A curate’s egg for pensions
Good news and bad for pension savers. The size of the average pension fund in the UK has risen considerably, but many people will be disappointed by the income that their pot can secure.
Good news and bad for pension savers. The size of the average pension fund in the UK has risen considerably since the introduction of auto-enrolment (whereby employees are automatically signed up for their company pension scheme), according to pension provider Aegon. But most people still aren't on target to achieve the income they hope for in their retirement years. The average pension pot in the UK is now £49,988, according to Aegon, up from £28,766 in April 2015. This rise is partly a result of pension auto-enrolment, but the introduction of the pension freedom reforms has also boosted people's confidence in retirement saving, said Aegeon.
However, while the increased savings will be welcomed, many people will be disappointed by the income that their pot can secure. Right now, the average £50,000 pension fund would be enough to buy an annual annuity of just £2,500 a year, taking the income of someone entitled to a full state pension to around £10,800. By contrast, the average person hopes to achieve an annual retirement income of around £33,300. While that figure may be unrealistic, savers should aim to generate a retirement income worth around 60% of their pre-retirement income. With average earnings now around £28,000, that would suggest a target of £16,600 requiring a private pension income of £8,000-odd on top of state benefits.
The difficulty of building up adequate savings has been compounded in recent years by a steady slide in annuity rates, which are set in conjunction with interest rates and gilt yields. Even very large pension funds now generate relatively modest amounts of income; a £500,000 pension pot is typically enough to buy an annuity of around £27,000 a year, while a pension pot of £1m (which is now the lifetime limit on pension pots) buys a little over £40,000. Pots tend to be higher on average for older savers the typical 55-to-65-year-old has a fund worth £71,342, for example, says Aegeon. But despite the good progress made in recent years, many people will have to increase their contributions still further if they are to secure the level of income they're aiming for in retirement.
Why don't savers trust providers?
One issue holding back pension saving is a lack of trust, according to the consumer group Which. Consumers are even less likely to trust pension providers to give them good value for money than banks and energy companies, according to research just published by the group. Just 23% of consumers trust long-term financial products such as pensions, Which's data shows, while 40% trust day-to-day banking products and 30% trust gas and electricity providers.
The research mirrors the findings of a recent investigation into the sector by the Financial Conduct Authority, the industry's trade body, which found that mis-trust in pensions was leading many savers to make inappropriate financial decisions, particularly at age 55 and over when pension funds can be accessed.
Moreover, many savers who have opened pensions have so little faith in the sector that they assume there is nothing to be gained by shopping around for a better deal, says Which. As a result, many savers are still buying the annuity product on offer from their existing provider, even though moving elsewhere could secure a substantially higher pension income.
Pension planners struggle to access tax perk
Savers looking to take advice on their pension planning may struggle to access a new tax break intended to cut the cost of such guidance. Since April, savers have been allowed to take £500 out of their pension funds tax-free to pay for independent financial advice on pension planning. The facility was introduced amid concern that the high cost of advice has put many people off getting help particularly those with smaller pension pots. You can take advantage of the allowance up to three times during your lifetime, though no more than once in any single tax year. This is so that you can get advice at different stages of retirement planning.
However, pension providers are not obliged to offer savers access to this facility, and most large providers have so far chosen not to do so, although Standard Life, Hargreaves Lansdown and LV are among the exceptions. Providers argue that the pensions advice allowance is complicated to administer and that there has been very little demand from customers for the facility. However, advisers argue that it's a chicken and egg situation demand is only likely to increase if providers actively promote the scheme.
Occupational pension schemes also have the option of providing access to the advice allowance for their members, though take-up in this sector is also believed to be limited.
Tax tip of the week
If you rent out a property as a furnished holiday let (FHL), you are eligible for certain tax reliefs. To qualify, your property must be within the European Economic Area, and be furnished and let for commercial purposes. Accommodation must also pass specific occupancy conditions (see HMRC's HS253 furnished holiday lettings guide for more detail). If your property qualifies, you can claim capital gains tax reliefs for traders, including business asset rollover relief, entrepreneur's relief and relief for gifts of business assets. These are not available in relation to long-term rental properties. You are also entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures.