BOOST YOUR PENSION - Class 3A

UPDATE 25 MARCH 2017
The take-up of this offer has been very low. To the end of January 2017 just 7600 people had bought extra pension. That compares with the original estimate of 265,000 when the policy was announced. 

The offer
The Government is offering millions of pensioners the chance to boost their state pension by up to £25  a week. The offer applies to everyone who is already entitled to a state pension or will be before 6 April 2016. That is all men born before 6 April 1951 and all women born before 6 April 1953.

The extra pension can be bought in units of £1 a week up to a maximum of £25 a week - an extra pension of £1300 a year. The cost depends on age. At age 65 each pound a week of pension costs £890. So for the full £25 a week you would pay £22,250. At 70 the cost is £779 per unit or £19,475 for the maximum £25. At 75 it is £674 or £16,850 for the full £25 a week. 

If you have a birthday coming up shortly it is worth waiting. For example at age 67 the cost is £21,175 for the full £25 a week. But if you wait for your next birthday the price falls by £500. So it is worth waiting if your birthday is less than 20 weeks away. The time varies depending on your age but about 20 weeks is a useful guide. 

Annuity comparison
The cost may seem high. But it is a much better deal than buying an annuity on the insurance market. A pension for life of £1300 a year at age 65 would cost a healthy single person around £37,000. A married person who wanted their widow or widower to have 50% of the annuity on their death would have to pay around £45,000. Put another way, for £22,250 a 65 year old could buy an extra pension of £790 or £630 with a 50% widow/er's pension. So £1300 a year is good value. That is because the Government has no costs for commission, sales, holding capital, or profits as commercial firms do.

But remember if you buy an annuity with money in a pension fund you have paid no tax on that and are taxed on the annuity. You cannot pay for the pension top-up from a pension fund. So if you do buy it you do that with savings that have already been taxed AND you pay tax on the income it generates. 

Inflation proofing
The extra pension starts the week after your money is received but it may take a few weeks to actually arrive in your payment. The extra pension is index-linked so it will rise each April in line with inflation measured by the CPI the previous September. The September 2015 CPI was -0.1% so there will be no rise in any deferred amounts from April 2016.

At least half the extra pension can be inherited by a spouse or civil partner. The amount depends on the age and sex of the one who dies first. In some cases the survivor can inherit all of the extra. 

Is it worth it?
The Government says the cost is 'actuarially neutral'. In other words by the time they die the average person would have had as much back in extra pension as they spent buying it. It is not clear on what basis that calculation was done. The price is the same for women and men. But as women live longer it is more likely they will get back more than the cost. On the other hand they are less likely to be survived by a spouse.  The healthier you are the longer the pension will last and the better the deal is. If you are unwell or you smoke then it may not be worth doing.

Tax and benefits

The extra pension is taxable. So the deal is not as good for anyone who pays tax and even worse for those who pay higher rates of tax. Ironically they are precisely the people who may have a spare £22,250 hanging around waiting to be used! They may be better just putting it into a cash ISA as and when they can, or into a normal savings account, and drawing it down at £1300 a year. Those withdrawals of their own capital are of course tax-free whereas the taxed additional pension would be worth £1040 after basic rate 20% tax, £780 after higher rate 40% tax, and £715 after additional rate 45% tax.

The most optimistic measure of life expectancy produced by the Office for National Statistics (called 'cohort') indicates that men aged 65 have an even chance of living for 21.4 years and women for 24.0 years. The break even point where the net income equals the outlay at 65 is 17.1 years (no tax), 21.4 years (basic rate tax), 28.5 years (higher rate tax) and 31.1 years (additional rate tax). 

If you get a means tested benefit such as pension credit, council tax support or housing benefit they will normally be reduced. In these cases the deal is unlikely to be worthwhile.

How to get it

The deal opened on 12 October and will close on 5 April 2017. You can buy the extra pension at once or in stages. If you change your mind you can get your money back and give up the extra pension within 90 days of paying.

The scheme is called State Pension Top-up (technically voluntary Class 3A National Insurance contributions!) and you can check what it would cost you and apply on the official gov.uk website or call 0345 600 4270. You will need proof of your ID and your National Insurance number if possible.

Further information: Link to the full table of the cost by age of each extra pound per week of pension.

Full DWP guide

21 November 2015

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DOING NOTHING FOR 39 MONTHS

“What I like doing best is Nothing."

"How do you do Nothing," asked Pooh after he had wondered for a long time.

