Surviving Retirement by Roger Fayle

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 1

The

POCKET GUIDE to

SURVIVING RETIREMENT Easing the transition between work and retirement

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 2

About this guide

This guide aims to provide practical advice, written in plain English, to those who are thinking ahead to, or approaching, retirement. Whether youâ&#x20AC;&#x2122;re looking forward to retirement with enthusiasm or nervousness, youâ&#x20AC;&#x2122;ll find information on many aspects of later life, including financial issues, leisure and travel, and other lifestyle events and activities. Weâ&#x20AC;&#x2122;re confident that this guide will assist you to strengthen your finances, as well as help you to get more enjoyment from your post-work years.

hargreaves Lansdown Kendal house 4 brighton Mews Clifton bristol bs8 2NX telephone: +44(0)117 900 9000 www.h-L.co.uk Disclaimer: The information contained in this guide provides only general guidance and does not constitute financial advice. You should not rely on this information to make (or refrain from making) any decisions. All information contained within was correct as at October 2009. For advice tailored to your own particular situation, always seek independent advice from an expert or professional. Illustrated by Howard McWilliam

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 3

CoNteNts

Retirement: the Beginning of a New Life?

page 5

Tax, Pensions and Benefits

page 8

Home, Sweet Home?

page 21

You and Your Money

page 27

Quick Tips: Gains without Pain

page 39

Securing Your Future

page 49

Getting More Help

page 55

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 4

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 5

1) RetiReMeNt: the begiNNiNg of A New Life?

In November 1999, Jonathan Clements wrote in the Wall Street Journal: “Retirement is like a long vacation in Las Vegas. The goal is to enjoy these years to the fullest, but not so fully that you run out of money.”

For those who make the most of it, retirement marks the beginning of a rewarding new chapter in their lives. Others approach the end of their working lives with unease, as they begin to worry about how to spend their time productively while living within more modest means. However, it’s important to understand that retirement is not something to be afraid of - it is an opportunity waiting to be seized. Without the daily demands of working life, new ambitions can be realised and new experiences enjoyed. Think of retirement as a gradual process, rather than an event - freewheeling downhill towards the plains of senior citizenship, rather than cycling off a cliff! Of course, retirement in the 21st century certainly isn’t what it was in the past. Instead of having your working life come screeching to a halt, you can apply gentle braking and ease into a portfolio-style approach to retirement. This could include part-time or consultancy work, starting your own business, leisure activities, volunteering and education. As they say, the choice is yours.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 6

Then again, as with all things in life, the key to a successful and rewarding retirement is to approach this transition with enthusiasm and plan ahead. One way to look ahead positively to retirement is to consider what you hope to gain and what you stand to lose. For instance, try dividing a piece of paper into two columns headed “More of ” and “Less of ”, and then list all the positive aspects of stopping work.

for example, in the “Less of ” column, you might include the following positive changes: an end to … 8

working long hours;

peak-time commuting on gridlocked roads or packed trains;

office politics and egos; and

taking just five weeks’ holiday each year.

in the “More of ” column, you might list: 4

extra holiday and leisure activities;

more time for family and friends;

opportunities to learn new skills; and

certain expenses being lower.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 7

As you’d expect, retirement presents you with endless opportunities and prospects. Of course, it’s entirely up to you as to how you spend the additional time that it offers - the only limit is your own imagination. Also, it’s important to realise that retirement doesn’t mean having to cease work permanently. Although you may decide to retire completely from your current occupation, you may be able to continue working part-time in order to supplement your pensions. Alternatively, you may decide to branch out by working in an entirely different occupation, or by going into voluntary work or further education. Again, it’s entirely up to you how you fill your time, within the constraints of your talents and household budget. Throughout this guide, our aim is to ease the transition between work and retirement by showing you how to get more life for less money. In the next section, we begin by looking at three key areas: tax, pensions and benefits.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 8

2) tAX, PeNsioNs ANd beNefits

tax Many retired people are disappointed when they discover that they continue to pay substantial amounts of tax after their working life ends. Although you no longer have to pay National Insurance Contributions (NICs) on earned income after reaching state pension age, you still have to pay tax on earned and unearned income, such as pensions and other benefits, savings interest, dividends from shares, and so on. Hence, tax planning is as important in retirement as it is during working life - and even more so, given the lower incomes on which many retired people must survive. Indeed, more than two million people over sixty, including many on relatively modest incomes, have to 8

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 9

complete a self-assessment tax return every year. For the record, here are the tax rates and allowances for the 2009/10 tax year, which ends on 5 April 2010:

iNCoMe tAX: Personal allowance for 2009/10: Up to age 65: £6,475 65 to 74: £9,490* 75+: £9,640* * These age-related allowances are reduced if your total income exceeds a certain threshold (£22,900 in 2009/10). tax rates for 2009/10: • Basic-rate tax on the first £37,400 (which is 20% on earnings, 20% on savings, and 10% on dividends) • Higher-rate tax on any excess (40% on earnings and savings; 32.5% on dividends) There will be a 10% starting rate for savings income only, with a limit of £2,440. If an individuals taxable non-savings income is above this limit then the 10% rate will not apply. Capital gains tax for 2009/10: Individual exemption - £10,100 (£5,050 for most Trusts); you are taxed at 18% on gains exceeding this allowance. inheritance tax: 40% tax on remainder of estates in excess of £325,000 for 2009/10. Usually transfers between spouses and civil partners are exempt.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 10

As you can see, it pays to minimise your exposure to income tax, which may be easiest to do on the unearned income from savings and investments. As we explain in section 4, you can do this by making use of various tax shelters, including the popular Individual Savings Account, or ISA. Providing you with comprehensive tax advice would take an entire book, so we won’t go into this topic in too much depth here. However, you’ll find a list of tax rates and allowances at www.hmrc.gov.uk/rates and the number of your local HM Revenue & Customs (HMRC) office will be listed in the phone book. Another excellent source of advice on consumer affairs and financial matters is the Citizens Advice Bureau (CAB) website at www.adviceguide.org.uk; you can find contact details for your local CAB in the phone book. Naturally, Hargreaves Lansdown advisers can offer advice on many areas of tax planning. You can arrange a free initial discussion with a financial practitioner by calling 0117 317 1690. In addition, Tax Help for Older People (TOP) is a charity which provides free tax advice to people over sixty on modest incomes (usually up to £17,000 a year) and their families and carers. These limits can be extended for disabled people, those in their fifties made redundant or taking ill-health retirement, and the recently widowed. This service is supported by HMRC, volunteers from the tax profession, and the Big Lottery Fund, and can be found at www.taxvol.org.uk, telephone 0845 601 3321.

