Five Ways to Fund Retirement
Not sure of the best way to plan for retirement? You don't have to put all your money in the hands of City cowboys who could lose you everything - check out these five different ways to fund your retirement.
Downsize
The kid’s have flown the nest, leaving you and your partner, if you have one, rattling around in a property that is too big for your needs as you reach retirement. Downsizing to a smaller, more comfortable property as you reach retirement age is a popular way to finance retirement, allowing you the opportunity to cash in on spiralling property prices and access the equity in your home. While downsizing within the same locality will give you access to additional money during retirement, many retirees choose to downsize to a different area, where property prices are cheaper and they get more value-for-money. For example, a couple selling a three bedroom property in Wimbledon, London, for approximately £450,000, would be able to buy a three bedroom bungalow in Brecon, Mid Wales, for approximately £225,000, allowing, if they have paid off their mortgage, a surplus of £225,000 on which to live off during retirement.
Best for: Those who have paid off their mortgage and seen their property rise considerably in value and who are looking to relocate to a different, cheaper, area to live.
Equity Release
For those who have a strong emotional attachment to their home, or who do not want the stress and strain of moving, but are ‘equity-rich-cash poor,’ equity release schemes are proving a popular option. As many as 23,470 lifetime mortgages worth over £1.015 billion were taken out between July 2005 and July 2006 by pensioners looking to raise extra capital through their homes. Equity release refers to the process of releasing or 'unlocking' part or all of the excess value on a property - excluding what is still owed on any mortgage. In order to apply for an equity release scheme, candidates need to be in their mid fifties, although some schemes start at sixty, and should own their home with no mortgage or have only a small loan outstanding. SHIP, the UK equity release industry body which represents more than 90% of the Equity Release sector, claims that interest rates for lifetime mortgages are currently more favourable than those for normal mortgages, especially when you consider that interest rates for equity release remains fixed for the life of the loan, unlike mainstream mortgages which can fluctuate in line with the Bank of England’s inflation base rate. However, many schemes charge a far higher level of interest, and anyone considering such a scheme should seek independent financial advice.
Best for: Those who do not want to move from their existing home, but are keen to tap into the increased value of their property.
Work
Perhaps not the most popular choice for anyone contemplating retirement, but at least now, following new anti-ageist legislation on 1st October, if you want to continue to work passed the traditional retirement age of sixty or sixty-five then you can. Also, new legislation, known as A-Day, have made it easier to continue to work, full or part-time, without it eating into your pension rights. Under previous legislation members of occupational pension schemes had to retire from work in order to draw their pension, whether they wanted to work or not. The new legislation allows people to ease their way into retirement, so that you can begin drawing on your pension while continuing to work, or choosing to work part-time. As the population ages, and state pensions continue to dwindle in size, working, even on a temporary or part-time basis, is likely to figure as prominently in the lives of the over-65s as it does with the younger generation.
Best for: Those with less money to live off during retirement than they would like, and for those who enjoy working, albeit on a part-time basis.
Pensions
Although they have suffered a justified bad press in recent years, with miss-selling scandals and shortfalls in many a scheme knocking consumer confidence and trust in pensions overall, the tax incentives to those who choose to fund their retirement in this way are extremely advantageous. New rules allow schemes the opportunity to be able to pay a tax free lump sum of up to 25% of the fund value and to a maximum of 25% of the lifetime allowance irrespective of the type of pension held, be it a private, occupational or voluntary contribution pension scheme. New rules also mean that if you want, you can even contribute a year’s salary into your pension, so long as it does not exceed the annual allowance limit for each tax year. The annual allowance for the 2006/7 tax year has been set at £215,000, rising by £10,000 each year to £255,000 in the 2010/11 tax year. However, if you make additional contributions above this excess, it will be taxed at 40%. Also, remember that if you hold too much money in your pension scheme, anything over £1.5 million, held over a lifetime, will be liable to 55 per-cent recovery charge tax.
Best for: Regular savers looking to plan ahead for their retirement by saving in a tax-efficient way.
