Wednesday, 30 March 2016

NOT SO PREMIUM BONDS

Premium Bonds will give a poorer return from the June draw. So are they still a good place for your savings?

Premium bonds are good if you fulfil three conditions
  • You can buy the maximum £50,000 or close to it. 
  • You pay higher or additional rate income tax. 
  • You have used up your personal savings allowance with interest on other savings outside ISAs.
How do they work?
Each month the £60 billion of bonds earn interest, currently at an annual rate of 1.35%. But that will fall to 1.25% from 1 June 2016. Each month the interest of £65 million or so is put into a prize fund. That total is then shared at random among the bondholders as prizes. Each bond has a 1 in 26,000 chance of winning a prize in each monthly draw. Those odds fall to one in 30,000 from June. Prizes are paid tax-free so the return is better for higher rate (40%) or additional rate (45%) taxpayers. 

At the moment the fund is divided so that 98% of the prizes are for £25 which uses up 84% of the money. Two and a quarter million £25 prizes were paid in March 2016. Just over 18,000 prizes each of £50 and £100 were also paid. Those three prizes use 90% of the prize money and accounted for 99.75% of the prizes.

From June those three prizes will still take the same proportion of the money and prizes. But the number of £50 and £100 prizes will treble to more than 64,000 each. The number of £25 prizes will fall to 1.9m (93% of the prizes) and take 75% of the money. 

Higher prizes range from £500 to £1 million. Although winning a million is a nice thought, forget it. You won’t ever win that prize. Even with the maximum £50,000 bonds you would have only an even chance of winning a million after 50,000 years. That was when when humans stopped having sex with Neanderthals and 10,000 years before we started painting in caves. From June the odds of winning the second prizes of £100,000 are the same as the million pound prizes.

Interest rates
When considering the actual interest earned in any realistic timeframe it is those three lower prizes that should be counted. That means the effective interest rate - the money used for the prizes you might win - is 1.13% from June compared with 1.19% before the changes. That is equivalent to earning 1.41% taxable interest for a basic rate taxpayer, 1.88% for a higher rate taxpayer and 2.05% for a top rate taxpayer. 

Those are not bad rates for an instant access account. Money in Premium Bonds can be taken out without notice at any time.

With 50,000 bonds you will expect to win 20 of those lower prizes a year – down from 23. Almost all of them for £25. Of course chance will not produce an even return. But over time that should be the average. Here is the monthly two and a half year record of one large holding I am familiar with 1,1,1,0,0,1,0,0,0,1,3,5,2,2,3,3,3,3,3,0,0,0,2,2,1,2,3,3,1,1. All £25 except one for £100.

Prizes
Even with a maximum holding you can only expect to win £500 or £1000 once every 20 years. The larger prizes of £5000 and more are far more sparse. If you had bought £50,000 premium bonds to celebrate Alfred the Great coming to the throne in 871 or London falling to the Vikings the following year you would have expected one larger prize by now. You will wait another 1144 years for the next.

With smaller amounts of bonds, prizes of course are much rarer. £100 gives you an even chance of winning a £25 prize every 27 years. With one bond bought when when Stonehenge was built you might have expected about two prizes by now.

So Premium Bonds are still good for people who can afford to buy the maximum who are higher and top rate taxpayers and who have used up their personal savings allowance with interest on other savings. That probably means £25,000 to £50,000 in other savings products on top of any cash in ISAs. Additional rate taxpayers do not get the personal savings allowance. More than half the bonds are held by people who have at least 30,000 of them.

Randomness
ERNIE (Electronic Random Number Indicator Equipment) who draws the winning bonds each month is not a computer. However hard they try computers cannot produce genuine truly random numbers. So ERNIE uses a process which was invented by a Bletchley Park codebreaker called transistor thermal noise to create truly random events which are then counted and combined in turn into bond numbers. Every month the Government Actuary checks the prize list for randomness before the prizes are paid.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

Personal Savings Allowance
The new personal savings allowance means the interest on savings is tax free up to £1000 for basic rate taxpayers and £500 for higher rate taxpayers. So the tax-free prizes are of most value to those who have other savings which have used up those allowances. Additional rate taxpayers do not get the personal savings allowance. So premium bonds are very good for them.

