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UK Companies Aim For Collective Defined Contribution Schemes

A number of UK companies including Royal Mail are pushing the idea of Collective Defined Contribution (CDC) schemes as a better alternative to defined-benefit pensions. According to Aon Senior Partner Kevin Wesbroom, CDC schemes create a “middle ground” where employees receive a defined amount of income while companies will have “less balance sheet risk” that could lead to events similar to the defined-benefit fiasco various UK industries are facing.

According to CDC advocates such Member Nominated Trustees co-chair Janice Turner, employees “do not have to make difficult decisions” because they can get a pension they can rely on.

One of the highlighted issues is intergenerational fairness. Using CDC, the younger generation may have to pay higher contributions to provide for retirees’ benefits in the future if business investments underperform. Another concern is CDC plans is similar to with-profit funds, which can fail with a lack of transparency.

However, Wesbrook believes CDC funds will be “entirely transparent” and will allow employees and board members to criticise fund decisions.

According to the Department for Work and Pensions, it is a “welcome proposal” and they are still looking for other options.

Worker pensions is an increasing trouble in the United Kingdom with employees at the highest risk of having no retirement benefits under a defined-contribution pension scheme. CDC schemes can produce a “third more” than the amount delivered by DC schemes.

 

Women Losing £29,000 Due To UK State Pension Gender Gap

Which? uncovers the £29,000 difference of pensions between retired men and women in the United Kingdom. The UK state pension gender gap had closed slightly, but according to Which? its speed is not enough.

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The UK state pension is currently at £159 a week and is available to anyone who had paid 35 years of national insurance contributions. They must also have reached the ages of 65 (for men) and 64 (for women).

Further research by Which? showed that the average weekly pensions of £153.86 for men results to an annual pension excess of £29,000 compared to women who received only £125.98 a week.

The government initiated the state pension gender gap close to remove the disadvantages of low-earning women to receive better pensions similar to their male counterparts. The amount they receive, about 81.9 per cent, was up from 79.7 per cent from August 2015 and 77.7 per cent from August 2017.

Despite the inequality women suffer from pensions, the Department for Work and Pensions believes Which?’s analysis did not include “contracted-out” workplace pensions. The department said these contracts played a huge role up to April 2016.

The department added that income-focused surveys on pensions only show part of the bigger picture. The Department for Work and Pensions stresses that the new state pension system is simpler and easier than its predecessor with millions benefitting from the improvements.

Explaining The Different Pension Review Charging Models

Pension review services help you understand your pensions efficiently. However, the public views these services as mostly contingent. They are left surprised when they suddenly see fees charged for the review of their pensions. To make things clear, here are the three common models of pension review charging approved by the Financial Conduct Authority.

True Contingency Model

Pension review services will provide free consultation, calculations, report, and a recommendation based on these facts. The first model is the true contingency variation. You are only charged if you approve of transferring your pension to another fund based on their recommendation. However, these decisions are fact-based, which removes the likelihood of profiteering from service providers using this model.

Consultation as a Service Model

Pension review services can also charge for consultation, which also includes calculations, reports, and recommendations. They can also charge you for the pension transfer directly from the pension’s total fund value. However, you can find the information provided to be in-depth compared to the discussion with providers using a contingency consultation charge model.

Set Transfer Fee Model

The third model is similar to the second model wherein the consultation service including all research and analysis has a set fee. However, its difference is there is a set transfer fee if you use their services. Instead of charging you by percentage as per the second model, the service provider will provide you a set value paid direct from your pension fund.

Older Workers Are Not Bearing Their Share of Pensions Burden

According to the Intergenerational Foundation charity, the UK’s elderly are not sharing in the burden of pensions in the country. The thinktank, which focuses on the topics dividing generations, said that baby boomers focus their efforts on winning public policy that favours their generation compared to others.

The charity found “short-term pressures” that “disadvantage the young and favour the older generations” tempt government lawmakers.

One example it gave was the pensioner bond of UK Chancellor George Osborne’s higher interest for state-sponsored savings bonds. The baby boomers who had these bonds had a higher payout at 4% compared to the National Savings bonds which only achieve a 2.2% interest per year.

Current calculations also show the young’s burden for pensions in 30-40 years. Pension liabilities and public sector pensions have paid the price for pensioners without the elderly bearing any trouble for the issues.

The charity organisation said the government’s expectation that the UK will have a fast-growing income is the motivation that continues its overestimation of the UK’s capability to pay for pensioners. It said if the growth they seek fails to materialise, it will be the younger generations that will pay the price in their elderly years.

Millennial Retirement Age Now At 71 Years Old

According to the UK’s Actuary Department, millennials starting their careers at 20 years old will need to work until they are 71 years old. Meanwhile, 30 year old workers will need to work until they are 69 to retire with enough to cover basic necessities.

The Actuary Department said the National Insurance rates may increase and add an annual £1000 to annual tax bills for existing workers in the United Kingdom. Ministers also mentioned that the pension age is likely to reach 68 by 2030 drawing its conclusion from the Actuary Department’s information.

Millennials will have rougher employment constraints compared to their predecessors because they will work longer to fund the latter’s pensions and their own.

According to former Pensions Minister Baroness Altman, the decision was “difficult” but it was needed to “deal with the future increases in state pension costs” for the coming years.

The Actuary Department also said that between 2057 and 2059, the pension age will reach 70, affecting individuals who are aged 29 years old and younger.

The only bright side the UK Treasury saw is that the pension fund will have a surplus once the new pension ages are executed. With NI payments going up by 17 percent, future pensioners will have better options and improved amounts.