Investment
Those who have had their finger’s burnt with pension-schemes-gone-bad, or those who like to keep a firm grip on their finances and be able to access their cash whenever their circumstances might change, rather than hang on until reaching retirement age, may prefer to simply invest their money and hope it generates enough money to fund retirement. A popular alternative to pensions in recent years has been buy-to-let property, which has seen massive returns as property prices increase. Research from the Society of Mortgage Lenders revealed that buy-to-let borrowing set new UK records in the first half of 2006, with lenders advancing 152,500 loans, worth a staggering £17.5 billion. But as the market becomes fiercely competitive, consumer group Which? stresses that the key for anyone thinking about investing in buy-to-let is to think of it in terms of running a business: turnover in the form of rent needs to exceed the costs of buying and maintaining the property. They suggest that as a rough guide, rent from a property should exceed the actual running costs by 25-30 per cent. The idea being that this profit will cover the owner for times when the property is not rented out and cover any large expenses such as a broken boiler, as well as costs such as tax on rental income.
But there are other investment options available to those looking to generate a retirement income, some of which include: investing in the stock market, either through the purchase of individual shares, or through investment trusts or funds, which offer a greater degree of security by spreading where your money is invested; bonds or gilts, which offer a far greater degree of investment security than shares and usually tie your money up for a certain period, typically, 5 – 10 years, and; ISAs, which are tax free wrappers that can be used for saving cash or investing in equities or equity related products and offer many tax breaks, as ISAs are exempt from
Capital Gains Tax.
Good for: Those who like to keep control of their finances and are weary of pensions, but are willing to spread their money around and take controlled risks where necessary in order to generate a retirement income.
Friday, 19 December 2008
What is an Annuity?
What exactly is an annuity?
Financial Advice for Retirement Planning: A regular income paid until the death of you or a dependant (wife, husband) bought with a fund of money (normally a pension fund).
What criteria do annuity providers rely on to determine how much they will pay you?
Financial Advice for Retirement Planning: How much money you have and how long you or your dependant included in the annuity are likely to live – that is receive the income.
Why is it important to shop around for an annuity?
Financial Advice for Retirement Planning: Everyone has the right to shop around. This is called the Open Market Option. Exercising that option may lead you to find that you are already with the top company but annuity rates vary from time to time and are based on your age, health, etc. Even a healthy person can increase their annuity income by a quarter or more if their existing pension company has low annuity rates. If you, or your dependant, smoke or are in poor health the increase can be substantially greater than this.
What different types of annuity are there?
Financial Advice for Retirement Planning: Guaranteed annuity; where either a level or increasing income is fixed at the outset.
Investment-linked annuity; where the income can go up or down (normally within limits) dependent upon the underlying investment.
Enhanced or impaired life annuity; if either the annuitant or his/her dependant is in poor health or smokes, etc, rates can be higher. This can be on a joint life or single life basis. Joint life pays a fixed percentage of the annuity to the dependant which is fixed at the outset. The annuity can be paid for a guaranteed period of up to 10 years, regardless of the death of the annuitant.
What are the risks involved in purchasing an annuity?
Financial Advice for Retirement Planning: That the annuitant dies earlier than the insurance company expects. Poor investment performance with investment linked annuities can lead to falling income. Significant increases in interest rates in the future could mean that you would be better off to have delayed purchasing the annuity. To delay can result in lower income due to annuity rates having fallen (much the most common occurrence).
Do annuities cover increased expenses such as nursing care?
Financial Advice for Retirement Planning: Pension annuities do not change in order to cover increased expenses such as nursing care using non pension capital. A specific type of annuity called an Immediate Care Annuity can be purchased to cover such costs.
Can you pass your annuity on to your estate if you die?
Financial Advice for Retirement Planning: Pension annuity income can pass to the estate during the guarantee period if the annuitant dies prior to the end of such a period. Otherwise no residual value is available to the estate. With non-pension annuities such as those covering nursing care, you can buy guarantees which effectively do rebate a set proportion of the capital if the annuitant has not received the benefit and these guarantee amounts do become part of your estate.
Will my partner be covered by my annuity?
Financial Advice for Retirement Planning: Your partner will be covered by an annuity only if you set it up on a joint life basis at outset. This can provide either the same amount of income as you or a specified amount or percentage.
Are pensions the best way to save for retirement?
Financial Advice for Retirement Planning: Pension savings have the highest tax breaks of any savings product. They are however designed for the purpose of providing pension income and are relatively inflexible, particularly as a source of capital to pass to the next generation.
