Avoiding a financial mess in old age
As one in four over-50s fear losing their home, Chiara Cavaglieri shows how to plan successfully for a worry-free future
Saturday 10 August 2013
A generation of "tomorrow's pensioners" are plagued by money worries, with one in four people in their fifties afraid that they will lose their home because they are falling behind on payments.
The research from charity Age UK makes for sober reading and the very best financial plans do start as early as possible, but it's never too late to make a difference – if you've reached middle age and your savings have fallen short, there is still time to put a solid strategy in place.
Always start with the basics: paying off your debts and reducing bills. Cutting any outstanding liabilities is a priority and you should pay down the most expensive debt first, which is usually on credit cards. If you have a decent credit score (check free at Noddle.co.uk), try to move loan balances to a 0 per cent credit card. Right now, interest-free balances transfer periods are at an all-time high with the Barclaycard Platinum card offering 27 months interest free on transfers.
"Know your interest rates – sounds easy, but if you ask people in the street the interest rate on their mortgage or credit cards, most would give you a blank look," says Steve Rees from debt consultant Vincent Bond & Co. "Clearing the most expensive debt first does not mean ignoring payments on other loans as you need to pay the minimum to keep your credit score intact, but try to work out the best way of maintaining your other debt repayments while putting a little extra towards the one that is costing you the most."
You also need to keep a roof over your head, so clearing the mortgage before you retire is the ultimate aim. Consider downsizing to release cash, although remember that the costs of buying a new home don't stop with the asking price – solicitors, estate agents and stamp duty can make this an expensive prospect.
If you are struggling to keep on top of things, organisations such as Money Advice Service and Citizens' Advice Bureau offer free advice and can point you in the right direction for claiming any relevant benefits.
You should also take advantage of all tax relief and employer contributions available. This typically boils down to individual savings accounts (ISAs) and pensions. You can put the entire annual ISA allowance (currently £11,520) into stocks and shares, but only £5,760 can be in cash. Your money grows tax free and you're free to dip in and out of it as you please. Pensions are far less flexible as you can't touch the pot and only 25 per cent can be taken as a tax-free lump sum at age 55. However, you benefit from initial tax relief on contributions and if your employer is matching those contributions, they have far greater growth potential, even very late in the day.
"A 50-year-old earning £30,000 a year, who chooses to contribute 4 per cent of their salary (£100 a month), which is then matched by their employer, could still build up a pension pot of around £49,500 by the age of 66, which could then pay an income of around £2,250 a year," says Hargreaves Lansdown's Tom McPhail.
There are also ways to boost your state pension. For example, National Insurance credits can help you maintain your record for any weeks when you have been claiming benefits such as carer's allowance, jobseeker's, or incapacity benefit. You can make an additional payment to replace missed years, and if you're a low earner you can top up your payments with pension credit. If you're happy to defer taking the state pension, you will eventually get more money – it increases by 1 per cent for every five weeks you put off claiming, or 10.4 per cent for every full year you put off claiming.
Keeping a steady income until you're ready to retire is clearly important. This is easier said than done if you find yourself locked out of the job market, but the default retirement age (formerly 65) has been phased out and anyone who wants to carry on working can't be discriminated against.
"With the state pension age rising to 67 by 2028, it's more important than ever that the Government, employers and recruiters ensure that people looking for work are judged on their skills, expertise and what they can bring to a job, not just their birthdate," says Michelle Mitchell, Age UK's Charity Director General.
If you are working, you should also take steps to protect that income. Ideally, you should have a safety net covering your outgoings for three to six months in case you are out of work due to illness or an accident. Products such as income protection and critical illness cover are well worth looking into, as they provide tax-free cash until you're back at work, or reach retirement. With income protection you should look for a policy that covers you if you are unable to work at your own occupation; that is to say, the one you're trained for, not "any job". If you buy critical illness cover on top, check the list of conditions covered as all policies impose various restrictions and exclusions.
If you think you will inherit money from your parents or another family member, plan now to mitigate inheritance tax liability. You should also review your will every couple of years and update it if your circumstances should change.
Keep a close eye on all of your existing pensions and investments to calculate how near or far you are to your ideal retirement goal. Seek independent financial advice to determine the best way to achieve this.
Over a 10-year period you can afford to take some investment risks, but you should reduce your exposure to equities gradually over time, and in the final few years put the bulk of your money into cash.
At the point of retirement, consider your options carefully. If you're taking out an annuity never automatically get it from your pension provider as you can improve your rate by 20 per cent if you shop around, particularly if you qualify for an enhanced or impaired life annuity.
Remember that some decisions can't be undone, including buying an annuity, so don't rush your decisions and take advice.
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