Pensions: the new era New rules introduced on 6th April 2006 (“pensions A-Day”) mean that 10

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 11

most people can now save as much as they like into any number and types of pension. What’s more, you can get tax relief (a tax benefit from HMRC) on contributions of up to 100% of your earnings each tax year up to age 75. Even if you do not have any earnings, you can still contribute up to £3,600 gross per tax year. The tax benefits are subject to a maximum Annual Allowance (£245,000 in 2009/10 tax year - not applicable if this is your final year). There is also a Lifetime Allowance, above which your pension funds will be taxed at up to 55%. The lifetime allowance is £1.75 million in 2009/10, rising to £1.8 million in 2010/11 where it will be frozen for at least the following five tax years. Although pensions are relatively inflexible investment vehicles (for example, you can’t start taking an income from a pension until age 55, or 50 if taken before 6th April 2010), they do offer tax relief on contributions. For each £80 that you contribute, the government currently adds £20, and higher-rate (40%) taxpayers can claim up to a further £20 tax rebate from HMRC, usually via their tax returns if they have sufficient income in the higher rate tax bracket. Hence, a £100 contribution to a pension costs a non or basic-rate taxpayer just £80, or effectively as little as £60 for a higher-rate taxpayer. Please note a tax charge could apply if your income has exceeded £150,000 in any tax year since April 2007. Has your total annual income exceeded £150,000 since April 2007? It was announced in the April Budget that if your income exceeds £150,000 (this tax year or in the previous two), then you may be subject to a 20% tax charge on deemed contributions over £20,000. Please call us on 0117 980 9926 for more information and to request our budget factsheet if you think this may affect you. Even if you don't pay tax, you will benefit from tax relief on contributions paid into stakeholder and personal pension plans, which 11

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 12

automatically reclaim basic-rate tax relief for you. For example if you pay £2,880 HMRC will currently add another £720, making a total of £3,600. What’s more, if the rules of your pension scheme allow you can take up to a quarter (25%) of your pension fund as a tax-free lump sum. Since A-Day, this includes pension pots built up in AVCs (see below) and by contracting-out of the State Second Pension (formerly SERPS), where the rules have been amended to allow this. It is important to remember when talking about tax rules and rates that the government can change them, and the value of any relief will depend on your individual circumstances. Tax rates generally change in April each year.

Company pensions Company (or occupational) pensions can be divided into two types. Defined-benefit schemes (which include final-salary plans) offer a yearly pension which is normally based on your final pensionable salary and the number of years you’ve been a member of the scheme. With defined-contribution schemes (also known as money-purchase schemes), the size of your pension pot at retirement depends on how much has been paid into the scheme and the investment returns it has earned. When you retire, part of your fund can normally be taken as a tax-free cash sum, with the rest providing you with a taxable income, usually in the form of an annuity. With both forms of pensions, it is usual for both employer and employee to make contributions to the schemes, normally a percentage of salary, although this is not always the case. Until A-Day, you could not normally take an income from a company 12

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 13

pension and continue to work for the same employer. However, since April 2006 you can do so, provided your scheme’s trustees have agreed to this change. Hence, this allows you to move towards a flexible or “phased” retirement, where your income is made up of both pension payments and salary, the mix of which can change over time. If you’ve worked for several different employers during the course of your working life, it’s a good idea to draw up a “Pensions CV” which lists your various periods of service with different employers (and the gaps which you may need to make up for with extra contributions). You can then use this CV to establish how much income you can expect from any associated pension schemes by asking each pension’s administrator for a forecast. If you have trouble locating a former employer or pension scheme trustees, contact the Pension Tracing Service at www.thepensionservice.gov.uk or call 0845 600 2537.

Personal pensions, stakeholder pensions, siPPs and AVCs With a personal pension you (and sometimes your employer) contribute to a fund managed by a life insurance company or investment manager, which invests the money on your behalf. The contributions paid in, plus the investment returns, will determine how large your pot becomes. In April 2001, the government introduced “stakeholder pensions” - a type of personal pension which was designed to be simple and flexible, with low charges. Additional voluntary contributions (AVCs) are simply extra pension contributions made by an individual to a company scheme or free-standing AVC. In 1989, Self-Invested Personal Pensions (SIPPs) came into existence. A SIPP is simply a tax-efficient “wrapper” around a collection of 13

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 14

investments which are chosen and managed by you (with or without the help of professional advisers and investment managers), aimed at providing you with an income in retirement. Originally, the high charges levied by SIPPs made them a niche product for “high net worth” investors, but greater demand (especially since A-Day) has reduced costs and launched SIPPs into the mass market. SIPPs are proving attractive to middle-income people who want to take responsibility for their own pension, thanks to the control, flexibility and freedom which they offer. hargreaves Lansdown is a leading siPP provider: our Vantage SIPP is one of the lowest-charging plans available in the UK. We also offer market-beating discounts on stakeholder pensions. For more details, visit www.H-L.co.uk or call 0117 980 9926.

Annuities Other than final-salary schemes, the contributions that you make to a pension build up an investment fund which then provides you with an income in retirement. Most pensioners hand over their pension pots to life insurance companies to buy an annuity, which is a promise to pay them a regular (usually monthly or annual) income for the rest of their lives, in exchange for their pension pot. You do NOT have to buy an annuity from the pension company which you (or your employer) have saved with. Indeed, where you are in a money-purchase scheme, companies are normally legally obliged to inform you of your “open market option”, which means that you are free to buy an annuity from the life insurance company of your choice.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 15

Hence, if you have a private or stakeholder pension, company pension or free-standing AVC, then it is absolutely essential to shop around for the highest annuity income that you can buy. Failing to do so could cost you thousands of pounds, but where do you begin? Simple: for a hassle-free route to a considerably higher retirement income for life, let the HARGREAVES LANSDOWN ANNUITY SUPERMARkET search the market for you. Just visit our website at www.hlannuity.co.uk or call 0117 980 9940, tell us the value of your current pension(s) and we will give you a free guide on annuities and an immediate report of the top-paying annuities from our panel of top providers for free. If you decide to go ahead, we will do all the paperwork for you, as well as chasing your existing pension provider and your new annuity provider.