"Well, it's when people call out at you just as you're going off to do it, 'What are you going to do, Christopher Robin?' and you say, 'Oh, Nothing,' and then you go and do it.
(A A Milne, The House at Pooh Corner, Ch.X, 1928)

How much does it cost to do nothing? For the last 79 months the Monetary Policy Committee has met and decided to keep the Bank Rate where it was, no change, at 0.5%. It last cut the rate – from 1% to 0.5% – at its March 2009 meeting. In its 79 subsequent meetings, the latest on Thursday, the nine members have decided by an overwhelming majority to keep the interest rate lever stuck on its lowest 0.5% notch.

The Bank Rate cuts from 5% in April 2008 leading up to that final March 2009 decision were attempts to stimulate an economy in dire straits after the 2008 world banking crisis. Until then Bank Rate was the Monetary Policy Committee’s only lever. It controlled inflation by raising or lowering Bank Rate to stimulate or rein back borrowing and therefore growth in the economy.

But when it cut rates to 0.5% in March 2009 the MPC realised it need another way to control the economy. So it had a second lever fitted. It was called Quantitative Easing or QE (technically the Asset Purchase Programme). That meant magicking up money out of thin air in and using it to buy back Government bonds from businesses and pension funds. As the interest rate lever hit its bottom notch of 0.5% the new QE lever was pushed up to its first notch of £50 billion in the hope that this would stimulate growth by pumping money into the economy.

Over the next three years more and more money was magicked out of nowhere until in July 2012 the final £50bn was pumped in making the grand QE total of £375bn created out of nothing and passed on to business. The magic money tree was in full bloom. I did suggest at the time that the MPC renamed itself the MoneyTree Policy Committee. It didn’t.

That decision in July 2012 was the last occasion the MPC actually decided to change anything. Since then inflation has consistently missed its target of 2%. Currently it is 0% and the Bank’s regular forecasts that in two years’ time it will be back on its 2% target look more and more laughable every time one is made.

This Thursday 8th October the MPC voted to “maintain Bank Rate at 0.5% and the size of the Asset Purchase Programme at £375 billion”. The same decision it has taken every month for 39 months. For more than three years both levers have been stuck.

The MPC has nine members. Five are grand employees of the Bank of England from the Governor down. Four are independent members who serve for three years, though occasionally they are reappointed. The independent members are paid £135,751 a year for work the Bank describes as on “a part-time basis”. At the end of their term they are restricted in what they can do for three months and paid for that time too. So in effect they are paid 13/12ths of their annual pay or £147,063 a year for each of their three year’s work.

There are four of them and for the last 39 months they spent their (part) time on visits round the country, meeting at the bank for three and a half days, discussed the economy. And then taken that important decision on how to maintain price stability and support the Government’s economic policies for jobs and growth. And for 39 months they have voted to do nothing. To leave both levers where they are. The cost of the four of them for that period at today’s rate (it hasn’t changed much) is £1.9 million.

This blogpost was first published in the Money Box newsletter 9 October 2015. Get the newsletter every week by subscribing here.

FCA IS WRONG ON PLEVIN REDRESS

The Financial Conduct Authority published a statement on 2 October 2015 indicating the rules it intended to make on how firms should pay redress to PPI customers in the light of the Supreme Court decision on Plevin dated 12 November 2014. It has taken nearly a year to do so. And it is hard to imagine an implementation of Plevin which was less favourable to consumers or more favourable to the banks.

The case

Susan Plevin took out a loan of £34,000 in 2006 to which was added £5780 premium for PPI. Of that premium £4910 was taken in commission by the firms that arranged it leaving £1630 as the actual cost of the insurance. So nearly 72% of the premium went in commission. None of those figures were revealed to her and she brought a claim in 2009 that the PPI deal was unfair because the amount of commission was not disclosed to her. The Supreme Court agreed. 

FCA scheme

The FCA proposes to make the following scheme, subject to consultation. It will apply to any PPI deal where a premium was paid on or after 6 April 2008, the date from which the law used in Plevin applies.

The FCA says it will only expect firms to pay limited redress under these rules which will consist of

• the premiums minus what they would have been if the commission had been 50%
• the interest paid on those premiums by the customer
• 8% a year simple interest on that total

In my view the scheme contains two errors.

Amount of redress
First, the Plevin judgement makes it clear that where the commission on a product is excessive and the customer was not told the rate of commission that creates an unfair relationship between the buyer and seller. In those cases a court can make an order "requiring the creditor to repay in whole or in part any sum paid by the debtor " (para 9 of Plevin judgement). In Mrs Plevin's case the court held that if she had known the true rate of commission she would not have entered into the deal, either not buying it at all or finding a cheaper source elsewhere (para 18).

The implication is that PPI deals sold with excessive rates of commission were invalid and the customer should have their premiums refunded in full. And the court has the power to do that (para 9).

