This is Money Blog

Why you won't need £413,000 for retirement

A new study , based on data from the Office of National Statistics, suggests an average household needs £413,000 for a comfortable retirement, based on a life expectancy of 85: read the full details. Do you really need that much?

I've worked for 18 years  (21 years if you include my £1.30 an hour child labour stacking shelves at Tesco) and earned and spent around £290,000, according to my back-of-fag-packet calculation.

I've paid around £17,000 in stamp duty (we like moving) and countless more on moving costs, mortgage payments and rent, £5,000 on backpacking, untold thousands on two little people... the list goes on.

My point? If I can cope on £290,000 in 18 years, during some of them the most expensive years of my life, why will I need £413,000 - or £326,000 for a single person - to cover 20 years of my retirement, when hopefully I'll have no mortgage to pay and no mouths to feed?

I was impressed by two recent blogs by the 'Undercover Economist' Tim Harford highlighting a trend of the pension industry in the US to frighten American into saving more. He cites studies that show most people doing fine on pension saving.

http://timharford.com/2008/06/maybe-our-pension-worries-are-overdone/

http://timharford.com/2008/06/how-can-i-tell-if-i%E2%80%99ll-have-a-decent-pension/

And as an IFA points out in our report on the £413,000 research, some of the cost will be covered by state pensions.  Ok yes, there are big chunks of the population who have fallen behind in pension saving, and yes, we are all living longer.

At the same time, many within Britain's affluent middle classes, who are a lucrative target for the penions industry, are already well prepared for retirement but continue to be coaxed to save more into pension plans that turn a tidy profit for a multi-billion pound pensions industry.

- Andrew Oxlade, Editor, This is Money

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Postscript - Tim Harford's books offer a refreshing challenge to conventional financial wisdom. As usual, TiM has worked to secure money off for its readers. So here are links to buy his books at a 30% and 34% discount:
-The Undercover Economist
-The Logic of Life: Uncovering The New Economics of Everything

Why people deserve an inheritance tax break

‘We’ve got it - inheritance tax.’ Were those the words uttered by a crack team of Conservative policy monkeys, after finally coming up with something to draw the battle lines over?

It’s incredible how long it took them to latch on to the ill-feeling that’s been building up over what many consider a deeply unfair tax.

It's even more incredible that the Chancellor Alistair Darling thinks shuffling some figures to make it look like he has raised the inheritance tax allowance when it just stops people having to become tenants in common solves any problems or will fool anyone.

The problem is any debate on the issue inevitably manages to get stuck straight back in the old political divisions - Tory vs Labour, Haves vs Have-nots, North vs South and so on.

But strangely when discussions take place there often appears to be a reversal of which side you would typically expect to have the notion that soaring house prices benefit people.

It’s the anti-raising inheritance tax lobby that seems to believe sky-high house prices are benefiting property owners.

The suggestion is owners of family homes that have become worth far more than the inheritance tax threshold should count themselves lucky, and not mind being heavily taxed if they try and pass it on.

‘But we have paid for our homes out of taxed income, so this is double taxation’, say the pro-inheritance tax reform posse.
‘Yes, but you didn’t earn that huge increase, you just sat back and watched the value of your home soar and now want to perpetuate injustice by handing that wealth to your offspring’, counters the eat the rich crew.

And this is where the false notion of high house prices benefiting people comes in.

The owners of an average family home in South East England bought in the early 1980s for £100,000 and now worth £800,000, didn’t directly work for that rise in value, but they are in many ways entitled to it.
Living in an area where house prices are absurdly inflated is not all fun and games:

• Your house may be worth lots but so is any other house in your home area, so there’s no benefit unless you up sticks and leave friends and family far behind.
• Your children and their friends find it almost impossible to purchase a property in their own home town.
• Your home area loses its diversity, as moving there becomes possible only for very high-earners, and pubs, shops and amenities shut as developers move in on every available spot.
• Your children will face an even bigger mountain of debt, if having managed to climb on to the property ladder they have children of their own and need to buy a family home.

This is not meant to be a 'woe of the wealthy' sob story - but these are legitimate concerns that need discussing rather than being brushed under the class war carpet.
It’s true that the Conservative proposals do play straight to the stereotypical Tory South, but then the current government has ignored those voters’ concerns over house prices for a decade.