If the fund you accumulate in a pension is planned to provide you and your dependants with the core income that you will need in retirement then there is no better way to accumulate a fund for this purpose.
However, you have to ensure that just because it is tax efficient you do not end up with an imbalance in your savings and too high a proportion of your assets in pension. However, given current levels of pension savings, this is a very rare problem
Financial Advice for Retirement Planning: A regular income paid until the death of you or a dependant (wife, husband) bought with a fund of money (normally a pension fund).
What criteria do annuity providers rely on to determine how much they will pay you?
Financial Advice for Retirement Planning: How much money you have and how long you or your dependant included in the annuity are likely to live – that is receive the income.
Why is it important to shop around for an annuity?
Financial Advice for Retirement Planning: Everyone has the right to shop around. This is called the Open Market Option. Exercising that option may lead you to find that you are already with the top company but annuity rates vary from time to time and are based on your age, health, etc. Even a healthy person can increase their annuity income by a quarter or more if their existing pension company has low annuity rates. If you, or your dependant, smoke or are in poor health the increase can be substantially greater than this.
What different types of annuity are there?
Financial Advice for Retirement Planning: Guaranteed annuity; where either a level or increasing income is fixed at the outset.
Investment-linked annuity; where the income can go up or down (normally within limits) dependent upon the underlying investment.
Enhanced or impaired life annuity; if either the annuitant or his/her dependant is in poor health or smokes, etc, rates can be higher. This can be on a joint life or single life basis. Joint life pays a fixed percentage of the annuity to the dependant which is fixed at the outset. The annuity can be paid for a guaranteed period of up to 10 years, regardless of the death of the annuitant.
What are the risks involved in purchasing an annuity?
Financial Advice for Retirement Planning: That the annuitant dies earlier than the insurance company expects. Poor investment performance with investment linked annuities can lead to falling income. Significant increases in interest rates in the future could mean that you would be better off to have delayed purchasing the annuity. To delay can result in lower income due to annuity rates having fallen (much the most common occurrence).
Do annuities cover increased expenses such as nursing care?
Financial Advice for Retirement Planning: Pension annuities do not change in order to cover increased expenses such as nursing care using non pension capital. A specific type of annuity called an Immediate Care Annuity can be purchased to cover such costs.
Can you pass your annuity on to your estate if you die?
Financial Advice for Retirement Planning: Pension annuity income can pass to the estate during the guarantee period if the annuitant dies prior to the end of such a period. Otherwise no residual value is available to the estate. With non-pension annuities such as those covering nursing care, you can buy guarantees which effectively do rebate a set proportion of the capital if the annuitant has not received the benefit and these guarantee amounts do become part of your estate.
Will my partner be covered by my annuity?
Financial Advice for Retirement Planning: Your partner will be covered by an annuity only if you set it up on a joint life basis at outset. This can provide either the same amount of income as you or a specified amount or percentage.
Are pensions the best way to save for retirement?
Financial Advice for Retirement Planning: Pension savings have the highest tax breaks of any savings product. They are however designed for the purpose of providing pension income and are relatively inflexible, particularly as a source of capital to pass to the next generation.
If the fund you accumulate in a pension is planned to provide you and your dependants with the core income that you will need in retirement then there is no better way to accumulate a fund for this purpose.
However, you have to ensure that just because it is tax efficient you do not end up with an imbalance in your savings and too high a proportion of your assets in pension. However, given current levels of pension savings, this is a very rare problem
Travel Insurance Tips for Older Travellers
Travel Insurance Check List
1. About You
Ensure that you are honest with yourself and the insurance companies by asking yourself questions such as these: Do you have any pre-existing medical conditions? Failing to declare these could invalidate your policy should you need treatment because of this condition treatment. What age will you be on the date of travel? All policies have age limits. Check you will not be over the age limit by the end of the travel period.
Consult a doctor before you travel to ensure you understand the risk associated with your travel destination – for example, what will the climate be like? Will this affect any medication you are taking? Ask your doctor for adequate medications to cover the whole trip and with some to cover possible delays as it may be more difficult to obtain overseas.