New Pension Plans Will Automatically Enroll 18-Year-Olds Who Start Working

Unless they opt out of it, workers aged 18-years-old and above will automatically receive salary savings once the government begins extending its enrolment scheme. According to ministers who support the scheme, it would mean staff aged 22 years old and over with a salary of £10,000 yearly their employers will enrol without notification into a pension unless they opt out.

About 900,000 young workers will be under the new pension scheme. However, there will be no salary deductions. UK’s employers will be responsible for the provisions on the salary savings.

According to Work and PensionsSecretary David Gauke, it encourages a habit of saving. He said extending the habit to young people below 22 years old can help improve the spending habits of young and old employees with disposable income in the country.

According to ex-pensions minister Steve Webb who now works at Royal London as Policy Director, the government’s ideas are “great” and the automatic pensions enrolment helps newer employees prepare for their future easily.

The automatic enrolment programme is set at a minimum of 2% of earnings with 0.8% coming from the worker. The employer and the government’s applicable tax reliefs will make up the remaining 1.2%. The automatic contributions will increase to 5% by April 2018 and to 8% from April 2019 onwards.

UK State Pension Scheme Overhaul is Necessary To Show “Moral Leadership” – Reform Scotland

According to Scotland’s organisation, the UK’s state pension rules must be changed to show moral and political leadership in the UK government. Reform Scotland said that given the pensioner population growth in the next 25 years, the current situation must serve as a “reality check.”

The organisation presented a Pensions Guarantee proposal that highlights necessary changes. These overhauls will help “simplify the system” through a complete renovation. It was first published in 2014. Their proposal involves trashing the National Insurance and putting in place a compulsory system that deducts payments from income in a defined contribution scheme.

According to Reform Scotland Chairman Alan McFarlane, politicians are involved “in a conspiracy of silence.” He said the National Insurance is “nothing more than income tax” that sounds positive. However, current taxpayers are still addressing previous pensioners’ benefits and had done so since the state pension invention.

McFarlane said it is fairer for taxpayers because in this way, they can pay for their own. Many employees with huge contributions are complaining about paying the pensions of retirees. It also gives pensioners guaranteed dates and amounts for their pensions.

The UK’s state pension laws have a “triple lock” guarantee that provides benefits for retirees who have worked from the 60s to 90s.

UK Pensions System Considered ‘The Worst Among Developed Nations’

In Britain, you’re not in much luck if you depend on the government for your pensions. According to UBS report comparing pensions for retiring-age women in all major cities of the world, London ranks among the worst in the list.

The report looks into each country’s basic state pension and the mandatory employer-provided pension. UBS then calculated the proportion of average income earners’ pensions upon retirement. In London, women can only expect 41% of their current income. UBS noted the figures are close with Hong Kong’s figures.

One of the highest pensions for women is in Singapore, which provides 73% of their current income upon retirement. Next is Australia’s Sydney, which guarantees about 72% of a woman’s employment income. New York is at fifth place while Canada’s Toronto is only at ninth place.

Age UK’s research supplements UBS’ efforts after finding over eight million people from ages 40-64 facing huge retirement challenges once they hit the state pension age of 65.

UBS added that London women have to save 47% of her income monthly by the age of 50 to ensure they can retain their current lifestyles. The amount to save varies; if the woman had saved earlier, she needs to set aside about half of the figure.

 

Women Allowed to Retire Earlier Than Pensions Age with Consequent Provisions Cut

Labour will let WASPI (Women Against State Pension Inequality) to retire as early as 64 years old in exchange for a lower pension.

The organisation has called for state officials to consider the living conditions of these women who had worked since the 50s. They are the most to suffer from pension setbacks brought about by the equalisation of the pension age for both men and women, yet the government did not inform them about the changes.

According to Shadow Work and Pension Secretary Debbie Abrahams, the Labour government will allow women to receive their pensions at 64 accompanied by pension cuts. The amounts can range from 5%-12%.

Debbie Abrahams said that the injustice faced by 1950s-born women will end once the Labour party announces its proposals in its manifesto. She added that the party is calling on the government to allow those affected by the unequal pensions to receive their due immediately.

If the women reached the pension age of 66, they can receive £155.65 weekly as part of their state pensions. Retiring at 64, these women will receive £137 weekly. Women born between 6 August 1953 to 5 April 1960, about 2.6 million women, will receive the benefit of earlier retirement.

The Effects of Inflation on Retirement

UK’s retirees are guaranteed their pensions given the triple-lock mechanism that protects any change in the promised value a decade ago. However, the continuing inflation could render the values received monthly as useless.

Inflation affects pensioners because:

It weakens the currency: the purchasing power of the Pound Sterling could reduce savings because of increasing item prices. This will mean looking for additional sources of income

No opportunities for employment: retirees can only look to savings accounts or risk their pensions in stock market investments, which could mean losing more cash if things do not go as planned.

According to Aegon Head of Pensions Kate Smith said the inflation severely affects all UK households, most especially pensioners who only have a fixed amount of income.

She said that if the inflation continues, the inflation’s effects would continue to trample fixed incomes of pensioners and other affected individuals. She said that only 75% of UK’s population have taken action to find new ways to invest money to protect their savings from possible rising inflation troubles.

The UK’s state pension amounts only increase by 2.5 per cent every year, which is not enough to combat the effects of inflation in the country. According to Retirement Advantage pensions technical director Andrew Tully, building some form of protection “against the ravages of inflation” is important at this time.

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