In many South East areas a small family house now costs at least £300,000. According to Halifax’s historic house price calculator that would have cost £100,000 in 1997.

If a buyer had purchased that home in 1997 they would have needed to find £10,000 for a 10% deposit, and at an average interest rate of 7% over 25 years would pay £101,000 in interest to their mortgage lender.
A buyer purchasing it today would need to find £30,000 for a 10% deposit, owe a hell of a lot more, and at an average interest rate of 7% over 25 years would pay £302,500 in interest to their mortgage lender.

Clearly there is a problem here. But despite making controlling inflation a top economic target over the past decade, the Government has completely failed to tackle rampant price rises relating to the basic necessity of a roof over your head.

Meanwhile, it has sat back and seen its income from inheritance tax post healthy gains, as a tax originally designed for the very rich drags in more and more ordinary families. (And Stamp Duty revenues have been pretty healthy too.)

The real winners of sky-high house prices are mortgage lenders and the taxman. And those hoping to score political points on this should remember the Conservatives kicked off the whole problem a long time before the current government made it worse.

So yes, perhaps in the ‘day at the coalface’ sense the owners of homes being hit by inheritance tax didn’t ‘earn it’.

But they have paid their dues and earned more right to that money than a Government which has presided over the shambles the UK housing market is in today, or any future governments that don’t come up with any meaningful plans for sorting the mess out.

- Simon Lambert, This is Money

Useful links:

Help and advice for first-time buyers

Mortgages and property news, tips and advice

Who will embrace the zimmer generation?

If it is possible to be such a thing for a sport that is played in the depths of winter, I am a fair weather follower of football.

I can get surprisingly involved when we are in the World Cup yet as the wife, daughter and daugher-in-law of West Ham United supporters I am used to an agonising roller coaster flirt with relegation each season. Along with most other people in the country, I cannot but marvel at the sums of money now involved in the beautiful game.

As I was belatedly taking down the Christmas decorations, however, I was completely caught off guard by a couple of chirpy chappy comentators on BBC1 trying to take the mickey out of Sir Alex Ferguson, the manager of Manchester United.

Now, I have to say, Ferguson has always seemed to me a highly objectionable character. He looks mean, he seems to have a limited sense of humour or tolerance of criticism, I tend to believe the tales of his temperamental behaviour in the dressing-room and he chews gum with an open-mouthed zest that most sane people would find totally repugnant.

He is, however, clearly one of the best football managers around today and probably (though I lack much historical knowledge to back this up) for quite a long time. Manchester United is a global brand of amazing power and even ranged against the Russian billionaire Abramovich's deep pockets at Chelsea, the Reds are way out in front in the league.

So I was somewhat taken aback to hear the BBC's match commentators start to try to have a laugh at his expense. At a minor setback, one said: 'Well at least he'll be getting his fuel paid for this winter.' Wittily the other added: 'Of course, he's had his bus pass for several years now.'

The action then picked up depriving the Beeb's pin brains of the opportunity for more 'oldist' jokes at the expense of Ferguson who has just turned 65, thus qualifying him - regardless of his talent and achievement - as the worthy butt of any assinine barb from a younger generation.

Now, our broadcasting corporation may not yet have informed its staff that since last Autumn new regulations have come into force on the issue of ageism. And I'm sure Ferguson would shrug off comments about him getting the government's winter fuel payment for older folk.

But the fact that Ferguson's continued presence on the bench is seen as something worthy of a snigger is potentially disturbing.

The contrast between someone in their mid-sixties and a field full of fit young men may be seen as amusing but Ferguson is, after all, only just at the standard retirement age for men. With concerns over the funding of pension schemes because of increased longevity, it will not be long before people routinely work well past Ferguson's likely deadline.

The major worry is, however, not that young people will find it funny that you and I are still knocking around the workforce when we are in our early seventies but that they will be the ones we need to rely on to give us employment.

And for all the anti-age discrimination legislation, for all the increased understanding that we will all have to work til we drop, few employers will really embrace the idea of staffing up with the zimmer-frame generation.

- Lisa Buckingham, Editor, Financial Mail on Sunday

>> See the archive of Lisa Buckingham's Financial Mail column

Sort out all your finances in eight steps

Sorting out your finances really doesn't need to be difficult. In fact you can learn everything you need to know by the end of this blog post.