Regular exercises on flights can help reduce ankle swelling, and more seriously, the risk of thrombosis. Be prepared for long flights – make sure you drink enough water to avoid dehydration and ensure you have enough of any medication you require on your hand luggage. Angina and breathlessness can be worse at high altitude and sometimes in aircraft – it is wise to alert the cabin crew if you suffer from these conditions.
2. Where you are going?
Going to the EU? Make sure you have a European Health Insurance Card (EHIC). It will help to significantly reduce medical bills and enable travellers to receive the same medical treatment as local residents. Is the destination country deemed safe for travel? You may not be insured if you are travelling to a country where the Foreign and Commonwealth Office have advised against travel. For advice on countries not to travel to and for global information prior to travel visit www.fco.gov.uk/travel.
3. What about the small print?
Check the cancellation policy. Some insurers do not include this as standard. Likewise, check you are covered if you need to cancel your holiday because of a pre-existing condition. How much cover does your policy provide? Check the limits on what the insurer will pay for each claim on e.g. medical expenses. Do you need personal baggage cover? Many travel insurance policies do not include this as standard, but you may not need to add it if you are already covered under your home and contents policy; check the small print before you decide.
Check where valuables should be kept. Many policy conditions insist that valuables be kept in a safe place, as defined by your insurer, otherwise you may not be covered.
“As with any insurance policy, it’s important to scratch beneath the surface and check the small print to ensure you comply with your policy conditions," says Richard Mason of Moneysupermarket.com.
“Older travellers may want to consider approaching specific organisations such as Age Concern or Help the Aged for insurance, but as always it is worth comparing these quotes to check they are competitive.”
1. About You
Ensure that you are honest with yourself and the insurance companies by asking yourself questions such as these: Do you have any pre-existing medical conditions? Failing to declare these could invalidate your policy should you need treatment because of this condition treatment. What age will you be on the date of travel? All policies have age limits. Check you will not be over the age limit by the end of the travel period.
Consult a doctor before you travel to ensure you understand the risk associated with your travel destination – for example, what will the climate be like? Will this affect any medication you are taking? Ask your doctor for adequate medications to cover the whole trip and with some to cover possible delays as it may be more difficult to obtain overseas.
Regular exercises on flights can help reduce ankle swelling, and more seriously, the risk of thrombosis. Be prepared for long flights – make sure you drink enough water to avoid dehydration and ensure you have enough of any medication you require on your hand luggage. Angina and breathlessness can be worse at high altitude and sometimes in aircraft – it is wise to alert the cabin crew if you suffer from these conditions.
2. Where you are going?
Going to the EU? Make sure you have a European Health Insurance Card (EHIC). It will help to significantly reduce medical bills and enable travellers to receive the same medical treatment as local residents. Is the destination country deemed safe for travel? You may not be insured if you are travelling to a country where the Foreign and Commonwealth Office have advised against travel. For advice on countries not to travel to and for global information prior to travel visit www.fco.gov.uk/travel.
3. What about the small print?
Check the cancellation policy. Some insurers do not include this as standard. Likewise, check you are covered if you need to cancel your holiday because of a pre-existing condition. How much cover does your policy provide? Check the limits on what the insurer will pay for each claim on e.g. medical expenses. Do you need personal baggage cover? Many travel insurance policies do not include this as standard, but you may not need to add it if you are already covered under your home and contents policy; check the small print before you decide.
Check where valuables should be kept. Many policy conditions insist that valuables be kept in a safe place, as defined by your insurer, otherwise you may not be covered.
“As with any insurance policy, it’s important to scratch beneath the surface and check the small print to ensure you comply with your policy conditions," says Richard Mason of Moneysupermarket.com.
“Older travellers may want to consider approaching specific organisations such as Age Concern or Help the Aged for insurance, but as always it is worth comparing these quotes to check they are competitive.”
Women & Money - Avoid These Mistakes
Find out what mistakes women mainly make when dealing with money
The number of female millionaires in the UK is growing by around 11% each year – accounting for 46% of Britain's 376,000 millionaires, and recent research suggests women are set to dominate the rich lists in the years to come.
Plus, when it comes to entrepreneurship, in several regions across the country, women have overtaken men in starting up new businesses.
But at the same time, many women also make common financial mistakes that could prove costly in the future. Read on to make sure it’s not you.