Buying
You can buy Premium Bonds online at www.nsandi.com where you can also check for prizes and trace lost bonds. You can also buy them by phone or post. You must be at least 16 years old. Parents, grandparents, and great-grandparents can buy them for children but only parents can do that online.


version 1.01
31 March 2016




Saturday, 19 March 2016

THE EQUATION THAT SANK IAIN DUNCAN SMITH

The Secretary of State for Work and Pensions Iain Duncan Smith resigned on 18 March, two days after the Chancellor delivered his Budget which included another major cut in the benefits paid to disabled people.

In his resignation letter Duncan Smith said

"I have for some time and rather reluctantly come to believe that the latest changes to benefits to the disabled and the context in which they've been made are, a compromise too far. While they are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers."

The cut in the Budget was specifically set out in para. 2.76

  • "changing the way that entitlement to Personal Independence Payment is determined – a reduction in the number of assessment points awarded for needing to use an aid or appliance to carry out two of the ‘daily living’ activities assessed. This will take effect for new cases and re-assessments from January 2017."

And the Prime Minister's reply to Iain Duncan Smith's letter of resignation says that the change was agreed by all.

"That is why we collectively agreed – you, No 10 and the Treasury – proposals which you and your Department then announced a week ago."

The equation
The savings from this change were around £1.3 billion a year. They were matched almost pound for pound by two items of spending. 1. raising the threshold at which higher rate tax began from April 2017 by £2000 to £45,000. 2. Cutting the rate of tax on capital gains made from selling shares, businesses and other items.

In 2019/20 the savings from cutting PIP were given as £1.3 billion and the cost of cutting those two taxes was estimated to be £1.235 billion. It was this use of the PIP savings to which Iain Duncan Smith objected. The table below sets out the annual costs and savings and the total over the five year period 2016/17 to 2020/21. They match closely.



2016/17
2017/18
2018/19
2019/20
2020/21
2016/17 to 2020/21
SAVINGS






Cuts to PIP
£15m
£590m
£1,190m
£1,300m
£1,280m
£4,375m
SPENDING






Raise higher rate threshold
£0
£365m
£595m
£565m
£600m
£2,125m
Cut Capital Gains Tax rates
£105m
£630m
£605m
£670m
£735m
£2,745
Total SPEND
£105m
£995m
£1,600m
£1,235m
£1,335m
£4,870m

Source: Budget March 2016 Red Book Table 2.1, lines 5, 28, 73. pp.84-85.

The cancellation of the cut in the Personal Independence Payment leaves the Budget with this tax cut spend of nearly £4.9 billion but no offsetting saving of £nearly £4.4 billion. How this gap will be filled remains to be seen. Iain Duncan Smith's successor as Secretary of State, Stephen Crabb, will be asked to find a way. 

Higher rate threshold
Raising the income at which higher rate tax is paid will benefit people with a taxable income of more than £43,000 from 2017/18. That is about one in seven income taxpayers. The gain from the Budget change will be £200 in the year. The total gain from changes to the threshold between 2015/16 and 2017/18 will be £441.50. About 4.7 million people will benefit. Additional rate taxpayers, with an income of more than £150,000, will also gain, paying £80 less tax as a result of the Budget change and paying £81.50 less tax in 2017/18 than in 2015/16. About 335,000 people will benefit from that.

These figures assume that the limit for paying the lower 2% rate of NICs will also rise with the higher rate threshold. The lower earnings limit where NICs begin has not been announced for 2017/18 or beyond and it is assumed it stays the same. It will rise with inflation but that will make very little difference to the totals.

Capital Gains Tax
The rate of tax charged on gains from Budget day is cut from 28% to 20% for higher and additional rate taxpayers and from 18% to 10% for basic rate taxpayers. Sales of residential property are exempt so the gains will mainly be made from the sales of shares and businesses. The number of people who pay CGT is in the region of 200,000. Not all of them will benefit. 