Scott Adams' famously (in the US) devised a nine-point plan for sorting out your money (he of the Dilbert cartoon fame pictured). In his 'Unified Theory of Everything Financial', a play on Einstein's Unified Theory of Everything, he uses just 129 words to say everything that needs to be said. It was originally published in 'Dilbert and the Way of the Weasels' in 2002 but you can read the nine-point plan on this Marketwatch blog.

For us Brits, it needs a tweak and it becomes an eight-point plan...

Step 1. Make a will (A guide to will writing - 10 tips for a perfect will)

Step 2. Pay off your credit cards (Guides and tips for clearing card debt)

Step 3. Get term life insurance if you have a family to support (Calculate the life insurance you need - Get a quote)

Step 4. Fund your company pension to the maximum (A guide to company pensions)

Step 5. Buy a house if you want to live in a house and can afford it (Mortgage/house-buying guides - Compare mortgage deals)

Step 6. Put six months worth of outgoings in a tax-free Isa savings account. You can put up to £3,000 into an account each year. (See the web's best savings tables)

Step 7. Take whatever money is left over and invest 70% in a stock index tracking fund and 30% in a bond fund through any discount broker/fund supermarket and never touch it until retirement

Step 8. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

There you have it. I'm sure your family and friends who share a phobia of finance would be grateful to receive the Unified Theory of Everything Financial' so please pass it on.

- Andrew Oxlade, Editor, This is Money

The pensions crisis

While most of us are still enjoying the good weather others are carrying out surveys into how little we are saving for our retirements. It may not be welcome reading but there are some very scare statistics out there.

It's frustrating the huge number of people who aren't saving into an Isa let alone a pension. I say frustrating because it's so easy to set up a pension, take out an Isa or join your company's pension scheme these days.

Figures from the Office of National Statistics show almost 11 million people are failing to pay into a pension. That's a huge sum and one might think it is coming down though as more people realise the need to save for their retirements.

But the bad news is the figure is getting bigger. It has grown by an astonishing 250,000 in the last year. I'm not sure what this quarter of million people think they're going to do when they retire. Hope their property will bail them out perhaps? I hope not.

And Prudential has found that more than one third of Britons admit they have little or no savings to live on if they lost their jobs. But ironically 2.9 million people feel they are are in imminent danger of losing their jobs.

I'm not a psychologist but this smacks just a little bit of burying one's head in the sand.

You may have seen this one coming but what is the Government doing to encourage us to save for our retirements? Tax our savings, complicate pensions, fail to honour company pensions it said were safe, introduce tax credits designed to penalise people who save.

Please, please, please start saving for your retirement otherwise hard-working people like me will have to pick up the tab in higher taxes. And  we don't want that do we?

The finger of blame could easily be pointed at the Government for not giving enough incentives to save for our retirements and making pensions too complex but we too must take some of the blame ourselves.

What are we spending our money on instead?   

- Justin Harper, Money Mail

>> Work out how you should be saving at www.thisismoney.co.uk/pensions

Standard Life - niggly aspects of share ownership

There's been some anxiety over whether Standard Life windfall shares can be transferred to another stock broking account once they are trading, without the loss of the extra bonus shares. These bonus shares are promised to policyholders at the rate of one free share for every 20 held continuously for 12 months.

Late last week Standard put out a statement about this which, for anyone interested, should clear things up.

You're allowed to move your entitlement to a nominee account - such as an online stock broking account - without their being an impact on the freeby shares.

But if you transfer the shares into someone else's name, the perk goes.

Also, importantly, you can't move the shares into an Isa or Sipp qualifying account without losing the entitlement, because doing so counts as a change of ownership.

Hope that helps anyone who's considering the issue.....

- Richard Dyson

Useful links

Standard Life - read our special round-up

Blog - Dad, sell your Standard Life shares

Standard Life 2000 vs 2006: why did the turnout grow?

Back in 2000, when Standard Life last polled members on whether they wanted their insurer to demutualise, the potential windfalls were far bigger than today. But members then did as the board said, and voted against the float.

This time round, of course, the board has urged members to vote FOR demutualisation - and they have again duly done as they are told, and overwhelmingly supported the float.