Shopping Debt
It’s fun to joke about your Jimmy Choo habit, but being a shopaholic is no laughing matter – it can throw you into financial strife, often for an item you’ll never even use. Price comparison website uSwitch.com estimates that almost 800,000 British women can attribute half of their unsecured debt to fashion, and having an average personal shopping debt of a massive £8 000. In all, British women spend an average of more than £1,800 a year on clothes, totalling an astonishing £20 billion.
“In today's celebrity obsessed society, where women emulate the shopping habits of their favourite fashionistas, it's not surprising that many are becoming more interested in size zero clothing than nought per cent APR," says Ann Robinson, director of consumer policy for uSwitch.
If you think you have a problem, start setting yourself savings goals, shop at Primark instead of Prada, and make some cash off your unwanted items by selling them on eBay – seeing how much money you’ve spent on useless items may also help you think twice in the future.
Keeping Up With the Beckhams
It’s not just celebrity clothing that British women feel the need to splash cash on – it’s their designer lifestyles, too. In fact, they spend a shocking £4.3bn a year in a desperate attempt to match celebrity style.
When it comes to shopping, more than three quarters of women admit to pulling out the plastic to copy celebrity chic, with beauty products and treatments like facials and manicures topping their ‘Celebrity Spending’ lists. And they’re using their credit cards to spend around £713 a year on fake tans, hair extensions and other beauty treats.
It may seem harmless, but channelling all your extra cash into your nearest salon could have a shocking affect on your future finances. Research from Virgin Money claims that 45% of people with no savings say they cannot afford to save for retirement, yet about £1.8m is spent every single day on cosmetic surgery and each year the average household pays out £769 on alcohol, £1,908 on restaurants and hotels, and £3,542 on debt interest payments.
“It all comes down to choices,” says Simon Fraser, President of Institutional Business at Fidelity International Limited. “Live for the now and cope with old age poverty when it hits, or make a few lifestyle tweaks based on the possibility of living until we are 100.”
To find out how much celebrities spend on life’s luxuries.
Pension? What Pension?
Over 60% of women do not contribute to a pension, and those who do contribute 22% less than men, according to findings by Prudential. Worryingly, the research also reveals one in five women have no additional means of boosting their pension compared to just one in 10 men.
Those women who do save are putting away an average of £236.54 a month compared with £304.56 on average for men, a difference of 22% per month. For a woman, this would equate to £42,577 over their lifetime, which would give them an income of just £3,603 a year for the rest of their retirement – so millions of women will go into retirement either having to rely on a partner or facing a struggle to maintain basic standards of living.
“Women simply cannot afford to close their eyes and hope for the best,” says Ian Martin, head of pensions and retirement income at HSBC. “By the time a 27 year-old woman reaches the age at which she can claim basic state pension, she would be entitled to around £135 a week, but only if she has made National Insurance contributions for most of her life. She should be asking herself whether she can really live on £135 a week.”
If you haven’t begun saving for a pension yet, don’t panic. In an ideal world, saving for your retirement should begin sooner rather than later. Unfortunately, it can seem less of a priority compared to other factors, such as buying a first home or starting a family, but even a contribution of just £50 a month can make a difference. Start now, and look carefully at your finances to see where you can cut expenses and where you can make plans for extra income too.
Relying on a Man
According to research from National Savings and Investments, 60% of women are financial fantasists, meaning that they refuse to accept the realities and responsibilities of financial planning, often leaving it to a partner or ignoring it completely – banking on future inheritance or assistance instead of exploring realistic strategies to boost a savings or retirement fund.
A worrying 60% of women say they do not bother to think about their finances at all and 5% say they will rely on loans when times get tough. Surprisingly, the problem is even worse among widowed, divorced and separated women – with 70% neglecting their financial future.
And women who think they will always be able to rely on their partner for financial support are putting their future at massive risk.
“With the number of divorces at high levels it is undeniable that individuals cannot rely on partners for their retirement finances,” says Gary Shaughnessy, Managing Director, Prudential Retail Life & Pensions.
The number of female millionaires in the UK is growing by around 11% each year – accounting for 46% of Britain's 376,000 millionaires, and recent research suggests women are set to dominate the rich lists in the years to come.
