up or down in the market can only become an annuity with an insurance company or income drawdown. “Schemepensions have been left out of the reclassification, which implies they are DB. DWP wants to make sure trustees are funding these schemes properly.”

According to Mr Lawson, currently those in scheme pensions can reduce the level of income they are taking if their fund is running low or investments are performing badly. However the DB rules mean the provider would have to make up any deficit or risk the scheme falling onto pension lifeboat scheme the Pension Protection Fund, meaning schemes having to pay PPF levies.

Sounds too complicated, let Enable IFA’s of Bishop’s Stortford help you make sense of it.

How is your pension performing?

In the news this week “New research, seen exclusively by The Telegraph, shows that more than two thirds of the people who run private sector pension schemes admit that their members do not face "good outcomes" in retirement.

In other words, the trustees, consultants and advisers who set up and administer defined contributions (DC) schemes – the most common type of workplace pension – fear they won't provide sufficient income for a comfortable retirement.

The research, conducted by the insurance company Partnership, showed that there was widespread disengagement with pensions among the 2.5 million members of DC schemes – where a person's retirement income is based on contributions, investment returns and annuity rates, rather than earnings.

In total, eight in 10 of those surveyed said the average worker did not understand their pension. The professionals interviewed cited three main problems: apathy, a lack of education about retirement options and a "general fear of pensions".

All three things that we at Enable want to make sure you avoid by getting the best independent Financial advice with reputable IFA's in Bishop Stortford.

The Telegraph go on to report “This lack of engagement is less of a problem if you are still a member of a final salary or "defined benefit" scheme – where your pension is based on your earnings. Here, there are far fewer choices to make: members don't have to choose between different investment options or take out an annuity on retirement. It is the schemes' trustees that shoulder both the investment and longevity risks. If they make the wrong decisions, the scheme can suffer, but it is still obliged to pay out the promised pensions to members.”

If you not are in this more fortunate position Enable IFA's can help you plan for the future.

Which Mortgage? What about offsetting your mortgage

The reality for most borrowers is the fact that their monthly mortgage payment is probably at the top end of what they can afford and they either do not have the spare cash to overpay, or they are using any spare money available for savings, to pay other debts or fund other purchases.

And with most lenders once that spare cash is paid into the mortgage, it is gone and cannot be used for anything else. This is probably why many borrowers prefer to keep their spare cash ‘liquid’ in savings accounts where they can access it for whatever they wish.

But for those who want the benefits of overpayment without technically overpaying, there is always the option of an offset mortgage. Here, instead of putting your savings into a separate account or ISA, you choose to put them in an offset pot alongside the mortgage. Instead of earning interest on the savings you offset the interest you would have earned against your mortgage, effectively overpaying.

With normal savings rates being particularly low, many borrowers with significant savings would benefit from offsetting as they would earn the equivalent of the mortgage rate on their savings. This method of overpaying also allows the borrower to keep their savings ‘liquid’ as they can always access the money from the offset pot at any time.

It is also worth bearing in mind that any interest you earn on your savings is taxable at your highest rate of income tax, which might be 20%, 40% or, as of April 50% for the highest earners. If you use your savings to overpay your mortgage instead, not only are you effectively earning interest on them at the mortgage rate, but because they no longer technically exist as ‘savings’ you do not pay any tax.  Enable can help your look at your mortgage options again.

State Pensions - that doesn't sound like much to live on?

Any self respecting teenager let alone 20 something will be able to figure out that current state pensions do not sound like much to live on.  Pensioners can also get money from the benefits system but this still means money can be tight for many years, even if you have worked for your whole life.

The latest figures from the Office for National Statistics show that 53% of single UK pensioners had an income of less than £10,000 in 2008-9.

So you really need to hammer home that it really does count to start saving early.  Teach them about compound interest because compound interest means if you save regularly from a young age, you will be better off than if you save more later in life.

Most pensions experts say that you should top-up the pension provision from the state with a workplace pension or a private pension.

Explain to them that In a final-salary scheme, the investment risk is taken by the employer and you are guaranteed a retirement income based on pay and length of service.

But generally a pension is a long-term investment. Remember investments, unlike savings, can go down or up in value depending on the success of the investment - such as shares on the stock market.

Explain to them that you will not be able to spend the money you put in now until you retire. However you do not have to pay much tax on this investment.

Let them know that if you join a workplace pension scheme, money comes out of your pay packet and into a pension pot. Your employer also puts money in, and there is tax relief on all this from the government.

You can then tell them that when you retire, the pot of money that you have built up can be used to buy a regular income in retirement, called an annuity.You  are never too young to start saving for a pension, get your children to talk to an IFA about planning and saving for their futures

SOS campaign for better interest rates

It’s shocking news that, “The value of UK savings has been eroded by £50bn in the past year because of inflation and low interest rates”, say the Save Our Savers a campaign group. It is particularly galling if you have worked, saved, paid your taxes, worked, saved and paid your taxes to find that you are bailing out those who didn’t.

Save Our Savers wrote to each member of the Bank of England's rate-setting committee urging them to raise the Bank rate recently to help pensioners and encourage saving. But the Monetary Policy Committee kept the rate on hold at 0.5%, allowing borrowers to continue to benefit from rates remaining at the record low.

In a plea to all nine members of the MPC ahead of the recent decision, Save Our Savers said that "a country without savings is a country without a future", the holding of interest rates at a record low could have a permanent impact. It warned that those on fixed incomes, such as pensioners, were suffering terribly from the combination of extremely low interest rates and above target inflation. "For many this is not a temporary setback. Its effect will permanently reduce the value of their future income," the letter said.

If you are one of the savers who are being hit hard by the record low interest rates IFA’s like Bishop Stortford’s Enable Independent might be able to help you rethink your investments and balance the books in these turbulent times.

Which pensions - how do I pay my pension with debts?

Kate Smith, regulatory strategy manager at insurer Aegon UK, believes integrating pensions with other financial responsibilities would make saving for retirement attractive even for those with significant debts.

"Employees could request a pension payment holiday so that their pension contributions (minus tax relief) are diverted to repaying a consolidated loan for example, ideally at a reasonable interest rate, for a maximum period, say five years," she suggests. "Existing savings would remain untouched, the employee could switch back to pension saving after the period, or once the loan is paid off – encouraging staff loyalty, good saving habits and raising awareness of financial responsibility."

Ros Altman further suggests greater flexibility.  Many people are dissuaded from contributing to pensions because the money is tied up for decades with no early access, even in an emergency. With access only available from 55, Altmann recommends allowing people to tap into their pension when they want to, but only their contributions, not their employer's or the tax relief. "In the case of NEST, people would still have half of their pension fund growing until retirement, even if they needed to draw out the other half," she says.

Financial Services Authority regulations that act as a barrier to allowing employers to promote their pension schemes more effectively should be removed, says Smith, at the same time as jargon is eliminated she says. "Information provided to pension savers needs to be simplified; too much information is bewildering and off-putting.  Let one of BishopStortfords IFA’s help you through the jargon.