The total gains on which CGT is charged were £30 billion in 2013/14. About a fifth of that (18%) is from residential property which the new rates will not apply to. If the new rates apply to the whole of the rest then the tax loss would be about £1.9 billion. But the Treasury says it will be only £630 million implying that it will only apply to around £8 billion of gains. At the moment I cannot reconcile those numbers. Perhaps you can do better with these latest CGT figures.

Personal Independence Payment
This benefit replaces what was called Disability Living Allowance. It pays between £21.80 and £139.75 a week depending on the degree of disability. The qualifying conditions for Personal Independence Payment (PIP) are much tougher than those for Disability Living Allowance (DLA). As people are reassessed many of them lose their payment or get a lower one. 

The planned change was announced on 11 March and would tighten the conditions further by halving the number of points allocated for needing aids for cooking, eating, and using the toilet. Halving the points would reduce the PIP paid, in some cases to nothing. Around 640,000 people would be affected. The Institute for Fiscal Studies estimates that 370,000 would get less money, costing them on average £3500 a year each. It would affect new claimants, existing claimants of DLA as they are moved to PIP, and existing PIP claimants who are reassessed or whose circumstances change. 

The change was due to start on 1 January 2017 but now will not do so. 

Version 1.00
19 March 2016

Tuesday, 15 March 2016

FLEXIBLE STATE PENSION

Should women born in the 1950s who face a steep rise in state pension age be allowed to draw a reduced pension early?

State pension age was raised from 60 for women born 6 April 1950 or later first to 65 to equalise it with men and then in parallel with men rising to 66 for anyone born 6 October 1954 or later. Many of these women say they were given no notice or too little notice of two changes to their state pension age. A strong campaign has been mounted by the group Women Against State Pension Inequality (WASPI). It wants what it calls 'fair transitional protection'.

The House of Commons Work and Pension Committee considered the women's case and in a report published on 15 March 2016 ruled out undoing the state pension age rises or revising the timetable for them because of the cost. (Though it left the door open to those "if the Government is subsequently able to allocate further funding" - p.22 para.5).

Instead it will consider further allowing these women to draw their state pension early but at a reduced rate. The reduced rate would last for life (paras.40-48).

It suggests that the reduction should be at an actuarially fair rate. In other words a woman who chose the reduced pension would get the same in total over he lifetime as if she drew her full pension at the new higher state pension age.

The rate it suggests is a reduction of 5.2% for each year early the pension was drawn. That is the rate used when MPs want to take their parliamentary pension early and is, the Committee says, common among similar work pension schemes. Note that the reduction applies for life so the pension is less from the date it is drawn until it ends on the death of the recipient.

There is already a provision in the new state pension for people to defer drawing it. In that case it is increased for life when they do finally take it. That increase is 5.8% for each year of deferral. The increase is paid as a supplement to the pension rather than as a part of it. That distinction is important because the main pension rises each April with the so-called triple lock of prices, earnings, or 2.5% whichever is the higher. But the extra pension earned by deferring only rises with inflation as measured by the Consumer Prices Index. This April the triple lock gave a rise of 2.9%; the CPI was zero so no rise was paid in the extra pension earned for deferring. The 5.8% increase for deferring is also supposed to be actuarially fair. In other words over the average life the total pension paid would be the same.

Some idea of what the reduction for drawing the pension early would mean is shown in the table. It uses a reduction of 5.5% for each year the pension is drawn early. That is between the 5.2% suggested by the Committee and the 5.8% given for deferring the new state pension.