The FCA takes a  different view. It says that the redress in such cases is not the whole cost of the product but just the excess commission over an amount that is fair. In other words it allows the bank to turn the deal into a fair bargain retrospectively by giving up the excess commission.

Fair commission

Second, the FCA picks 50% as a fair rate of commission. In other words, if I pay £100 for a product and the person selling it keeps £50 for themselves and passes £50 on to the insurer that is fair. The FCA gives no indication where that figure comes from.

The Supreme Court said that "Commissions paid to intermediaries were high, typically between 50 and 80 per cent of gross premium" (para 1) and in Mrs Plevin's case the commission was 71.8%. The FCA could be taking the view that if the lowest rate of commission was 50% then someone who shopped around could not find a better deal than that so the rate of 50% is somehow 'fair'. The FCA told me that it was a 'matter of judgement' but in the Plevin circumstances the FCA view was that 50% was a reasonable rate of commission. 

Redress cut by five sixths
Under its proposed rules the FCA says the bank will only have to refund the difference between the unfair rate of commission and 50%. Commission on PPI sales averaged 67%. So on average the bank would have to repay just 17% of the premium. Under the normal rules that apply to redress it would then have to add any interest paid by the customer on that amount and then the standard additional simple interest on that sum of 8% a year.

Under the current PPI redress rules customers have all their premiums refunded. And under one interpretation of Plevin that would also be the case. Instead, under the FCA's Plevin scheme redress would be based on 17% of premiums, costing the banks on average just one sixth of the normal PPI redress.

The FCA points out that the Supreme Court did not rule on how much redress was due. Nor did it say the insurance was mis-sold. So again the FCA view is that this is a reasonable way to assess the redress. 

Time bar

Complex as all this is, the FCA plans to limit claims under these provisions to a period of two years from when the rules are made.

Next steps
Some of these matters may be addressed by the FCA in its Consultation Paper which is promised before the end of 2015. After that period of formal consultation it will make the rules probably in Spring 2016. The FCA stresses that the rules could be different depending what the consultation responses are.

8 October 2015
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FCA OPENS FLOODGATES ON PPI CLAIMS

Everyone who bought Payment Protection Insurance (PPI) and paid premiums on 6 April 2008 or later can claim redress* after a court ruling last year. Yes. Everyone. The floodgates have been opened by the Financial Conduct Authority, though that was not the regulator's intention.

The problem was caused by the greed of the banks who mis-sold PPI on an industrial scale for more than a decade. The Supreme Court ruled last year in a case brought by Susan Plevin that the commission earned by the banks was so excessive they should have told customers what it was. If they didn't the sale was invalid.

In the Plevin case the commission was 72% of the sale. The FCA says the average mark up was around 67%. In other words for every £100 paid by customers the bank kept £67 and passed on only £33 to the insurer to pay for the actual insurance - and that still left a hefty profit for the insurer! And the FCA says - though it is not immediately clear why it picked this figure - that any commission of more than 50% means the sale was unfair.

That ruling opens the door to fresh claims from everyone whose PPI redress claim has been turned down.

Under the rules the Financial Conduct Authority (FCA) says it intends to make, it seems likely that every sale of PPI which was still being paid on 6 April 2008 (the date a key law came into force) will be covered if

• The commission was over 50% (it just about always was), and
• The customer was not told what the commission was (they never were).

Anyone who has already had PPI redress will not, of course, qualify again.

Claims under existing rules
Anyone who has not yet claimed would do better claiming under the existing rules initially as they will probably get more.

The average payout is between £2500 and £3000. Around seven million successful claims have been made. Banks are paying out an average of £388 billion a month in redress.

You can find out how to claim full PPI redress yourself at Money Saving Expert or Which? If your claim is refused go to the Financial Ombudsman Service as it upholds seven out of ten appeals. You do not need to use a claims management company. They will be no more successful than you and will take up to 40% of the money you're paid.

Plevin rules
Anyone who has claimed and been turned down - or that happens to them in future - can now claim again under these new Plevin rules. The rules above are only indications of what the FCA will eventually do. The final rules are expected in Spring 2016.

The FCA says it will only expect firms to pay limited redress under these rules which will consist of

• the premiums minus what they would have been if the commission had been 50%
• the interest paid on those premiums by the customer
• 8% a year simple interest on that total

That view may be challenged. There is an argument that if the sale was invalid then all the premiums should be refunded not just the bit over 50%. Nor is it clear why 50% commission is 'fair'. My latest blog explains why they are wrong. Wait for the full rules to be published in Spring 2016 before making any Plevin claim.

