Between a Rock and a Hard Place

by George on March 16, 2013

Your Biggest Ever NEST egg

Always good to catch up with friends and great to see pension guru Steve Bee again. Just before auto enrolment kicks off, it is sobering to realise that the new NEST pension scheme does not provide compliance or any advice to employers. That is extra and during our meeting the formal launch of J&rgon Free Benefits pension compliance service is done.

In case you have been asleep for a few years, NEST is an attempt to coerce Brits into saving for their retirement as we are all living longer and large generous defined benefit (final salary) schemes have been massacred by governments except for the 1 in 6 of UK employees who work in the public sector. Large employers have to start now (1st October 2012) and by 2018 everyone should be enrolled with 8% of earnings going into an individual pension pot. The 8% contributions are made up of: 4% from the employee, 1% tax relief on that and 3% from the employer. This is more than most people contribute and will be accompanied by plenty of “I can’t afford it!” moaning. In the days when I did monthly pension surgeries, most common question was “how much should I be contributing?” where a simple answer was 15% of earnings which can include tax relief. In the three years that I did the surgeries, I may have been able to count people who did save that much on the fingers of both hands.

Where do you stand?

Want to do a simple online pension health check? See Invidion or your financial adviser or even your own employer’s pension scheme calculator for an individual projection. Try not to leave it till the last few months before you retire – financial advisers give advice – they are not in the miracle business.

For most people, their pension pot is the largest pool of money they will ever have. Exceptions tend to be: inheriting loadsa money, winning the Lottery or selling your business. Buy-to-Let can be one route but is high risk. It is a self-financing way of accumulating assets when it works, but it depends on the tenants and property can be difficult to sell if you are in a corner.

Eating your home otherwise known as Equity Release to improve your standard of living in retirement, is likely to generate a disappointing amount of extra income. Why? Equity Release income depends on annuity rates which have also been savaged by government policy, namely printing money confusingly called QE or quantitative easing. Annuity payments are based on government bond yields which are now at the lowest rates for 300 years and governments wonder why Brits aren’t interested in saving for retirement.

The Short Straw

But supposing you never get there? A common question in my surgeries was “What happens to my pension fund if I die?” where the answer is that it usually goes to your named beneficiaries. This answer pleases most people but a surprising number think that the insurance/pension company will grab the fund if they die early.

And when this becomes a real question rather than a hypothetical one? Most recent figures from 2009 show over 320,000 people diagnosed with cancer while figures from 2010 show over 157,000 deaths from cancer. You’ve got cancer and your life expectancy is months or a very low number of years? Annuities become ridiculous. Less than 12 months to live? HMRC will allow a Serious Ill Health Lump Sum Payment subject to certain rules. The confirmation of the illness must be done by a “recognised medical practitioner” – fair enough.

But say you’ve got a couple of years to go?  This is where life gets cruel. You can take 25% tax-free cash now called a Pension Commencement Lump Sum but the balance has to be used to: purchase a conventional lifetime annuity, used for income drawdown or so-called third way annuities. The lifetime annuity rate may be enhanced but you are still kissing your money goodbye.

Drawdown and third way annuities don’t kiss it all goodbye but do have income limited by GAD rules Great for your beneficiaries maybe but if you have an aggressive cancer, you probably want the money NOW – to complete some items on your bucket list or perhaps try some private or alternative treatment?

Having previously got a client’s pension fund paid out in full where they told me life expectancy was 12-18 months, 12 months seems too rigid and too short. What are readers’ experiences here?

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