REDUCED STATE PENSION IF DRAWN BEFORE STATE PENSION AGE
Full state pension per week
£120 £125 £130 £135 £140 £145 £150 £155.65
Reduction per year 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Years early Reduction
0.5 2.75% £116.70 £121.56 £126.43 £131.29 £136.15 £141.01 £145.88 £151.37
1.0 5.50% £113.40 £118.13 £122.85 £127.58 £132.30 £137.03 £141.75 £147.09
1.5 8.25% £110.10 £114.69 £119.28 £123.86 £128.45 £133.04 £137.63 £142.81
2.0 11.00% £106.80 £111.25 £115.70 £120.15 £124.60 £129.05 £133.50 £138.53
2.5 13.75% £103.50 £107.81 £112.13 £116.44 £120.75 £125.06 £129.38 £134.25
3.0 16.50% £100.20 £104.38 £108.55 £112.73 £116.90 £121.08 £125.25 £129.97
3.5 19.25% £96.90 £100.94 £104.98 £109.01 £113.05 £117.09 £121.13 £125.69
4.0 22.00% £93.60 £97.50 £101.40 £105.30 £109.20 £113.10 £117.00 £121.41
4.5 24.75% £90.30 £94.06 £97.83 £101.59 £105.35 £109.11 £112.88 £117.13
5.0 27.50% £87.00 £90.63 £94.25 £97.88 £101.50 £105.13 £108.75 £112.85
5.5 30.25% £83.70 £87.19 £90.68 £94.16 £97.65 £101.14 £104.63 £108.57
6.0 33.00% £80.40 £83.75 £87.10 £90.45 £93.80 £97.15 £100.50 £104.29

The Committee points out that calculating the exact reduction to make the exercise cost neutral is difficult. First, some women - mainly those who were single with few other resources - may be eligible for the means-tested pension credit if their weekly income was below £155.60. Under present rules they would only be eligible for that at women's full state pension age. In the longer term the cost of Pension credit may rise. Second, if women chose to draw their pension rather than work then tax and National Insurance receipts would fall. There would though be some savings if fewer women claimed Jobseeker's Allowance or other benefits. And the scheme would require some administration costs.

The Committee recommends that the Government explores this option and says it will take evidence on it in the near future.

Issues
  • Even if the scheme was cost neutral in the long term it would bring cost forward as women claimed their reduced pension earlier. The costs would be felt in the first few years and the savings would only be made over the long term after they reached state pension age but drew their smaller pensions over another 25 years or so.
  • Although the Committee says the scheme would apply "from a specified age and for a defined cohort of women" it may be very difficult to impose such restrictions. Equality laws mean that the change could not only apply to women. Even restricting it to those with a certain number of years' delay could be challenged by men as indirect discrimination if women were the clear majority of those affected. So the reduced pension for drawing it before state pension age would almost certainly have to become a part of the new State Pension rules and allow anyone to claim their pension early - perhaps from 60 or even 55 - if they were willing to have a smaller pension for life. That would parallel the existing rule allowing the pension to be deferred in exchange for an enhanced pension for each year of deferral.
  • Although the change is a fairly fundamental one, could it be implemented quickly - perhaps by October and certainly by April 2017?
  • Women who were already on a means-tested benefit such as Jobseeker's Allowance, Universal Credit, Employment and Support Allowance, Housing Benefit, Council Tax Support would find that benefit was reduced if they got the state pension. So the very women who need the support could find they get the least from it.
Government response
The Government is obliged to give a formal response to a Select Committee report. But the DWP has already said  


“The government has already listened to concerns expressed by those affected by the 2011 changes, and took action to limit the maximum change to state pension age to 18 months, a concession worth over £1bn.
“Women retiring today can still expect to receive the state pension for 26 years on average – four years longer than men.”
Your thoughts
Many WASPI women have already expressed their opposition to this plan in their very active twitter presence. 

Please let me know your response to the Select Committee plans and the issues raised in this blogpost. Email paul@paullewis.co.uk.

I will update this blog to reflect different views and changes.

Background
My earlier blogpost Women Given just Two Years' Notice of State Pension Age Rise

Version 1.10
15 March 2016





Tuesday, 19 January 2016

CHANGING STATE PENSION AGE

1908 - age 70
The first state pension in the UK was the Old Age Pension. The law was passed in August 1908 and the first pensions paid on 1 January 1909 to around 500,000 people aged 70 or more. It was 5/= (five shillings or 25p) a week and was paid in full to individuals aged 70 or more with an annual income of £21 a year or less reducing to nothing at an annual income of £31 a year.  A higher pension of 7/6 (37.5p) was paid to a married man. At the time only one in four people reached the age of 70 and life expectancy at that age was about 9 years.

1925 - age 65
In 1925 a new kind of pension was introduced based on contributions paid at work by both the employer and the employee. It was paid from age 65 without a means-test. A married couple's rate of pension was paid if both spouses were aged 65 or more. That meant men whose wives were younger than they were had to wait for some time after they reached 65 to get the higher rate for their wives.