Shopping around can boost your retirement income by up to 30% for the rest of your life 15

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 16

Special annuity rates for smokers and people in ill health: If you are a smoker or in ill health, you should disclose this when shopping around for annuities, as you may qualify for a better annuity rate. For further details, call Hargreaves Lansdown Annuities on 0117 980 9940 or visit www.hlannuity.co.uk

income drawdown Returns from annuities have fallen in line with long-term interest rates over the past ten years, which means that the income they pay is much lower than it was in the mid-Nineties. Hence, some investors prefer to refrain from buying an annuity which provides a secure income for life and opt instead for income drawdown (also known as unsecured pension). Although this is a riskier option (see below for details), income drawdown offers more flexibility than an annuity. In addition if you die in drawdown a lump sum less 35% tax can be paid to your beneficiaries or an income can be paid to your dependants. If you have a decent-sized pension fund (or collection of funds), you can withdraw your 25% tax-free cash and leave the remainder in income drawdown, growing free of capital gains tax. You can then leave your money invested and draw an income from the fund each year, subject to the maximum limits set by the government. By doing this, your pension fund remains open to market volatility and can fall as well as rise, and this will affect your retirement income accordingly. When you reach 75, you can no longer continue with income drawdown, although currently you can enter into a similar arrangement known as an Alternatively Secured Pension (ASP) which must provide a minimum income. On your death after age 75, an income must be 16

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 17

provided for any dependants. If there are no dependants, it will be paid to charity free of inheritance tax. It’s important to note that income drawdown and ASP are only suitable for investors who are prepared (and can afford) to take a risk with, and a long-term view of, their pension fund. With income drawdown, the value of your fund and the income drawn down could vary considerably over time, so if this would worry you, then you’re probably better off opting for an annuity. If you are considering income drawdown, it would be wise to obtain advice first. If you are interested in income drawdown, Hargreaves Lansdown’s Vantage SIPP could be an excellent low-cost wrapper for your pension. To find out more, please visit www.H-L.co.uk or call 0117 980 9926.

trivial commutation If the total capital value of all of your annuities, company and personal pension pots (but not state pensions) is £17,500 (2009/10) or less, and you are aged between 60 and 75, you can opt to take these small pensions as cash, a quarter of which can be tax free. However, if the trustees of your company scheme have not introduced this rule change, then you may not be able to pursue this option, which is known as “trivial commutation”. At the time of writing triviality rules are under review and are subject to change. If you have any questions on pensions, no matter how simple or complex, our pensions helpdesk will be delighted to help you simply call 0117 980 9926.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 18

state pensions For comprehensive information on state pensions and other benefits, contact the Department for Work and Pensions at www.dwp.gov.uk look up your local DWP office in the phone book or visit www.thepensionservice.gov.uk

basic state pension The state pension is paid to people who claim it having reached their normal state pension age, currently 60 for women and 65 for men. From 2010 to 2020 the state pension age for women will gradually be increased to 65 and then to age 68 by 2046 for both men and women. How much you receive depends on how many years that you have paid or been credited with National Insurance Contributions (NICs). In order to receive a full basic state pension, you currently need to have paid NICs for 44 years if you are a man, or 39 years if you are a woman. However, if you reach state pension age after 5th April 2010 the number of qualifying years has been reduced to 30. If you are a married woman who does not have enough qualifying years based on your own NICs to get a full basic state pension, you may be able to get a state pension based on your husband's NICs. You can only do this if he is already getting a basic state pension and you are aged sixty or over. If you are a widow, widower or surviving civil partner, you may be entitled to get a basic state pension based on your late husband's, wife's or civil partnerâ&#x20AC;&#x2122;s NICs.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 19

Additional state pensions In addition to the basic state pension, there is the State Second Pension (S2P), (previously SERPS) which provides an additional pension for employees. The amount you get is based on your earnings during your working life and your level of NICs. Some workers have chosen to “contract out” of S2P and save in their company or private pension plan instead. Contracting out in a particular year means that you lose your entitlement to SERPS/S2P for that year and any subsequent year where you have remained contracted out. Instead you get an additional pension from your company or private pension. It’s important to establish how much your state pensions will be by asking for a pensions forecast from The Pension Service, especially if you want to make up for “lost” years. You can request a BR19 application form by calling 0845 300 0168, or visiting www.thepensionservice.gov.uk Note that you will not automatically receive these state pensions. If the DWP knows where you are, you will be contacted and asked to apply for them. If the DWP does not contact you and you are less than 3 months from state pension age, be pro-active and contact them yourself to request a BR1 claim form.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 20

other state benefits If you have any experience of the state benefits system, then you will know that it is a vastly complicated minefield of benefits, means testing and qualification criteria. A range of benefits are available if you are disabled, unemployed, unable to work due to sickness, caring for a sick relative or elderly parent, etc. However, free, independent help in understanding benefits and claiming them is available from a number of sources, such as the excellent www.entitledto.co.uk website, www.ageconcern.org.uk, www.helptheaged.org.uk and the official DWP website at www.dwp.gov.uk By the way, itâ&#x20AC;&#x2122;s worth mentioning that for those with a physical or mental disability, a Disability Living Allowance (if under 65) or Attendance Allowance (if over 65) may be claimed. Neither of these benefits are means tested.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 21

3) hoMe, sweet hoMe?

Thanks to the dramatic increases in house prices over the past decade, many retired people find themselves to be “property rich but cash poor”, though their property wealth may have been dented over the last two years. Nevertheless many look for ways to boost their income by unlocking some or all of the value in their home. One way to do this is to “downsize”, which involves selling one home and replacing it with a smaller or less expensive property. However, the sizeable property transaction costs involved in downsizing reduces its 21

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 22

appeal. When you add up the stamp duty, fees charged by your estate agent, solicitor and surveyor, plus removal, storage and travel costs, it can amount to a five-figure sum, which deters many homeowners from trading down during retirement.

equity release: using your property as a pension If you don’t want the hassles and stress of moving, or think that downsizing isn’t for you, then you might consider an equity release scheme. If you are aged between, say, sixty and ninety-five and have a house with at least £60,000 of equity in it (the difference between the house’s value and any mortgage or loans still secured against it), then you can borrow against the value of your home and thus release some of your equity. This new debt is then usually repaid from the proceeds of selling your home after your death. In essence, equity release falls into two categories. There are lifetime mortgages, which involve taking out a secured loan against your home and allowing the interest to roll up until your death. If you want to unlock the value of your home over a period in staged or ad hoc withdrawals, you can opt for a variation known as a drawdown lifetime mortgage. By withdrawing capital only as and when you need it, your overall interest bill reduces. The alternative is a home reversion scheme, whereby you sell a proportion of your home, say, 30%, in return for a lump sum, usually from a life insurance company. However, there are a number of drawbacks with equity release, 22

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 23

including arrangement and valuation fees and, more importantly, the interest rates on offer, which are usually considerably higher than the Best Buy rates paid by homebuyers or remortgagers. What’s more, if you live a long time, these rates could compound up over decades, eating into your remaining equity and your family’s inheritance. For this reason it is often sensible to discuss this with your family. For example, a £50,000 loan at, say, 6% a year would grow to £160,357 over twenty years, or £287,175 over thirty years. Although lifetime mortgages offer a guarantee that the loan will never exceed the value of the property, equity release remains an expensive, inflexible and risky gamble. The risks are increased further if you use the money to invest in the stock market, as you are borrowing to invest, known as gearing. Unless you have a life-shortening illness and need a lump sum for immediate needs, equity release could prove to be a costly mistake. Indeed, this sector, known as “home income plans” blew up in the Eighties and early Nineties, with pensioners losing hundreds of millions of pounds after borrowing against their homes and investing this capital in the stock market. If you are interested in equity release and prefer this to raising a normal mortgage or remortgage against your home (which may be a cheaper and more flexible option), then contact a member of Safe Home Income Plans (SHIP) at www.ship-ltd.org Age Concern publishes a free guide to equity release, which you can order on 0800 009 966 or download from www.ageconcern.org.uk/AgeConcern/fs12.asp

