Pension incomes could rise 10%

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Finally there's great news for people about to retire: changes in the markets mean that the income you'll get from your pension may well increase by anything up to 10% in the next few years.

But why the change, and what does it mean for you?
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The change

When you retire, if you have a defined contribution pension (also known as a money purchase, a personal pension, a group personal pension or a stakeholder pension) you will have built up a pot of cash.

At retirement, you can either choose to draw down small chunks of that cash directly each month (known as draw-down), or opt for the far more common option of buying an annuity - which swaps the lump sum for a monthly payment for the rest of your life.

For years now the amount of income you can get for the same lump sum has been falling steadily, partly as a result of the fact we're all living longer, and partly as a result of movements in the financial markets.

Recently the financial markets changed, however, and started moving in the opposite direction - which may mean that we will see incomes rise.

The markets in question are the government bond markets. Annuities are driven in part by the interest rate paid on 15-year government bonds. This interest has been falling rapidly because government bonds have been in particularly high demand in troubled times, which means the government hasn't had to pay out so much interest in order to get people to lend it money.

Now it has started to rise. At the bottom of the market, the interest rate was 2.06%. Now it's 2.6%. According to the Telegraph, the experts are predicting a rise to 3.2% within the next two years. This would equate to an 11% rise in annuity rates - or an 11% rise in the income you could buy with your pension pot.

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If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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Should you put off buying an annuity?

It sounds like excellent news, so should we be breaking out the champagne, and defer taking an annuity for a couple of years in order to take advantage of the huge leap in income?

Tom McPhail, head of pensions research at Hargreaves Lansdown, isn't so sure. He points out that the rise in the interest paid on these bonds has so far been "marginal". He agrees that if they were to rise as the Telegraph's experts have predicted, then annuity rates would rise, but he is not convinced that this is guaranteed, and he says the rises so far have not been significant. He says: "We shouldn't get carried away by this. Yes annuity rates will go up, but we don't know when and we don't know how much."

Not only is he less certain that the yields on government bonds are set to soar. He also highlights that annuity rates are also driven by inflation, and there's a broad consensus that inflation isn't going anywhere for the next couple of years at the very least.


Risks

He says: "I am worried that people will defer taking an annuity in the hope that rates improve. There's the question of what they live on in the meantime. Some will keep working, but others will have to take the lump sum or put the money into draw-down. Unless you have a six figure pension pot that's a very short-term solution."

"Then there's the question of where they put the pension pot while they are waiting. If it's a short term strategy then they'll need to keep it in cash, and what return will they get on that? 0.5%? And all the time they'll need to pay charges on it, so the pot will erode further."

If a 65-year-old man chose to defer today, waited for four years for rates to improve, and then gave up and bought an annuity at today's rate, McPhail says that he would have to reach the age of 93 before breaking even on his decision - which is a lot to ask given that life expectancy for men is currently 86.

If you defer annuitising and annuity rates increase dramatically in the interim, you will earn more income, but you are taking a real risk.

One option, McPhail says, is to partially annuitise now, and then annuitise the rest in a few years, in order to counteract the uncertainty in the market. He says: "I don't disagree that rates will go up at some point. But that doesn't necessarily mean you ought to put off buying an annuity: it's not that simple."

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Pension incomes could rise 10%
Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship. Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so. To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension. In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.
Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.

The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

Around 427,000 households in the over-70 age groups are either three months behind with a debt repayment or subject to some form of debt action such as insolvency, according to the Consumer Credit Counselling Service (CCCS).

Its figures also show that those aged 60 or older who came to the CCCS for help last year owed an average of £22,330. Whether you are retired or not, the best way to tackle debt problems is head on.

Free counselling services from the likes of CCCS and Citizens Advice can help with budgeting and dealing with creditors.

Importantly, they can also conduct a welfare benefits check to make sure you are receiving the pension credit, housing and council tax benefits, attendance and disability living allowances you are entitled to.

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The average UK pensioner household faces a £111,400 tax bill in retirement as increasing longevity means pensioners are living on average up to 19 years past the age of 65, according to figures from MetLife. And every year in retirement adds an extra £5,864 in direct and indirect taxes based on current tax rates to the costs for the average pensioner household. You can be forced to go bankrupt if you fail to pay your taxes, so it is vital to factor these costs into your retirement planning.It is also important to check that you are receiving all the benefits and tax breaks you are entitled to if you want to make the most of your retirement cash.

The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.
Older Britons are often targeted by unscrupulous criminals - especially if they have a bit of money put away. For example, many over 50s were victims of the so-called courier scam that tricked into keying their pin numbers into their phones and handing their cards to "couriers" who visited their homes. It parted consumers from £1.5 million in under two years. Detective Chief Inspector Paul Barnard, head of the bank sponsored dedicated cheque and plastic crime unit (DCPCU), said: "Many of us feel confident that we can spot fraudsters, but this type of crime can be sophisticated and could happen to anyone." The same is true of boiler room scams that target wealthier Britons with money to invest, offering "once-in-a-lifetime" opportunities to snap up shares at bargain prices. Tactics to watch out for include cold calling, putting you under pressure to pay up or lose the opportunity for good, and claiming to have insider information that they are prepared to share with you.
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