1940 - men age 65, women age 60
In 1940 pension age for women was cut to 60 to try to ensure for most couples that the married rate would be paid as soon as the husband reached 65. 

1948 - retirement condition added
From 1948, men had to retire as well as reach 65 to claim the new Retirement Pension paid under the National Insurance scheme. If their wife was still under 60 when they reached 65 and retired they could now claim a dependant's addition for her. When she reached 60 she could claim a married woman's pension of around 60% of the full rate. 

1995 - women's state pension age to be equalised
Following pressure from Europe, the Conservative Government under John Major was forced to announce plans to equalise state pension age for men and women. The decision was put off at least once for fear of adverse public reaction. The timetable for change was the most relaxed possible and would raise pension age for women from 60 to 65 over a ten year period from 6 April 2010 to 6 April 2020.

2007 - rises for men and women to 66, 67, 68 planned
Rising life expectancy led the Blair Labour Government to pass a law to raise state pension age to 66 between April 2024 and April 2026, then to 67 between April 2034 and April 2036 and to 68 between April 2044 and April 2046.

6 April 2010 - women's state pension age begins to rise
The first women are affected by the equalisation changes. Women born 6 April 1950 to 5 May 1950 have to wait until 6 May 2010 to reach state pension age, a delay of up to one month.

Entitlement to Pension Credit for men and women became linked to women's state pension age rather than the age of 60. A similar change restricts entitlement in England only to free bus travel. Entitlement to Winter Fuel Payment is also linked to women's state pension age and the qualifying date for the payment in winter 2010/11 moves to 5 July 2010. It would then rise by six months each year.

May 2010 - further change promised
In opposition the Conservative Party had announced it would raise pension age for men and women more quickly than existing plans. After it came to power in the Coalition government with the Liberal Democrats in May 2010 this pledge was repeated in the programme for government set out in the Coalition Agreement.

"We will...hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women."

October 2010 - revised changes
The commitment in the Coalition Agreement fell foul of EU equality laws which allowed the government to equalise state pension ages as late as April 2020 but would not allow further discrimination between men and women during that process. So in the Spending Review of October 2010 the plans were revised. Women's state pension age would now be raised more quickly to reach 65 in 2018 and then both men and women's pension age would rise to 66 by 2020. Critics pointed out that plan breached the Coalition Agreement promise of 'no sooner than...2020 for women'.

2011 - Pensions Bill sets out the planned changes
In February 2011 the detailed timetable for change was announced in the Pensions Bill 2011. Women's state pension age would rise to 65 by November 2018 and then men and women's pension age would rise together to reach 66 by 5 April 2020. Five million men and women would face a later state pension date. But while men would have to wait at most another year, 500,000 women would have to wait longer than a year. The wait for 300,000 would be 18 months or more and 33,000 would have to wait for two years.

Widespread protests and rebellions in Parliament - which the Government defeated - led to promises by the Secretary of State Iain Duncan-Smith to introduce some 'transitional' changes to help the most severely affected women. But the Pensions Bill went through almost all its stages in Parliament with no details of what the Government would actually do.

On Thursday 13 October 2011, the last possible date, the Government announced its plans. It would cap the delay for women at 18 months. It kept the rise to 65 by November 2018. But would then stretch out the transition from age 65 to 66 for both men and women by an extra six months. It will now be completed in October 2020. The concession will cost £1.1 billion (at 2010/11 prices), half of which will be spent on stretching the timetable for men, none of whom had complained.

On Tuesday 18 October 2011 the House of Commons accepted these changes and despite a further attempt in the Lords to make further amendments the Pensions Act 2011 became law on 3 November 2011.

April 2011
In April 2011 the Government began a consultation on how it should bring forward the change in state pension age to 67 and then 68. That consultation closed on 24 June 2011.

29 November 2011
In the 2011 Autumn Statement the Chancellor George Osborne announced that the rise in the State Pension Age to 67 would be brought forward eight years to run from April 2026 to April 2028 instead of April 2034 to April 2036. That change will save £60 billion.