What interests me is the change in turnout. When there was MORE money at stake, the turnout in 2000 was lower - around 50 per cent of members. This time round, much to the delight of Standard boss Sandy Crombie, over 65 per cent of qualifying members voted. That's one of the biggest ever turnouts in a corporate ballot.

So why the increase? I've really no idea - but here are a few stabs:

1: Those who supported demutualisation last time round were annoyed at having lost their windfalls - so they made sure to vote in favour this time, and encouraged everyone else they knew to do so too

2: The evolution of online chatrooms and blogs in the past six years might have helped spread the word and bump up numbers

3: Most important of all, I reckon, is that this time round members were being encouraged to vote by the company through its official literature. It's quite amazing, given the circumstances, but it appears that Standard's policyholders still hold the company and its management in sufficient respect to listen and obey. Last time round, the turnout was lower because policyholders were getting mixed messages. On the one hand, the carpetbaggers were urging them to cash in their chips and vote for a float, while on the other the company's management was telling them to keep the status quo. The result was that policyholders were confused and so fewer voted. This time, however, the board was urging them both to vote and to vote for the float. Bingo.

The overall conclusion from this, as I see it, is rather depressing. It suggests that most policyholders (or small shareholders of a Plc, for that matter) are predisposed to take the board's word as gospel and vote as directed.

Any other thoughts on the matter?

- Richard Dyson, Financial Mail on Sunday

Useful links

Everything you need to know about Standard Life's stock market float -www.thisismoney.co.uk/standardlife

BLOG POST: How big is YOUR Standard Life windfall?

BLOG POST: Standard Life's new era of spin

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How does the pension change affect you?

An extra blog post from me today...

There was a little extra fizz of excitement for me today. ITN, makers of ITV News, invited me to a park in central London to see how today's ruling on pensions would affect a cross-section of people.

We spoke to a 21-year-old student called Sam. Today's ruling could have a major impact for him because now in 2050 the age for claiming state pensions will rise from 65 to 68. So he will probably have to keep on working when some of his older mates get to put their feet up.

We explained that the State pension still wouldn't add up to much and dished out a bit of basic advice: he needs to clear his student debts first and then set up a pension - preferably a work scheme where the company contributes. You can get all this sort of advice on our pensions section... www.thisismoney.co.uk/retirement

But the interesting thing was the sums we did - the change is hugely significant for today's young people. If we carried on with the existing scheme, the £135 weekly pension would rise to £362 in 40 years. But with the new link to earnings rather than inflation, it would grow to £950 a week.

It highlights the huge difference this ruling makes. However, with the on-going retirement of our baby-boomers, I just can't see how it's going to be paid for by moving the state pension age by three years, nearly half a century away. All budding economists - feel free to have your say.

BTW - The ITV News piece is on the 6.30 bulletin.

- Andrew Oxlade, Editor, This is Money

How does the pension change affect you?

An extra blog post from me today...

There was a little extra fizz of excitement for me today. ITN, makers of ITV News, invited me to a park in central London to see how today's ruling on pensions would affect a cross-section of people.

We spoke to a 21-year-old student called Sam. Today's ruling could have a major impact for him because now in 2050 the age for claiming state pensions will rise from 65 to 68. So he will probably have to keep on working when some of his older mates get to put their feet up.

We explained that the State pension still wouldn't add up to much and dished out a bit of basic advice: he needs to clear his student debts first and then set up a pension - preferably a work scheme where the company contributes. You can get all this sort of advice on our pensions section... www.thisismoney.co.uk/retirement

But the interesting thing was the sums we did - the change is hugely significant for today's young people. If we carried on with the existing scheme, the £135 weekly pension would rise to £362 in 40 years. But with the new link to earnings rather than inflation, it would grow to £950 a week.

It highlights the huge difference this ruling makes. However, with the on-going retirement of our baby-boomers, I just can't see how it's going to be paid for by moving the state pension age by three years, nearly half a century away. All budding economists - feel free to have your say.

BTW - The ITV News piece is on the 6.30 bulletin.

- Andrew Oxlade, Editor, This is Money

Prudential time-bars endowment claims

Prudential has joined the majority of those involved in the endowment mis-selling scandal and slapped a time-bar on complaints.

Like everything in the endowments mess, the issue of time-barring is about as clear as mud.