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 24

buying a second home, here or abroad One of the joys of retirement is that when you give up working in a particular location, you are no longer tied to one specific area or part of the country. Free of the restrictions of commuting, you have complete freedom to decide where you’d prefer to live, rather than where you’re forced to live. For example, lots of retired people decide to move home in order to be closer to their children or grandchildren, while others move abroad to enjoy the better weather and improved health that come from living in warmer climes. However, rather than give up a lifelong link to a particular region, many retired people choose to buy a second home in order to enjoy the best of both worlds. Before you go down this route, it’s worth taking some time to consider the following: Buying a second home is almost always an expensive event. When you add up the cost of stamp duty, estate agents’ commission, removal charges, legal and surveyor’s fees, and so on, the upfront expenses can amount to between 5% and 10% of the purchase price. What’s more, owning a second home is somewhat similar to owning a yacht, because you need to budget for the ongoing costs, as well as the purchase price. Expenses which you need to take into consideration include repairs, decoration and alterations, insurance, Council Tax, energy bills and so on. Hence, you’d be well advised to approach these calculations with your best budgeting hat on.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 25

If you plan to rent out your second home as a holiday let, for example, during the summer months, then you need to be aware of the tax regulations governing this situation. In general, income from Uk holiday lets is taxed as trading income, rather than investment income. You can normally claim capital allowances on fixtures and fittings, or an annual wear-and-tear allowance of 10%. The running expenses of a holiday home can largely be offset against income thus reducing your profit and tax, apart from expenditure which relates to your own occupation of the property. In addition, to qualify as furnished holiday accommodation, the property must be available to let for at least 140 days per tax year and actually be let for at least 70 days. There are also restrictions governing how long a single tenant can continuously occupy the property. Nevertheless, despite the above rules and restrictions, you will still have ample time to enjoy your second home. Crucially, if you plan to buy a second home overseas, or intend to retire abroad, it pays to take expert advice from local, English-speaking professionals prior to taking the plunge. Before snapping up that villa in the latest hotspot or fashionable holiday resort, make sure that you have a full understanding of local property laws, taxation, the cost of living, and the health and benefits system. You should also take advice on how your Uk pensions and other benefits will be affected should you acquire non-resident status. Finally, if youâ&#x20AC;&#x2122;re planning to make a large (or even a modest) purchase in a currency other than sterling, it makes sense to plan ahead and secure the very best exchange rate. The Hargreaves Lansdown Currency Service can be found at www.h-L.co.uk or you can telephone 0117 311 3257.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 26

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 27

4) You ANd YouR MoNeY

In this section, we look at ways to make better financial decisions when investing, saving and spending money.

budgeting Budgeting is the very cornerstone of good financial planning. Indeed, if you don’t monitor your income and expenditure, then you’re not in full control of your household budget; “if you don’t measure it, you can’t manage it”. Naturally, if you fail to keep an eye on your spending, you’ll end up living beyond your means, which is a bad habit worth avoiding. Furthermore, as you approach retirement and eventually stop work, your spending habits and sources of income will evolve dramatically over time. For example, your mortgage should be paid off, your children may have flown the nest, and your commuting costs will shrink to zero. On the other hand, it’s likely that you’ll be spending more on food and drink, holidays and other discretionary spending. One way to discover how your household budget will change post-retirement is to keep a spending diary for a month. In it, you should record all of your expenditure (whether by cash, cheque or plastic card), plus one twelfth of the yearly expenses which you pay by standing order, direct debit, etc. In addition, tot up your annual earnings and income from all sources and take a twelfth of this figure. You now have estimates for your monthly income and expenditure. The next step is to trawl through these figures and make educated guesses as to how each contribution 27

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 28

will change after retirement. This should give you a good idea of how much your budget will be when you stop working, especially if you’ve erred on the side of caution.

Credit cards Although there seem to be more credit cards than there are people in the Uk, they are something of a double-edged sword. Used wisely, a credit card is a convenient tool which enables you to enjoy interest-free credit on your spending, plus cashback and other rewards. On the other hand, use it carelessly and it turns into a WMD: Weapon of Money Destruction! If you are a sensible credit card user who always pays off your monthly bill in full, look for a card which has a long interest-free period (up to 59 days) and rewards your loyalty with cash rewards. It’s possible to earn 1% cashback on all of your spending, which amounts to £10 for every £1,000 spent, with introductory offers boosting this to 2% or even 3% for a few months. On the other hand, if you’re carrying any credit card debt at present, it makes sense to repay it before you stop work. One way to speed up this process is to switch your debts to one of the dozens of credit cards which charge no interest on balance transfers for an introductory period. By using a “0% credit card” wisely, you can avoid paying interest on your plastic balances for a year or more. Though balance transfer fees can make this less attractive. Research suggests having a credit card tends to increase one’s spending, so you may prefer to give your credit card a miss and stick to paying with cash, cheques or debit cards. However, paying by credit 28

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 29

card for goods and services costing between £100 and £30,000 gives you extra legal protection if items are damaged or fail to arrive. In these situations, under Section 75 of the Consumer Credit Act 1974, you can claim against your credit card company, as well as the supplier. This protection is especially valuable when a supplier goes bust, taking your money with it!

The best place to compare and search for credit cards is in the Best Buy pages of the weekend newspapers, on the money pages of Ceefax and Teletext, or on the internet.

holiday spending Although retirement isn’t necessarily one long holiday, many retired people do take several foreign holidays, especially keen skiers (“snowbirds”) and sun-worshippers. When you travel abroad, as well as taking the right travel insurance with you, it’s crucial to choose the right provider of foreign currency. The exchange rate can vary significantly from one provider to another so it pays to shop around. Additionally, it pays to take the right plastic with you when you’re travelling abroad. Almost all credit cards charge a “currency conversion charge” of 2.75% on overseas spending. However, cards issued by Abbey the Nationwide Building Society and the Post Office don’t currently levy this fee, which saves you almost £14 for every £500 spent.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 30

inflation Inflation is the tendency for the price of goods and services to rise over time. An inflation rate of, say, 3% indicates that goods priced at £100 a year ago now cost £103. Although inflation affects everyone, it hits retired people much harder than it does the adult population at large, for two reasons: First, unlike working people, whose earnings tend to rise faster than inflation, most pensioners’ incomes are fixed or, at best, index-linked. This means that their incomes and benefits generally keep track with one of the headline inflation indices, usually the Retail Price Index (RPI). Second, because certain expenses weigh more heavily on pensioner households than on other groups, particularly Council Tax, heating costs and food bills, the cost-of-living increases experienced by pensioners are usually higher than general inflation. Indeed, ‘pensioner inflation’ has been running above general inflation for the last ten years. Thus, although the government has legislated to link pensions to earnings at some point after 2012, over the long term inflation will always be one of the pensioner’s biggest enemies, even allowing for periods when average RPI is negative as it is now.