5 December 2013
Two years later, the 2013 Autumn Statement announced the principle "that people should expect to spend, on average, up to one third of their adult life in receipt of the State Pension."

It warned that would bring forward the rise to 68 which was announced in the 2007 Pensions Act. 

"This principle implies that the increase in the State Pension age to 68 is likely to come forward from the current date of 2046 to the mid 2030s, and that the State Pension age is likely to increase further to 69 by the late 2040s." (1.122-1.123)

And admitted that one purpose of this change was to save money

"Along with action this government has already taken on the State Pension age, [this change] could save around £500 billion from pension expenditure over the next 50 years."

A paper setting out the principles also said that in future people should have at least ten year's warning of any change in their state pension age.

The changes were set out in the Pensions Act 2014 and the Government set out the timetable of the 2011 and 2014 changes.


A review of state pension age was promised by spring 2017.

March 2016
On 1 March 2016 the Government set out the Review's terms of reference and John Cridland, ex-Director General of the Confederation of British Industry, was appointed as its chair.

It is clear from these terms of reference that the principle of people spending a set proportion of their adult lives on state pension had been abandoned. Para 2.2 says the Review will consider "Whether the current system of a universal State Pension age rising in line with life expectancy best supports affordability, fairness, and fuller working lives objectives."

It was also clear that cost was a major consideration "These recommendations should be affordable in the long term" (para 1.1).

And the principle that there should be one state pension age for all was being abandoned "the review is to have regard to: Variations between different groups" (para 2.3). That leaves the way open for pension age to vary with postcode as life expectancy does; with occupation; or even with education - should someone who starts contributing at 16 reach state pension age earlier than someone who does not start until 21?

The Review will report to Government by January 2017 and a decision will be made by the Chancellor George Osborne before 7 May 2017 (para 3.1). Perhaps in the 2017 Budget.

14 April 2016
Version 1.52

Thursday, 31 December 2015

PENSION SECRECY SHUTTERS LIFTED

The Department for Work and Pensions has finally answered two Freedom of Information requests about the new state pension and the letters written to women whose pension age was postponed twice. Initially both requests were refused.

Pension letters destroyed if not delivered
Letters written to women warning them of rises in their state pension age which were returned undelivered by Royal Mail were destroyed and no further action was taken to find the women concerned. No record was kept of how many letters were returned.

Part of the changes to state pension is the rise in the State Pension Age. This has hit women harder than men and data provided under FOI showed that the Department failed for 14 years to begin to inform women of changes passed in 1995. That exercise began in 2009 and was halted in March 2011. Women's state pension age was changed again in November 2011 and the DWP then restarted writing individual letters from January 2012 to inform women of their new state pension age including both changes. That was often the first they had heard of any change. But many women claim they never received such a letter.

A global study of data quality to be published by the credit reference and address validation agency Experian found that 23% of customer prospect data - including names and addresses - contained errors. That does not mean nearly a quarter will not arrive. But many were clearly at risk of not doing so. That raises the question of what the Department did to deal with this problem.

Initially the DWP refused my Freedom of Information request for more details of how many letters were returned and what happened to them, on grounds of cost. But on review the DWP agreed to give answers.

  • QUESTION: What information does the DWP hold on how many of those letters in any or all of those batches were returned by Royal Mail?
  • REPLY: DWP no longer has access to this information. To support the principles of the Data Protection Act 1998, DWP has a Records Management Policy. This confirms the retention periods for DWP products and, in line with this Policy, there was no specific reason to retain these letters.
  • QUESTION: When letters were returned as above what further steps were taken to try to find the people concerned?
  • REPLY: The letters were issued to the customers’ latest address held on HMRC records. No followup action was taken on any letters that were returned undelivered as DWP had no further information on the customers’ whereabouts. 


No state pension
Women are the big losers from a new rule under which people with fewer than ten years of National Insurance contributions get no new state pension. Under the old rules (since 2010) people with under ten years contributions get a pro rata pension of 1/30th of the full amount for each year of contributions. Under the new pension they get nothing. Nearly three quarters f those affected will be women.