Plus, when it comes to entrepreneurship, in several regions across the country, women have overtaken men in starting up new businesses.
But at the same time, many women also make common financial mistakes that could prove costly in the future. Read on to make sure it’s not you.
Shopping Debt
It’s fun to joke about your Jimmy Choo habit, but being a shopaholic is no laughing matter – it can throw you into financial strife, often for an item you’ll never even use. Price comparison website uSwitch.com estimates that almost 800,000 British women can attribute half of their unsecured debt to fashion, and having an average personal shopping debt of a massive £8 000. In all, British women spend an average of more than £1,800 a year on clothes, totalling an astonishing £20 billion.
“In today's celebrity obsessed society, where women emulate the shopping habits of their favourite fashionistas, it's not surprising that many are becoming more interested in size zero clothing than nought per cent APR," says Ann Robinson, director of consumer policy for uSwitch.
If you think you have a problem, start setting yourself savings goals, shop at Primark instead of Prada, and make some cash off your unwanted items by selling them on eBay – seeing how much money you’ve spent on useless items may also help you think twice in the future.
Keeping Up With the Beckhams
It’s not just celebrity clothing that British women feel the need to splash cash on – it’s their designer lifestyles, too. In fact, they spend a shocking £4.3bn a year in a desperate attempt to match celebrity style.
When it comes to shopping, more than three quarters of women admit to pulling out the plastic to copy celebrity chic, with beauty products and treatments like facials and manicures topping their ‘Celebrity Spending’ lists. And they’re using their credit cards to spend around £713 a year on fake tans, hair extensions and other beauty treats.
It may seem harmless, but channelling all your extra cash into your nearest salon could have a shocking affect on your future finances. Research from Virgin Money claims that 45% of people with no savings say they cannot afford to save for retirement, yet about £1.8m is spent every single day on cosmetic surgery and each year the average household pays out £769 on alcohol, £1,908 on restaurants and hotels, and £3,542 on debt interest payments.
“It all comes down to choices,” says Simon Fraser, President of Institutional Business at Fidelity International Limited. “Live for the now and cope with old age poverty when it hits, or make a few lifestyle tweaks based on the possibility of living until we are 100.”
To find out how much celebrities spend on life’s luxuries.
Pension? What Pension?
Over 60% of women do not contribute to a pension, and those who do contribute 22% less than men, according to findings by Prudential. Worryingly, the research also reveals one in five women have no additional means of boosting their pension compared to just one in 10 men.
Those women who do save are putting away an average of £236.54 a month compared with £304.56 on average for men, a difference of 22% per month. For a woman, this would equate to £42,577 over their lifetime, which would give them an income of just £3,603 a year for the rest of their retirement – so millions of women will go into retirement either having to rely on a partner or facing a struggle to maintain basic standards of living.
“Women simply cannot afford to close their eyes and hope for the best,” says Ian Martin, head of pensions and retirement income at HSBC. “By the time a 27 year-old woman reaches the age at which she can claim basic state pension, she would be entitled to around £135 a week, but only if she has made National Insurance contributions for most of her life. She should be asking herself whether she can really live on £135 a week.”
If you haven’t begun saving for a pension yet, don’t panic. In an ideal world, saving for your retirement should begin sooner rather than later. Unfortunately, it can seem less of a priority compared to other factors, such as buying a first home or starting a family, but even a contribution of just £50 a month can make a difference. Start now, and look carefully at your finances to see where you can cut expenses and where you can make plans for extra income too.
Relying on a Man
According to research from National Savings and Investments, 60% of women are financial fantasists, meaning that they refuse to accept the realities and responsibilities of financial planning, often leaving it to a partner or ignoring it completely – banking on future inheritance or assistance instead of exploring realistic strategies to boost a savings or retirement fund.
A worrying 60% of women say they do not bother to think about their finances at all and 5% say they will rely on loans when times get tough. Surprisingly, the problem is even worse among widowed, divorced and separated women – with 70% neglecting their financial future.
And women who think they will always be able to rely on their partner for financial support are putting their future at massive risk.
“With the number of divorces at high levels it is undeniable that individuals cannot rely on partners for their retirement finances,” says Gary Shaughnessy, Managing Director, Prudential Retail Life & Pensions.
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