investing A man currently aged 65 can expect to live to 83; for women of the same age, life expectancy is now 85. Thus, inflation has plenty of time to damage your retirement income. Hence, it makes sense to invest a 30

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 31

proportion of your capital in investments which seek to provide a rising income and/or capital growth which will outpace inflation over time. Of course, the investment needs of older persons are generally very different from those of, say, younger workers. Indeed, we spend our working lives setting aside some of our income to produce capital, which is then turned back into income to help fund our retirement. In effect, this money has come full circle! So, what are the best ways to generate income from spare capital after you retire? The answer depends on your own attitude to risk: specifically, how comfortable you are with watching the value of your capital and your level of income vary over time. Generally speaking, the more income that an investment produces, the less likely it is that the underlying capital will grow over time. Thus, much of investing strategy is a toss-up between income and capital growth. Note that the most sensible approach is to generate income from a variety of sources, in order to smooth out the changing returns from different assets over time. Furthermore, itâ&#x20AC;&#x2122;s a smart move to keep a generous sum in cash, in order to allow for unforeseen events and major purchases. Itâ&#x20AC;&#x2122;s up to you how much you put aside in your rainy-day fund, but six to twelve monthsâ&#x20AC;&#x2122; living expenses would be a start. In addition, it makes good sense to review your portfolio at intervals to make sure that it still meets your ongoing needs. One simple way to do this is to keep all of your investments in one place, which enables you to have an instant overview of your position. By transferring your existing investments (and subsequent purchases) into our hL Vantage service, you can earn discounts on initial 31

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 32

charges (which can be reduced to zero), plus annual loyalty bonuses on funds inside your ISAs, old PEPs and those held outside these wrappers (excluding the Vantage SIPP). This improves your returns, and is provided at no charge. For more information, visit www.h-L.co.uk or telephone our investment helpdesk on 0117 900 9000.

investing in equity income funds History suggests that the best way to beat inflation and achieve a rising income over the long term is to invest in shares. Naturally, this approach is not without risk, but it can produce superior returns: over the last 20 years, the total return from shares (growth plus income) has beaten inflation by almost 5%. This explains why equity income funds are popular with investors both young and old. Equity income funds aim to pay higher dividends (income) to investors than that provided by the stock market as a whole. With interest rates and inflation relatively low in historical terms, the yields from equity income funds are around 5% to 7% a year, which compares well with deposit accounts. (Think of the yield of a share or fund as being similar to the interest rate paid on a savings account, although the value of your capital doesnâ&#x20AC;&#x2122;t increase in a savings account.) When comparing equity-based investments with savings accounts, you need to balance the potential of a rising income plus capital growth from shares against the fact that a savings account provides capital security but the interest paid may not keep up with inflation. Whatâ&#x20AC;&#x2122;s more, the interest rates paid by savings accounts are quoted gross (before tax), so a gross rate of 5% a year becomes 4% after basic-rate tax, or 3% after higher-rate tax. On the other hand, equity income funds quote and pay their income net of basic-rate tax. 32

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 33

This means that basic-rate taxpayers have no further tax to pay, but higher-rate taxpayers must pay an extra 22.5% of the gross amount via their tax returns. By investing inside your annual Individual Savings Account wrapper (£10,200 if you are aged 50 or over in the 2009/10 tax year, £7,200 for the under 50s), you can avoid any tax on income and capital gains (except tax deducted at source from Uk equity dividends). Potentially, equity income funds can be a good way of providing older investors with a regular income that can increase over time. In order to pay reliable, above-average dividends, these funds tend to invest in solid, well-established companies, which generate a lot of cash and distribute a decent proportion of this to their shareholders. Hence, by investing in an equity income fund, you spread your investments - and your risk - across dozens of different companies, many of which will be members of the blue-chip FTSE 100 index of Britain’s biggest firms. Of course, companies which pay healthy dividends also tend to be successful businesses - often market leaders in their field - and their share values should hopefully increase over time. Thus, even if you don’t need a regular income from your capital, investing in equity income funds can still pay off. Instead of collecting dividends from your fund, you leave them to roll up inside the fund, which further boosts your capital growth. In addition, equity income funds tend to be less volatile and lower risk than those funds which invest in racier sectors, such as smaller companies, emerging markets and technology firms. Thus, equity income funds give you less of a roller-coaster ride during periods of stock-market upheaval. Nevertheless, there is evidence to suggest that the combination of good dividends plus capital growth enables equity income funds to outperform growth-orientated funds in the long run. There is an excellent range of established equity income funds run by 33

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 34

experienced managers with good track records. Hargreaves Lansdown is in regular contact with these fund managers, and we can provide you with up-to-the-minute research on which funds and managers we think could produce the goods for you.

More investment ideas Naturally, you can generate income from capital by earning interest from cash which is more secure, or by investing in fixed-interest securities such as corporate or government bonds which are less volatile than shares. However, although the income from bonds may seem attractive, and can currently exceed 5% a year, there is usually little prospect of capital growth. On the other hand, the income from bonds is tax-free inside a tax shelter known as an Individual Savings Account (ISA), as is savings interest from a cash ISA, which can be attractive to tax payers. Another option for more cautious investors seeking income is to use a lump sum - such as the tax-free cash from a pension - to buy a purchased life annuity. This provides you with a higher income, but at the expense of your capital. However, purchased life annuities do offer a key tax advantage: because part of the payments are deemed to be a return of your capital you are not liable for income tax on this element of income. Other investment options to consider include National savings & investments savings products, some of which provide a tax-free income. Investment bonds can also have their merits in certain circumstances. Finally, itâ&#x20AC;&#x2122;s worth noting that your investments donâ&#x20AC;&#x2122;t necessarily have to 34

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 35

generate an income in order for them to supplement your retirement earnings. For example, you can invest in growth-orientated investments and then withdraw your capital over time by selling a slice of these each year. This can be very tax efficient, as each person has an annual Capital Gains Tax allowance, which is worth £10,100 in 2009/10. However, withdrawing capital to fund your lifestyle can prove hazardous. It exaggerates your losses in the bad times and it is the Hargreaves Lansdown view that where possible you should live from income rather than capital. As an expert investment house, Hargreaves Lansdown offers two different, yet complementary, services to investors. If you are comfortable making your own investment decisions and simply want the biggest discounts on investment products, then we suggest trying our discount service. At Hargreaves Lansdown, we slash our commissions to the bone, which means that you receive big discounts on initial charges, plus we offer loyalty bonuses in our Vantage Service (but not in our SIPP) where the ongoing fees levied by hundreds of popular funds are discounted and returned to your Vantage account as cash. For more details of this service, please call us on 0117 900 9000. If your needs are a little more complicated, or you feel that you’d benefit from face-to-face financial advice from a qualified professional, you should look into our advisory and portfolio management service. To arrange a free initial consultation, please call 0117 317 1690. Whichever service you choose, you’ll benefit from Hargreaves Lansdown’s expert opinions and information on funds, insurance, investments and pensions, plus magazines such as our ever-popular Investment Times and guides such as this to help improve your financial knowledge. 35