On 14 January 2016 the DWP published Impact of New State Pension (nSP) on an Individual's Pension Entitlement which shows that from 2016 to 2050 a total of 110,000 people will get no new State pension because they have fewer than ten qualifying years of NICs. Of those 110,000, 80,000 (73%) are women and 30,000 (27%) are men.

The estimate of around 3200 people a year is rather lower than those published in the Impact Assessment in May 2014. Those lacked some detail and were not broken down into men and women. But the table showed that in each of the five years from 2016/17 to 2020/21 between 9000 and 12,000 people living in the UK would be denied a new state pension because of this rule. That is between 2% and 3% of those reaching state pension age in that period and a total of between 45,000 and 60,000 in just five years. A further 6000 to 10,000 a year who lived abroad would also would not qualify which is 18% to 23% of those living abroad reaching state pension age (see Table 3.1 on p27).


Further information
Women will get less than men from the new state pension
Women given just two years' notice of state pension age rise 

version 2.00
1 March 2016

Wednesday, 30 December 2015

HOW FLOOD RE WILL WORK

UPDATED 12 JANUARY 2016

Flood Re is part of a plan which is intended to ensure that homes at a high risk of flooding will be able to obtain buildings and contents insurance at a reasonable cost.

It begins throughout the UK on 4 April 2016. From that date an estimated 350,000 dwellings at high risk of flooding will be put into the Flood Re scheme.

Flood Re will be funded by a levy on all insurance companies. From 4 April 2016 all home insurance policies will include a supplement which will pay for that levy. The Government has estimated that will add around £10.50 a year per policy. It will almost certainly not be shown separately on insurance premium bills. But as part of the premium it will be subject to insurance premium tax of 9.5% which would add £1 to that amount. The levy will be reviewed in the first five years of the scheme and if it changes the supplement could change too. Almost all insurers are expected to join Flood Re and all of them, in Flood Re or not, will pay the levy based on the amount of home and contents business they do.

In Flood Re
If your home is put into the scheme by your insurer the flood risk element of your insurance will be charged at a fixed rate depending on your council tax band (valuation band in Northern Ireland). The amount for combined buildings and contents will range from £210 a year for the lowest band properties through £276 in the mid-range to £1200 a year for the highest. If you insure just the buildings or the contents the amounts will be lower. Details here 

Those are the fees that Flood Re will charge your insurer for taking on the flood risk. The insurer can pass those costs on to customers or can charge more or less than that for the flood risk. Charging less is very unlikely. The excess on the policy - the amount that has to be paid by the insured in the event of a claim - will also be fixed at £250 on this flood risk element. But again your insurer can charge whatever excess on this part which it chooses.

The rest of the insurance against all other risks will be estimated and charged as normal by your insurer on top of the amount for the flood risk. There is no guarantee what these premiums will be or what excess will be charged. The premium you pay will include all risks, including the flood risk passed to Flood Re, and you will not see those as separate elements in your premium. 

Your home will only be put in the scheme if your insurer chooses to do so. It is not clear if there will be any mechanism to request a property is or is not put into the scheme or to appeal against a decision. 

Flood Re expects to have 350,000 properties passed to it in the first year. It claims it can accommodate more than that but it is entirely up to insurers to decide which properties to include. The Environment Agency has estimated that more than 5 million homes are at some risk of flooding.

If a claim arises for flood damage the householder will claim directly to their insurers not to Flood Re which will have no contact with consumers.

Excluded from Flood Re
Some properties will specifically be excluded from the scheme even if they are at high risk of flooding. These include

·         Homes built from 1 January 2009
·         Purpose built blocks of flats
·         Houses converted into flats. But if the freeholder lives there and there are only one or two other units it can be part of Flood Re.
·         Buy to let property where the landlord arranges insurance.
·         Commercial property
·         Mixed use property – for example flats over shops.
·         Social housing buildings – but contents can be part of Flood Re.

The rules are complex. More details from Flood Re  

It is not clear whether or at what price these excluded properties will be insurable.

May be excluded in future
Flood Re Chief Executive Brendan McCafferty has said that homes liable to frequent flooding could be excluded from the scheme if the owner did not invest in flood resilience measures. Flood Re would gather information over the next few years and decide if these homeowners could be taken out of the scheme after three claims. He also some very high risk properties that flood every year or two could be excluded from the scheme whatever steps they took.