On one hand, there’s a very strong argument that if big business is going to mislead millions of people, it can deal with people’s complaints as and when they get round to making them. On the other, is the fact that the longer complaints take to surface the more they end up hanging over the heads of current with-profits policyholders.

The problem is that rather than dredging up some cash from the profits made when they were flogging endowments to anything that moved, insurers set compensation costs against the funds people currently have invested – many of whom suffered in the first place. Prudential says it has to introduce time-bars so that its 100-strong endowment claims team doesn't doesn’t cost customers £20m for the next decade.

One cottage industry that will be rubbing its hands thanks to the Pru’s announcement is the endowment claims market. Directions will be being issued to telephone sales staff to get on the phone and hard-sell compensation claims services to those who have had red letters.

If they call you, ignore them. Time-bar or no time-bar, your claim will not be any more successful if you employ an endowment claims firm. The only thing that will happen is they take some of the cash designed to help you.

If you want to make a claim do it yourself. For help in doing so, read our endowment claims guide, catch up with news and advice in our endowments section and find out about This is Money’s deputy editor Simon Moon’s successful claim.

And last but not least good luck.

- Simon Lambert, This is Money

Useful links

Read This is Money's endowment claims advice

Find out about Prudential's recent performance

Read about how Abbey's policyholders have been left unhappy

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How big is YOUR Standard Life windfall?

Standard Life's 2.4 million with-profits policyholders are being mailed ahead of the proposed demutualisation and being told how many shares they stand to get if it goes ahead (see our coverage here ).

On page 86 of the 112-page document, if they get that far, policyholders can see the prospective share entitlements of Standard's directors.

Non-executive director Alison Mitchell has the most. If the flotation goes ahead she'll get 3,874 shares. With the shares estimated at 240-290p, this lot will be worth £10,266 at the mid-price of 265p.

Chief executive Sandy Crombie's policies are obviously worth less... He'll get 1,028 shares (£2,724 at 265p). Chairman Sir Brian Stewart gets even less still, a paltry 301 (£797).

Anyone out there been told that they're getting more than 3,874?

- Richard Dyson, Financial Mail on Sunday

Useful link

www.thisismoney.co.uk/standardlife

Pensions made easy

I'll always remember the time my daughter switched off Teletubbies, turned and asked: 'Dad. What's a pension?' And so I told her. And she said: ' Wow! That's amazing. Can I have a Stakeholder for Christmas? And a talking Laa-Laa.'

You see, pensions are not complicated beasts. They're just big savings accounts that you start dipping into when you can't be bothered to go to work any more.

The nice part is that the money you save is free of tax, in other words you get FREE MONEY from the Government. And if you have a company pension, your employer will also put cash into the account for you: more FREE MONEY.

The system is deliberately made complicated by the people in the pensions industry who try to cream off as much of your money as they can in the form of commissions and blackholes by using impenetrable jargon such as blackholes. In fact they're just trying to get their own back for not having any friends at school.

But for anyone who still feels bamboozled or bored by the subject there's only one thing you need to know - the sooner you start saving the more money you'll have to spend on fun stuff when the appeal of going to work starts to wane and you have more time to spend your money.

And for you people, there's some good news on the way.

In about six week's time there is going to be a pensions revolution - when the system gets even simpler than it already is.

Of course This is Money will keep you up-to-date with all the developments but in the meantime you may want to sign up for our newsletter and newsflash to follow all the changes or visit some of the useful links below.

Richard Browning - This is Money

Useful links

Pensions made easy - bookmark our special section

The pensions revolution explained

Read what our panel of pensions experts are saying

Read more of our pensions blog

Work till you are 67?

It's an interesting quandry isn't it? Whether save more while you are working, or retire at 67. That is the debate that newspaper journos are obsessed with at the moment.

And it is probably because it is an extention of that age old debate about free-time. How much are we willing to sacrifice in leisure time or in our careers to achieve one or the other?

Putting a price on leisure time is hard to do - indeed, it is probably impossible. What is having a lasting marriage worth? £1 million? £2 million? What price for happy healthy children? £5 million?

But how much extra can we really save each month in order to retire sooner? My guess is that we most people in the UK could do more to live their lives a little bit simpler and spend less indulging ourselves for short term satisfaction.

If you would like to enter the debate on working longer please add your comments below.