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 36

Mortgage and other debts Although it makes sense to get rid of your biggest debt before retirement, more and more workers are retiring before their mortgages are paid off. Frankly, the last thing you need when you call a halt to your working life is to have a mortgage hanging around your neck like a millstone, so getting rid of it should be a top priority (alongside maximising your retirement income). Indeed, it can make good financial sense to direct your spare cash towards reducing your mortgage, rather than depositing it into a savings account. This is for two reasons: first, your mortgage interest rate is likely to be higher than the interest rate paid by even the highest-paying savings accounts. Second, you pay tax on savings interest, but paying extra chunks off your mortgage incurs no tax. Hence, itâ&#x20AC;&#x2122;s normally far more financially advantageous to pay, say, an extra ÂŁ500 off your mortgage at an annual interest rate of, say, 6% a year, rather than earn interest on the same amount at a mere 4% a year after tax. This applies all the more when analysing more expensive debts, such as credit card and overdraft borrowing, which can rack up interest at upwards of 15% a year!

savings accounts When compared to the population as a whole, pensioners tend to keep considerably more of their wealth in two asset classes: cash and property. That's why itâ&#x20AC;&#x2122;s absolutely vital for pensioners to search out the highest interest rates on their emergency fund, rainy-day money or nest egg - and to check often to make sure that these rates remain attractive. 36

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 37

Pensioners who don’t earn enough to pay tax on their savings interest should complete a form R85 which will enable them to receive their interest without tax being deducted at source (the R85 form is available from the bank or building society). Pensioners who do pay tax on their savings interest would do well to direct the first £3,600 of savings each tax year into a tax-free savings account known as a cash ISA (Individual Savings Account). By transferring savings from a taxable savings account to cash ISAs each tax year, a couple can currently squirrel away up to £10,200 a year from the taxman’s grasp. However, take note that each person over 50 in the 2009/10 tax year has an annual ISA allowance of £10,200. You can invest up to £10,200 in a Stocks and Shares ISA, or up to £5,100 in a Cash ISA with the balance (within the overall limit) invested in a Stocks and Shares ISA. Those under 50 can invest up to £7,200 in a Stocks and Shares ISA, or invest up to £3,600 in a Stocks and Shares ISA with up to another £3,600 in a Cash ISA. These investors will be eligible for the new £10,200 allowance only from 6th April 2010. Hence, you should consider Cash ISAs carefully if you want to maximise your stock-market investments. ISA rules have changed to allow greater flexibility in the use of ISA allowances. When you’re looking for a high-interest savings account, here are three things worth noting: first, if you surf the net and are prepared to manage your savings online, then you can earn higher rates of interest than those paid by branch or telephone-based savings accounts. Second, it used to be the case that the highest rates of interest were paid by notice accounts, which restrict access to your cash or the number of withdrawals. These days, this is no longer the case, so make sure that you check rates for easy-access and no-notice accounts.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 38

Third, there are a number of savings accounts which are specifically aimed at those who are retired or approaching retirement, usually identified by names such as “Fifty Plus”, “Sixty Plus”, “Silver Savings” and so on. The best of these accounts pay top rates of interest, so don’t ignore them. As we’ve already explained, your spending habits are likely to adjust once your salary no longer becomes your main source of income. In the next section, we show you simple ways to reduce your outgoings without compromising your quality of life. However, it’s worth remembering that retirement gives you more free time which you can use to your advantage. For example, you could put aside more time to manage your expenditure more closely, or become better at bargaining. Always bear in mind that the price you see is the maximum price which you should pay, not your ideal price. Hence, it pays to brush up your haggling skills!

Long term care The cost of long term care can easily be in excess of £20,000 per year and should be factored into your retirement planning. Sometimes families can help rather than you needing to go into a home. Yet if you do need long term care it can eat into your income and possibly erode your capital and your family’s inheritance. Some help may be available from your local authority but benefits are means tested. It is worth taking advice and making plans well in advance. Further information is available from Age Concern at www.ageconcern.org.uk

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 39

5) QuiCK tiPs: gAiNs without PAiN

While many active pensioners enjoy skiing and other taxing sports, others prefer SKIing: Spending the Kids’ Inheritance! However, although it’s entirely up to you what you do with your hard-earned money, it certainly doesn’t make sense to pay more for goods and services than you need to. Hence, in this section, we look at quick and easy ways to trim your bills, and how to get more bang for your buck. Without further ado, here are money-saving tips galore. 39

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 40

Annuities: more pounds from your pension As we mentioned in section 2, before taking the annuity (retirement income) offered by your existing pension provider, it’s vital to shop around for a better annuity rate elsewhere. Doing so could increase your retirement income by up to 30% every year for the rest of your life, which is the difference between receiving an annual income of £10,000 and £13,000. At Hargreaves Lansdown, we will do all the hard work for you at no extra cost. For more details of our professional and hassle-free annuity service, visit www.hlannuity.co.uk or telephone 0117 980 9940.

Cheaper medicine and prescriptions When buying medicines over the counter or on prescription, it’s always worth asking your pharmacist if there is a generic version of any branded medicine that you’re buying. The active ingredients in generic medicines are chemically identical to their branded rivals, but cost a fraction of the price. For example, ibuprofen is the generic version of popular painkiller Nurofen, but costs around a quarter of the price! (Before switching medicines, always speak to your GP or pharmacist.) You should note that everyone who is sixty or over is entitled to free NHS prescriptions and sight tests. However, if you are under sixty and are frequently prescribed medication which you have to pay for on prescription, you may save money by buying a prescription prepayment certificate, which costs £28.25 for three months or £104.00 for a year (subject to change). With prescriptions costing £7.20 each in England, a certificate is worth buying if you have four or more prescriptions in a three-month period, or more than fourteen during the course of a year. 40

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 41

Communications It makes no sense whatsoever to pay more than you have to for telephone and internet services. Shopping around online can be a great way to slash the cost of Uk and international calls, call and use mobile phones cheaply, pay less for internet access, avoid expensive premium-rate numbers, and even enjoy completely free PC-to-PC calls using Voice Over Internet Protocol. To learn how to do this, visit www.moneysavingexpert.com/utilities

Council tax If you suspect that your Council Tax is too high because your home is in too high a band, you can appeal at www.voa.gov.uk/council_tax/can_i_appeal.htm Single-person households are entitled to a quarter off their Council Tax (25% reduction). In addition, you may be entitled to Council Tax Benefit, see www.dwp.gov.uk/lifeevent/benefits/council_tax_benefit.asp or call the Pension Credit, Housing Benefit and Council Tax Benefit helpline on 0800 991 234.

