How your retirement income is being killed by other people's pensions

Elderly man feeling anxious about his bills at home

Are you relying on an income-producing investment for your retirement? How about an annuity? Then there's bad news ahead, because both are under threat.

What's going on?

Let's start with those income-producing investments.

Ever since savings accounts started to become so much less rewarding, more and more retirees have turned their attention to 'equity income funds'. These basically invest in companies that have traditionally always paid large dividends, providing an income stream.

Unfortunately, however, one pension investment expert has warned that there's growing pressure on companies to cut these dividends, which could mean a big cut to income payments. This summer we have seen major cuts from the likes of Wm Morrison, Anglo American and Standard Chartered.

Why?

Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown says that a large part of the pressure to cut the dividend comes from a number of black holes in pension funds. The risk posed by a pension scheme black hole came into particular focus this summer with the collapse of BHS, but companies have been agonising over them for a while now.

The main reason these black holes have opened up comes down to the way they are valued - using bonds - the more expensive bonds are, the bigger the hole is measured to be, and bonds are incredibly expensive at the moment.

The reason for this is the record low interest rates. Institutions looking for relatively low risk returns are investing more of their money in government bonds. As demand for these bonds goes up, it pushes the price up.

As a result, the black hole grows, and many firms need to divert a bigger slice of their profits into propping the pension scheme up, so they are cutting the dividend.

It gets worse

For anyone who has invested in equity income - either through a fund or as a holding in their pension - the bad news is that this isn't a trend that's set to change in the immediate future. The recent decision by the Bank of England to cut interest rates still further - to another record low - meant more money going into government bonds, opening up even bigger gaps in pension schemes.

McPhail warns: "We're likely to see more dividends cuts in coming months, unless there is sharp pick up in bond yields."

And annuities?

To add insult to injury, for those planning to convert their investment into an annuity, as bonds get more expensive, annuity returns fall too, so it'll bring down the amount you can make from an annuity.

McPhail suggests the Bank of England issues higher-yielding pension bonds specifically for purchase by annuity providers and pension schemes, which would offer a glimpse of hope in what is otherwise a fairly bleak picture.


            	Sir Philip Green attempts to pour a glass of water

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Seven retirement nightmares
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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