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Expat Investor : September October 2009
RETIREMENT expatinvestor.com 6 EXPAT INVESTOR September/October 2009 Don't freeze in your chosen retirement destination Pensions 'perfect storm' looms As international travel and migration become common-place, over 1 million UK pensioners are choosing to retire abroad. However, a new study from Alliance & Leicester International (ALIL), the Isle of Man-based international savings bank, highlights the fact that all retirement destinations are not equal in the eyes of the UK Department of Work & Pensions. Indeed, pensioners retiring to seven (58%) of the top 12 most popular destinations for UK expats consequences for their retirement finances. Admittedly, many of the destinations where pensioners suffer from frozen state pension payments have a lower cost of living according to the ALIL Cost of Living Scorecard. However, it is still difficult to imagine that the basic weekly pension of twenty years ago (single: £43.60 -- couple: £69.80) is sufficient to live a comfortable retirement now. Indeed, if you compare a basic will have their state pension frozen at the rate when they first started drawing it (men: 65 years -- women: 60 years) -- see table. This decision by the UK Government means that pensioners in affected countries do not receive any annual uplifts or inflationary increases to their state pension payments. With the average 65 year old man currently expected to live to 82 years old (+17 years) and the average women to 85 years old (+20 years), this has significant grocery item such as a pint of milk, you will see that while in the UK it costs 0.45p, in countries where the pension is frozen such as Australia (£1.10), Canada (£1.40) and New Zealand (£1.18) it costs significantly more. The prices clearly illustrates that while some costs may be cheaper in these countries, this is not necessarily the case across the board. Simon Ripton, Joint Managing Director of Alliance & Leicester International comments, "Many UK pensioners retire abroad to move closer to friends and family or simply to enjoy a better standard Retiring in almost 60% of the top expat destinations round the world means a frozen pension, as a new study from Alliance & Leicester International shows. of living. However, they don't necessarily realise that by choosing to move to Cape Town rather than Capri, they will have their state pension frozen at the level at which they first started to draw it. "While many of the countries where UK pensioners do not receive an annual uplift offer a lower cost of living, it is still difficult for these expats to enjoy their retirement on an income that -- in some cases -- is over 20 years out of date. This brings the need for individuals to have additional retirement savings sharply into focus." The fifth annual Future of Retirement study, It's Time to Prepare, shows that globally: people's short-ter m survival strategies in the midst of recession are creating a serious long-term pensions 'downturn deficit' there is a continuing lack of pensions planning, even though people are aware that they are likely to live longer this is being exacerbated by poor levels of financial understanding, education and access to advice while people are more concerned with protecting their pets and possessions in the short-term than ensuring they can look forward to a secure life after work. The consequence of these combined issues is that many people in the UK will struggle to make ends meet when they come to retire, unless they urgently review their priorities and planning. Stephen Green, Group Chairman of HSBC, tells Expat Investor," A perfect stor m is confronting pensions planning, created by an ageing population, falling pension funds values, a drop in state and employer contributions and an economic downturn which is forcing people to make tough financial choices." The preparedness gap The survey has identified a 'preparedness gap' in people's pensions planning across the world, with nearly nine out of 10 people not feeling fully prepared for their retirement. only 25% of respondents feel fully prepared for their retirement: 76% do not know what income they will receive in retirement only 38% feel they fully understand their long-ter m finances approaching half (43%) have undertaken some planning for later life, but still remain unclear about what their retirement income will look like 13% have done no retirement planning at all. "The 'preparedness gap' reveals that families in the UK need greater support and guidance to effectively handle their finances, not simply in schools and colleges but through 'trusted advisers' providing professional financial guidance," adds Mr Green. "If people prepare adequately for the long ter m an extended later life can present a golden opportunity for many -- but now is the time for people to seriously consider boosting their pensions contributions to improve their prospects of a comfortable retirement. The cost of procrastination is likely to be high." Advice gap opens up The survey reveals a parallel 'advice gap' in the UK, linking a lack of preparedness to insufficient financial education and guidance: more than a third (37%) have never had any form of professional financial advice while a third (33%) feel 'fairly' or 'very' unprepared for their retirement more than half (56%) of respondents have never had any form of financial education only 5% realised they would need to buy an annuity when they retire. Coping with the downturn -- pets not pensions? People are paying little attention to long-ter m considerations such as their likely retirement needs, focusing instead on purely practical short-term concerns which they better understand. General insurance solutions -- motor, travel, home and even, in the UK, pet insurance -- are seen as a greater priority than addressing longer-term needs around insuring health or income, even when job security is in question. Despite global economic uncertainty, only 2% in the UK intend to take out income protection insurance in the next 12 months, compared to 7% who will be insuring their pets. 87% of people have changed some element of their finances only 18% will now retire as planned 14% are reducing retirement savings or stopping saving for retirement altogether 19% have used savings to pay off debt 11% expect to delay their retirement. Mark Twigg, Director at financial services consultancy Cicero Consulting, which undertook the survey for HSBC Insurance, says, "It's Time to Prepare reveals the lack of understanding people in the UK have around their long-ter m retirement needs. They are less well educated or aware when trying to understand these needs and to act on them, than with their short-ter m requirements. "As the economic 'perfect storm' threatens, it is important that people are encouraged to understand long- ter m risks and to manage them effectively. While people are taking more responsibility for themselves, there is also a definite role for financial institutions to continue, and to build on, their work to educate and inform." A so-called 'perfect storm' of demographic, individual and financial elements is poised to derail people's retirement plans is the revelation of a global survey from HSBC Insurance. ALIL COST OF LIVING AND QUALITY OF LIFE SCORECARD State Pension Retirement Cost of a pint Position in ALIL Cost Increases Annually Destination of Milk of Living Scorecard No New Zealand £1.18 1 No South Africa £0.88 2 No Dubai £0.90 4 No Canada £1.40 5 No Australia £1.10 8 No Singapore £1.34 9 No Hong Kong £2.16 11 Yes America £2 3 Yes Italy £1.23 6 Ye sP or tugal £0.75 7 Yes Spain £0.78 10 Ye sF rance £1.41 12