Current accounts Most traditional bank accounts pay interest on credit balances of just 0.1% a year before tax, while charging overdraft interest rates that can exceed 30% a year on unauthorised borrowing. To find a better bank account, check the Best Buy pages of the weekend newspapers, the money pages of Ceefax and Teletext, or search on the internet.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 42

energy-saving tips To find cheaper gas and electricity tariffs (which involves no re-plumbing or re-wiring), visit www.energyhelpline.com or call 0800 074 0745. To learn how to reduce your energy consumption and wastage, visit the Energy Saving Trust at www.est.org.uk. Remember to turn off appliances completely, rather than leaving them on standby, plus your electricity supplier may sell long-life bulbs at discounted prices. There is also an annual Winter Fuel Allowance which retired people should claim. If you receive Attendance Allowance or similar, you may qualify for assistance with insulating your home and replacing your boiler - check with your local council.

filling your time (hobbies and the internet) It will take time for you to adjust to retirement, so it’s important to maintain a regular structure to your day. You may decide to spend your new-found leisure time by spending more time on your hobbies or developing new interests. You don’t have to stick to DIY and gardening, because many events and organisations offer reduced rates to the over-sixties. For example, you can enjoy discounts at cinemas, exhibitions, galleries, gardens, museums, theatres and so on. What’s more, a free bus pass or Senior Railcard will provide you with low-cost travel to your destinations. When it comes to keeping your memory and intellect intact, it’s “use it 42

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 43

or lose it”, so make sure that you set aside part of each day for mental exercise and challenges. The internet is a treasure trove of information on hobbies, sports, interests and pastimes, so it pays to get online as a ‘senior surfer’.

giving to charity Rather than throwing your spare change or a note into a collecting bucket, make charitable donations via Gift Aid. If you’re a taxpayer, Gift Aid currently turns a donation of 78p into £1, and higher-rate taxpayers can claim back any higher rate relief they are entitled to via their tax returns. Learn more at www.hmrc.gov.uk/charities

insurance After you’ve retired, be sure to shop around for cheaper car and home insurance. As you’re no longer using your car for commuting and work use, your premium should come down. Also, as you’ll spend more time at home after retiring, your buildings and contents insurance should be cheaper.

in general, you should shop around for all types of insurance policies, including: •

Boiler/heating cover;

•

Breakdown cover;

•

Car insurance; 43

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 44

•

Dental insurance;

•

Healthcare Cash Plans (these pay bills for dental, medical, optical and alternative remedies, with the Best Buys paying out six times what they cost!);

•

Home insurance (buildings and contents insurance);

•

Life insurance (ask yourself: do you still need this cover and, if so, how much?);

•

Payment protection insurance (very expensive for the over-fifties);

•

Pet insurance;

•

Private medical insurance; and

•

Travel insurance.

Being of a certain age, you will already have discovered that one cost keeps getting more expensive as you age: insurance. In particular, the premiums for life, health and travel insurance spiral upwards as you head into your sixties. One way to fight back against the ever-increasing cost of this protection is to take steps to improve your general health and well-being. By reducing your exposure to certain risks, you improve your attractiveness to insurers and, therefore, bring down the cost of your cover. Although you should always speak to your doctor before embarking on any major change to your diet, exercise regime or lifestyle, here are four ideas to improve your physical and financial fitness: 44

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 45

•

Alcohol: moderate drinking may have various health benefits, but drinking to excess is a high-risk activity. Hence, keep your alcohol consumption within the government guidelines: 21 units of alcohol per week for males and 14 units for females.

•

smoking: although the health risks are well documented, around three in ten British adults smoke. If you’d like to join the Uk’s eleven million ex-smokers, and save a fortune not only on the cigarettes but also on your insurance policies, call the NHS Smoking Helpline on 0800 022 4322, or visit www.gosmokefree.co.uk

•

diet: being retired means that you can exercise more control over your eating habits, so no more snatched meals between meetings! Dieticians recommend that we all eat at least five portions of fruit and vegetables per day, plus older people may benefit from vitamin supplements.

•

Keeping fit: taking regular exercise helps to combat obesity, improve circulation, reduce the risk of various health problems, and improve posture, suppleness and mobility. It also triggers the release of mood-enhancing chemicals such as endorphins and serotonin, which help to combat depression and the impact of pain.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 46

Learning and education If you’re interested in learning new skills or studying new subjects, the best place to start is the University of the Third Age at www.u3a.org.uk (Tel: 0208 466 6139), which encourages lifelong learning for those no longer in full-time gainful work. The Open University at www.open.ac.uk (Tel: 0845 300 6090) also provides adult education and distance learning courses, as will your local Adult Education Colleges. In addition, there are some excellent resources available at the Government Direct website: www.direct.gov.uk/educationAndLearning/AdultLearning/fs/en

Make money from your existing investments It’s a good idea to give your existing portfolio of investments an occasional health check. At Hargreaves Lansdown, we will be happy to show you how your portfolio breaks down by sector, helping you identify any areas where you might be over-exposed, plus any funds that we feel are weak and require your attention and possibly help you to manage it more efficiently. What’s more, by bringing all of your investments under one roof, you will have an “at a glance” summary of your portfolio. Even better, by using our free HL Vantage Service, you can earn annual loyalty bonuses on the funds held in your ISAs, Old PEPs, unit trusts and OEICs (excluding the Vantage SIPP). This helps to improve your returns, but is provided at no cost to you. For more information, visit www.h-L.co.uk or telephone our investment helpdesk on 0117 900 9000.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 47

Price-comparison websites To buy everything from books and CDs to electrical and household appliances for less, try the following websites: Leading price-comparison websites: www.dealtime.co.uk, www.froogle.google.co.uk, www.kelkoo.co.uk and www.pricerunner.co.uk For books: www.best-book-price.co.uk, www.bookbrain.co.uk, www.bookbutler.com and www.bookkoob.co.uk For DVDs: www.best-dvd-price.co.uk, www.dvdpricecheck.co.uk and www.find-dvd.co.uk and these online retailers: www.amazon.co.uk, www.blahdvd.com, www3.cd-wow.com and www.play.com

shopping and supermarkets If youâ&#x20AC;&#x2122;re planning a big shop, you can save a fortune by checking these supermarket-comparison websites: www.fixtureferrets.co.uk, www.madaboutbargains.co.uk/offers/off_Your_trolley.htm and www.trollydolly.co.uk Also, www.mysupermarket.co.uk checks the price of your shopping basket or trolley of goods at Asda, Ocado (Waitrose), Sainsbury's and Tesco.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 48

travel and leisure Many people seize on retirement as an opportunity to explore the Uk, travel the world or visit family and friends in far-flung locations. However, the cost of taking several holidays or trips abroad each year can really mount up, so it pays to shop around for car hire, cruises, hotels, flights, package holidays and so on. These websites will help you to get more pleasure for less treasure: www.cheapflights.co.uk, www.ebookers.com, www.expedia.co.uk, www.lastminute.com, www.opodo.co.uk, www.teletextholidays.co.uk and www.travelocity.co.uk

Volunteering and vocational work Retired people are the backbone of volunteering in the Uk - a massive, unpaid workforce of individuals who use their skills and experience to benefit others. If you are interested in unpaid volunteering to help others and get involved in your local community, visit www.volunteering.org.uk and the Retired and Senior Volunteering Programme (RSVP) at www.csv-rsvp.org.uk

water bills If you have more bedrooms in your house than you do people, then switching to a water meter could bring down your water bill by up to ÂŁ200 a year if you are a low water user (for more information on switching to metered water, contact your water supplier).