Save money: Live with granny

Monday's money-saving tip: Move in with your parents (and your grandparents).

A new survey out today from Economic Lifestyle (i'd never heard of them either) suggested 800,000 people now live in '3G households' - where three generations live together.

I went on the ITV lunchtime news as a pundit on the sofa. Both myself and fellow expert Gordon Lishman (Biog: Lishman), Age Concern director-general, agreed that it was a two-way thing - pensioners have lots of money tied up in their homes but lower average incomes than a few years ago while young couples are struggling to get on the property ladder (House prices to blame on both fronts). Hence why so many are moving in together.

The benefits are that you share all the bills and council tax, plus pensioners get to keep their state pensions and even things like the winter fuel payment. The downside is you might fall out.

One of the alternatives for pensioners if they want to keep their home is equity release. These plans are generally bad value (it's nearly always cheaper to sell up and downsize) and have attracted critcism. (Money Mail: Fears over equity release)

Gordon was telling me in the cab after the TV appearance that Age Concern's commercial arm is going to offer equity release through a third partner (Northern Rock), sold only giving the very best advice, of course.

I'd be interested in hearing opinions on it...

- Andrew Oxlade

A guide to equity release

P.S. I was on the sofa with Nick Owen (Biog: Nick) and Nina Hossain (Biog: Nina). They were really both very nice (I have vowed to expose snooty presenters). Actually I used to work with Nick's wife Brenda in regional newspapers who's also very nice. (I love name-dropping).

Pension payments vs cat neutering

How would you answer this? My next door neighbour, a nice chap in his early fifties, cornered me the other night. He wanted to talk about pensions, I just wanted to get inside because it was cold.

Anyway, the upshot is that this chap has a stakeholder pension to which he contributes less than £100 a month. He's just had a forecast saying that when he retires, the income he'll get will hardly help him to have the retirement he hoped for - indeed, it would hardly give his cat a reasonable retirement income.

You can imagine what his next comment was - it went something alone the lines of he might as well put the ****** money on the horses instead.

I do see his point - his contributions might be too small and he might have started too late to get anything meaningful from his pension - but he was trying to be prudent. He thinks he might as well not bother. I think he should spend some of the money he saves on neutering his tom cat. What do you think?

Sipps and house prices

I met today with one of the high-fliers from the world of buy-to-let. Lee Grandin, aged 34, runs Landlord Mortgages, the 'UK's largest specialist buy-to-let broker'.

While most people in the mortgage game are talking up the forthcoming changes to Sipps in the so-called A-Day revolution (Archive search: 'Sipps'), Grandin is going against the grain.

Upmarket lender Savills says Sipps will pump £6bn into the property market. Grandin says it will barely have an impact on house prices because buy-to-let investors prefer to borrow heavily on properties to ratchet gains higher. The Sipps rules make this tricky. He also says investors would face a captial gains tax bill for selling a property if they try and put it in a Sipp.

We'll see who is right come post-A-Day (1 April 2006).

By the way, Landlord Mortgages is also due to publish the latest figures on profits from property and the early signs are that it won't be good news. You can read it first before anywhere else in the next few days on our special section www.thisismoney.co.uk/buytolet.

- Andrew Oxlade

Sylvia Hardy: hero or villain?

Does anyone, like me, get a bit miffed by the fact that Exeter-based Council Tax refusenik Sylvia Hardy is a hero? I have buckets of sympathy for folk whose retirement income has stayed flat while taxes have soared.

But hero she ain't. I can't help wanting to point out that she and her retired pals are likely to be a hell of a lot better off than the next generation of pensioners. For one, she's got a reasonable pension that allowed her to retire at a comparably early age. For two, she's got a (vaguely ok) health service that will pay for her hip replacements, or other treatments, should she ever need them. I don't reckon future generations will have it so good. And, ironically, it's those future generations that are paying for what she's got right now.

When today's thirty-, forty- and fifty-somethings retire, they will have to do it later than Sylvia. And they will probably have to have saved more and worked harder. And their attendant retirement benefits, in terms of healthcare, fuel allowance and free telly licence, etc, will probably be considerably reduced. Who's paying for what?

I don't resent my taxes going towards Sylvia's retirement, but who's going to pay for mine?

- Richard Dyson