Meanwhile claim full redress for mis-selling under the current rules if you have not already done so. If you have and have been turned down consider an appeal to the Financial Ombudsman Service. That normally has to be made within six months of a final Ombudsman decision.

2018 cut-off
The FCA also wants to stop any new claims - under the old rules or the new Plevin rules - from Spring 2018. The banks have been demanding a cut-off for some years. If it goes ahead with that plan there are just two and half years left to get your claim in.

For a full PPI claim under the existing rules do it as soon as possible using one of the two websites linked to above.

For a fresh claim under the Plevin rules it is probably best to wait until the final rules are made in Spring 2016.

*Redress?
I use the word 'redress' not 'compensation' because there is no compensation being paid. You are simply being repaid - with interest - the premiums you were tricked into paying by venal banks determined to make as much money from their customers as they could get away with.

4 October 2015
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WOMEN DO WORSE THAN MEN WITH NEW STATE PENSION

UPDATE 2 NOVEMBER 2015

THIS BLOGPOST HAS BEEN SUPERSEDED BY NEW STATE PENSION CONTINUES TO DISCRIMINATE AGAINST WOMEN.

DO NOT RELY ON THE DATA BELOW WHICH HAS BEEN SUPERSEDED BY NEW INFORMATION FROM THE DWP.

Only one in four women who qualify for the new state pension in 2016/17 will get the full amount, which will be at least £151.25 a week. New figures show that out of 80,000 women reaching state pension age in 2016/17 only 20,000 (25%) will get the full rate or more. But 60,000 - three out of four (75%) - will get a much reduced pension. In many cases it will be the same as they would have got under the old state pension scheme - which by then will be around £119 a week.

The figures for 2016/17 are better for men - but not much. Just over four out of ten - 41% - will get the full new state pension or more. The rest - nearly six out of ten - will get a much reduced pension similar to that paid under the old system.

The Department for Work and Pensions has resisted publishing a gender breakdown for the early years of the new pension. It took a Freedom of Information (FOI) request to get any figures. And they still did not reveal the proportion of women and of men expected to get less than the full amount. When I requested these figures I was told "These figures aren’t in the public domain, but you could FOI."

However, it then emerged that the gender breakdown of those reaching state pension age up to 2033/34 had been published in 2013 - by the DWP! Those figures are out of date but unlikely to have changed significantly. Combining the two sets of data showed that the discrimination against women would continue to 2033/34 at least when 21% would get less than the full pension compared with only 15% of men.

In the first five years of the scheme, 2016/17 to 2020/21, 680,000 women will reach state pension age but only 250,000 (37%) will get the full new State Pension and 430,000 - nearly two out of three (63%) - will get less . For men the figures are 1,280,000 reaching pension age and 610,000 (48%) who get the full new State Pension and just over half (670,000 or 52%) will get less than the full amount. There are fewer women reaching state pension age than men because over that period their state pension age is raised at an accelerated rate to equalise it with men's. 

The table shows the new State Pension year by year the number and percentage of men and women who will get less than the full amount.

These calculations are based on figures from the stated sources. The DWP says the 2013 estimates are out of date. But it will not provide updated ones so I have had to put in a Freedom of Information request. When I get the updated figures this table will be updated too.

People will get a reduced new state pension for two reasons.

First, in its early years the new state pension will be reduced for time 'contracted out' and paying into a private or company pension. For many people that will reduce the amount of the new state pension to less than they would have got under the old system. In those cases they will get the pension they would have got under the old system. Hence the large number who have no more than the old pension.

Second, the new state pension requires 35 years' National Insurance contributions to get a full pension. The old pension only needs 30 years. It will be harder for women than men to achieve this number.

14 October 2015
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TRIMMING THE NEW STATE PENSION

UPDATE 21 NOVEMBER 2015
This paper was written in October 2015 and is now out of date. The Government did not use any sleight of hand on the 2016 pension rates. They are set out in my uprating blog

ORIGINAL VERSION
Is the government planning to save money by changing the rules and trimming the new state pension by more than £3 a week?

Under the current triple lock rules the basic state pension - paid to those who reach pension age before 6 April 2016 - will rise by prices, earnings, or 2.5% whichever is the highest. Prices are measured by the September CPI to be published on 13 October. The most recent CPI was 0.0% and the next one is expected to be much the same.

The earnings rise is measured by the annual increase in pay across the whole economy from May to July 2014 compared with the same period in 2015. The final revised figure is published on 14 October. The preliminary May to July figure was published last week and showed an annual rise of 2.9%. If the final revised figure remains above 2.5% then under the triple lock that will be used to increase the basic state pension from April 2016.