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 49

6) seCuRiNg YouR futuRe

In the previous section, we looked at ways to protect yourself and your assets by paying less for your insurance. Now we take a look at other ways to safeguard yourself, your family and your future.

home and personal security As you get older, itâ&#x20AC;&#x2122;s natural to become more worried about your personal safety and security. However, with a few simple steps, you can reduce the risk of becoming a victim of crime and other hazards. Home security: a significant proportion of all break-ins occur at the rear of properties, so make sure that your rear doors and windows have 49

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 50

secure locks fitted. For more advice on home security, visit www.crimereduction.gov.uk/cpghs.htm or contact your local Crime Prevention Officer. Also, make sure that you have working smoke alarms fitted in your home; they cost as little as £5 each in DIY stores. Learn more at www.firekills.gov.uk Financial and personal security: financial fraud is a fast-growing crime, especially identity fraud. Learn how to avoid being scammed at www.stop-idfraud.co.uk. For more information on staying safe when you’re at home or out and about, visit www.crimereduction.gov.uk/personalsafety.htm Finally, to learn how to protect your computer from spam (unwanted email), spyware, Trojans, viruses and other dangerous attacks, visit www.getsafeonline.org

inheritance tax (iht) If you plan to leave a legacy to your spouse and/or children, you should take steps to reduce your estate’s liability to Inheritance Tax (IHT). After deducting the nil-rate band (which is £325,000 in the 2009/10 tax year), your remaining estate is liable to Inheritance Tax at 40%. So, even if you've never paid higher-rate tax during your working life, you could hand over two-fifths of everything you own in excess of the nil-rate band when you die. However, there are a number of perfectly legal steps that you can take to reduce the size of your estate and your liability. Here are ten techniques currently in use:

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 51

Recent legislation means that on your death the unused proportion of your nil rate band can be claimed by your surviving spouse or civil partner for use on their death. For example if you were to die in the 2009/10 tax year and use half of your nil rate band the nil rate band of your spouse could be increased by 50% on their death. If you had a spouse or civil partner who has died then it should be possible to claim the unused proportion of their nil rate band to be used on your death.

Subject to certain conditions, you can claim business property relief of 100% against IHT on certain qualifying assets, such as qualifying AIM-listed shares and shares in unquoted trading companies which have been held for at least two years.

You can make potentially exempt transfers (PETs). If you make an outright gift to individuals or “disabled” trusts, do not retain a direct or indirect benefit in the assets being gifted, and survive for seven years or more, the value of the gift falls outside of your estate for IHT purposes. However, if you die within three to seven years of making any gift, taper relief may reduce IHT payable on the gift.

You can use your annual exemptions. Every tax year, you can gift up to £3,000. In addition, any unused exemption from the previous tax year can be carried forward to the current tax year, but no further. Thus, a husband and wife could gift assets worth £12,000 in the 2009/10 tax year if they both have the previous year's exemptions available.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 52

You can make small gifts. Each tax year, you can gift up to £250 to any number of people, completely free of IHT. A pair of grandparents could give each six grandchildren £250 a year, a total of £3,000 a year.

You can make marriage gifts. A parent can gift £5,000 to a child on the occasion of their marriage; a grandparent can gift £2,500; other persons can gift £1,000 - all completely free of IHT.

You can make regular IHT-free gifts out of income, but you must show that these gifts are habitual (though not necessarily annual), are made from post-tax income, and leave you with enough income to maintain your standard of living. This significant concession is widely under-used, particularly by higher earners.

You can use your spousal exemption. Married couples (and same-sex couples who are in a Civil Partnership) can take advantage of the exemption for transfers between spouses, either during their lifetime or on death. This can be helpful if both spouses wish to take advantage of any gift exemptions or to spread any potentially exempt transfers between them. This exemption is capped at £55,000 for a transfer from a Uk-domiciled spouse to a foreign-domiciled spouse.

You can be generous and make charitable donations. Donations to charities, either during your lifetime or via your Will, are currently IHT-exempt and subject to certain conditions, gifts to political parties, gifts for national purposes and transfers to employee trusts also escape IHT. If the idea of the Treasury taking 40% of your life’s wealth appals you, and 52

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 53

you have no dependants or surviving relatives, you could leave your entire estate to good causes! 10.

A key weapon in the fight against IHT is a particular type of life insurance policy known as a joint life, second death policy. For married couples, a policy of this type can be used to provide a payout on the second death, which can be used to meet all or part of an IHT bill. As the payout is made on the second death, a policy of this kind charges lower premiums than one which pays out on the first death. Whatâ&#x20AC;&#x2122;s more, since these policies will nearly always be written in trust, any payout does not form part of the deceasedâ&#x20AC;&#x2122;s estate and therefore does not normally attract IHT. Thus, this approach is a quick and simple way to settle an IHT bill or other liability.

Inheritance tax is a complex subject and the government has taken to tinkering with the laws surrounding trusts and IHT. Hence, this is an area where expert professional advice is essential.

Make a will and plan ahead! If you would like to have a say in what happens to your assets and possessions after you die, then you MUST have a Will. Otherwise, your estate will be distributed according to the somewhat unwieldy intestacy laws, which can cause major upsets, family rifts and even legal battles.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 54

Itâ&#x20AC;&#x2122;s also a sound idea to consider giving your spouse or partner the legal right to take over the management of your finances if you are mentally or physically unfit to cope with your affairs, using what is known as a lasting power of attorney (LPA).

Manage your assets better No-one wants to waste their retirement years ploughing through piles of paperwork several times a year, simply to get to grips with their portfolio. Thus, it makes sense to consolidate your investments under one roof, in order to have an easily accessible snapshot of your wealth, exposure to risk, and so on. You can do this by transferring your existing funds to our hL Vantage service, with the added benefit that we can provide discounts on future investments (for some funds, we can wipe out initial charges altogether). You can also earn annual loyalty bonuses on funds inside your ISAs, Old PEPs, and those held outside these wrappers (excluding the Vantage SIPP) - a service which we provide free to our customers. For more information, visit www.h-L.co.uk or telephone our investment helpdesk on 0117 900 9000.

Survive retirement 10.09:Survive retirement 10.09 29/10/2009 10:02 Page 55

8) gettiNg MoRe heLP