THESE are hard times both for pensioners and for many of those on the brink of retirement as annuity payments plunge and savings are eroded by inflation.
Even affluent retirees are seeing their income slashed by a combination of low interest rates, poor stock market returns and new drawdown restrictions.
Richard Johnston, chartered financial planner at Murray Asset Management, gives his top ten tips on making your money go further in retirement.
1 What kind of annuity?
The income of each individual will vary depending on the value of their personal pension, which – in most cases – is converted on retirement into a set pension income through the purchase of annuity.
However, as a simple guide a pension fund of £10,000 will provide, at present rates, annual income of approximately £540 a year for a man and £520 a year for a woman, based on a 65-year-old in good health.
This falls to £340 and £320 respectively if the pension is index-linked, in which case inflation of approximately 60 per cent would be required before the index-linked annuity would begin to provide a higher income.
2 Put it on hold
It may make sense to delay your annuity purchase if you have sufficient capital or alternative sources of income. Annuity rates are correlated with gilt yields which are, historically speaking, at very low rates.
Over the long-term, gilt yields are expected to return to normal levels, in which case the aforementioned £10,000 should produce pension income of more than £540/£520 a year. However, it is unclear when – nor is it certain if – this will happen.
Unlike an annuity (whose income is fixed for the remainder of life), this enables the fund-holder to “draw down” various levels of income each pension year, though there is a limit on how much an individual can take out annually.
Drawdown is particularly suitable for pensioners with flexible income requirements as they are at liberty to take out the maximum sum permitted one year and nothing the next.
4 Keep on working
Poor annuity rates have seen many “new” pensioners taking part-time jobs to boost their income, but anyone considering this should think carefully about the tax position.
While you will no longer pay National Insurance contributions if you have reached state pension age, you might find that the state pension and any private pension income, along with the employment income, pushes you into a higher tax bracket.
Effectively those with total income of over £42,475 would pay 40 per cent tax on that excess.
5 Investment options: growth
There are attractive investment growth opportunities even in the current difficult climate. Any potential capital gains tax (CGT) charge on the sale of shares can be avoided by using a stocks and shares Isa (into which up to £11,280 can be saved tax-efficiently in the current tax year).
6 Investment options: income
Several stock market investments offer relatively attractive income yields above those available from cash deposits and other asset classes. For example, the FTSE All Share currently yields approximately 3.5 per cent.
7 Cash savings
For pensioners uneasy with stock market volatility, fixed-term savings accounts are a reasonable alternative if they can squirrel the money away for a period. However ,when base rates eventually rise anyone opening a fixed-term account today could find themselves locked into a relatively poor rate of interest..
8 Tax-free lump sum
Until relatively recently, many people with a half-decent pension looked to this to fund a “dream” holiday or expensive luxury item, but in these austere times, the lump sum is increasingly used as a tool for reducing outlays in retirement. Using it to pay off all or part of an outstanding mortgage is first choice with many people.
9 Selling valuables
CGT is only payable on sales where the gain is above the CGT allowance of £10,600, although this can effectively be doubled for married couples and civil partners. There are special rules on those assets termed chattels or wasting assets eg furniture or cars, which may result in no or reduced CGT being payable.
10 Other options
Many pensioners still have valuable equity tied up in their homes. Where children have flown the nest, downsizing makes sense as it releases capital and reduces running costs. Moving to a smaller, less valuable, home could also significantly reduce exposure to inheritance tax when the first spouse within a marriage dies.
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Weather for Edinburgh
Saturday 18 May 2013
Temperature: 9 C to 13 C
Wind Speed: 18 mph
Wind direction: North east
Temperature: 9 C to 18 C
Wind Speed: 8 mph
Wind direction: North east