A 2.9% rise would mean the basic state pension increased by £3.35 from £115.95 to £119.30 a week. That is not under threat.

Setting the new state pension

But the level of the new single tier state pension is more doubtful. It will be paid to people who reach state pension age from 6 April 2016 and will be considerably higher than the old basic state pension. One of its purposes is to reduce the number of pensioners who need means-tested benefits. So it will be set above the current level where means-tested help is paid.  

Pensioners can currently get a means-tested benefit called pension credit if their weekly income is below a certain amount. If it is below what is called the guarantee credit then their income is made up to that figure. For the last four years the guarantee credit has risen by the same cash amount as the basic state pension. So this year when the state pension rose by £2.85 to £115.95 the guarantee credit rose by the same cash amount to £151.20.

The new state pension will be higher than the guarantee credit paid in April 2016. If the existing rules were followed then the guarantee credit would be raised by the same cash increase as the basic state pension. Adding £3.35 to £151.20 would raise the guarantee credit to £154.55. And so the new single tier state pension would have to be at least £154.60 a week.

Trimming

But could the Government be about to change those long established rules? The rise in the current basic pension is protected by the triple lock agreed by the current government for the rest of this parliament.

The previous coalition government raised the guarantee element of pension credit by the same cash amount as the basic state pension. Under the law the guarantee credit has to rise with earnings. But because earnings rises were low it took the view that it would raise the guarantee element by more than the law provided for.

This government has never stated its policy on the guarantee credit. And it has decided that other means-tested benefits are either frozen or set to rise with inflation - which with the CPI currently at zero is the same thing. So the government could decide to freeze the guarantee pension credit at its present level of £151.20 for 2016/17. That would require a change in the law (specifically the Social Security Administration Act 1992, s.150A). If it took that course of action the new single tier state pension could be just 5p higher at £151.25 and still fulfil the pledge that it would keep most new pensioners off means-tested benefits.

A new attempt by DWP to explain the new state pension uses that figure in its explanation.

That would mean an effective £3.35 cut compared with the level of the new state pension calculated under current rules.

It would not break any guarantees given by this government. It would go some way to answer the critics who say all the cuts are currently being borne by younger households. And it would contribute hundreds of millions of pounds savings to help deliver the £20 billion cuts which the Government says are needed to balance the budget by 2019/20.

The actual level of the basic state pension, pension credit, and the new single tier pension will be announced with or shortly after the Autumn Statement, expected on 25 November.

11 October 2015

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MERGING INCOME TAX AND NATIONAL INSURANCE

The Government has asked the Office of Tax Simplification to investigate 'closer alignment' of income tax and National Insurance. It could result in a single new tax which would probably apply only to earnings.

The task will be difficult and there will be winners and losers. Here is a brief summary of the main differences between the two taxes.

• NI is due only on earnings; income tax is due on all income including pensions, rental income, savings interest, and dividends.
• NI is calculated on weekly earnings; income tax is calculated on annual income
• NI is not charged under age 16 or above state pension age; income tax is due at all ages
• NI starts on earnings of £155 a week (£8060 per year); income tax begins above £10,600 per year but that threshold vanishes as income rises from £100,000 to £121,200 a year.
• NI for employees is 12% up to £815 per week (£42,385 a year); income tax for all is 20% up to £42,385 a year.
• NI for self employed is £2.80 a week (if profits exceed £5965) plus 9% of profits between £8060 to £42,385 a year. income tax for self-employed is at same rates and bands as for everyone.
• NI falls to 2% on earnings/profits (employees and self-employed) above £815 per week (£42,385 a year); income tax rises to 40% above £42,385 and 45% above £150,000
• NI of 13.8% is also paid by employers on the earnings of their employees above £155 a week; income tax is only paid by individuals.
• NI does not apply to savings interest and dividends; Income tax now has separate rules and thresholds for savings interest and dividends.
• NI is not charged on some payments made to employees; income tax is charged on all payments made to employees including benefits in kind. 

These differences mean that the calculation and collection of NI and income tax are very different. Employers have to collect both separately though at the same time through PAYE. Income other than earnings is taxed in different 

National Insurance is paid into the National Insurance Fund - basically a Treasury accounting exercise - and the proceeds are used only to pay state pension, a few other benefits and work related payments and a percentage is paid to the NHS.

Income tax all goes to the Treasury and is used as the Government chooses. 

Paying National Insurance contributions gives individuals entitlement to state pension and a few other benefits such as the non-contributory Jobseeker's Allowance and Employment and Support Allowance. 

In the last twelve months income tax brought in £142.1 billion (32.0% of receipts), NI brought in £111.5bn (21.4% of receipts).

22 July 2015

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