Not in Flood Re
If your home is one of the estimated 5 million or so homes at some risk of flooding but is not in Flood Re then insurers will no longer make any guarantees about providing insurance nor about the level of premiums or excess charged on these homes. The existing deal called Flood Insurance Statement of Principles will end on 4 April 2016 when Flood Re begins.

The Statement of Principles, which in one form or another was in force since 2000, guaranteed that your existing insurer would offer insurance – though at an uncapped premium – and included all properties. From 4 April 2016 all homes not in Flood Re will be subject to normal market forces including those at risk of flooding. Insurers can refuse to insure homes at flood risk or insure them on any terms, with any premium or excess they choose. The industry hopes that firms will be able to offer insurance on all property either by putting it into Flood Re or, if the risk of flooding is low, then taking on that risk in the normal way. But whether that happens remains to be seen.

The future
The Association of British Insurers says that in the 1990s there were three flood events which led to claims of £150m or more. This century there has been one a year. Further bad weather will test this latest effort to provide insurance to its limits.

Matt Cullen of the Association of British Insurers and Brendan McCafferty, Chief Executive of Flood Re, explained the scheme from their point of view on Money Box 9 January 2016.

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12 January 2016





Wednesday, 9 December 2015

NEW STATE PENSION NIGGLES

Are all the niggles and unfairnesses of the new State Pension there because of the pressing need to ensure it costs no more than the old one? 


I gave my evidence to the Work & Pensions Select Committee in Parliament on 25 November 2015. Before I was questioned the MPs quizzed the former Pensions Minister Steve Webb. He lost his seat in the General Election and is now Director of Policy at the insurers Royal London.

He admitted quite frankly to the Committee that his reforms of the state pension – which begins on 6 April – had to be done at nil cost. Or as he put it “When I went to the Treasury wanting to reform the State Pension, the one thing they said to me is—and I paraphrase slightly—‘Steve, you can do what the hell you like, just don’t spend any more money.’”

In fact the new state pension will, in the long term, cost less than the present one. Job done. But the more I looked at the various groups and campaigners who are complaining about how the new state pension will treat them the more I thought that every niggling unfairness about it came from Steve Webb’s nil cost brief.

Now, without sounding too much like Meryl Streep and Steve Martin, it’s complicated. So bear with me.

1. Women born 6 April 1951 to 5 April 1953 all reach state pension age before the new state pension begins. So they won’t get the new state pension. But men of the same age – who will be 65 when it begins – will. That is sex discrimination and they want the choice to have new or old.

2. The problems of women born 6 April 1953 to 5 April 1959 were covered in this newsletter two weeks ago. They were told about their state pension age rise just a couple of years before they were 60 and their age was raised not once but twice. That didn’t happen to any men.

3. As I reported here three weeks ago women will generally do less well than men out of the new state pension. Even by the 2050s one in seven women won’t get the full amount because they don’t have 35 years’ contributions compared with one in ten men. It is also expected that more women than men will not get a pension at all because they won’t get the minimum ten years’ contributions.

4. The new state pension will not allow women to claim a pension on their husband’s contributions either while he is alive or after his death. If they have an inadequate pension of their own they will have to rely on means-tested pension credit which is itself being cut by up to £13 a week.

5. Transitional rules cut back on the new State Pension for anyone who was not paying into SERPS and the State Second Pension which topped up the basic pension. As a result many will get little more than the old state pension in the first years of the new scheme. DWP figures show women are more likely to be affected than men.

6. And finally the cold-towel-round-head rules which affect people who were in company schemes. Under these rules the DWP will no longer inflation-proof part of their company scheme through the state pension. This rule will probably affect men more than women.

All those six items cut the cost of the new state pension. And of course help it to come in under the cost of the old as the Treasury demanded of Steve Webb. All of them leave some groups – mainly women – feeling unfairly treated. Perhaps it’s a price worth paying to simplify the state pension and keep it affordable in the long term. But we should at least be clear who is paying that price.


Oral evidence by Steve Webb, me, and Sally West from Age UK.


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7 March 2016