Older, wiser, fifty and free
The third in a series on financial planning through the stages of life
Sunday 29 October 1995
But being in your fifties need not be a trigger for nostalgic regret. Indeed, for many it is a time of financial and social freedom, as children become more independent. It is also a time when retiring starts to become a definite forthcoming event, rather than a remote future possibility.
The key to maximising this relative financial freedom is planning. Whatever your personal circumstances, the main financial points to consider are:
q Eliminate short-term debts. If you have any spare savings, pay off any outstanding overdraft or credit or store card debt - you are almost certainly paying a lot more to borrow than the return from your savings.
q Review your mortgage. The fact that you may be aiming to repay your mortgage within a decade or so does not mean you cannot cash in on the crop of cheap fixed-rate and discounted deals. In fact, as Ian Darby of John Charcol, the independent adviser, says, many in their fifties are ideally placed to benefit from this competition because some of the best deals are reserved for people who are borrowing less than 75 per cent of the value of their homes. Do check that the savings on the deal will cover the costs of switching to a lender within a year or so, and watch out for hefty redemption penalties.
q Check your pension provision. Retirement planning should be moved to the top of your agenda. As a first step find out what you are in line to get - from the state (ask the DSS what your projected basic state pension and Serps entitlements are), your current and any previous employers (check the projected benefits statements), and any private plans. It is useful if your partner does the same, as it is your joint income that will be critical in determining how much money you have in retirement.
q If you can, top up your pension. Pensions are a highly tax-efficient form of saving - you get tax relief on your contributions and the investment fund itself grows tax-free. If you have got spare cash, whether it is a lump sum or money you can afford to save each month, it is usually worth topping up your pension. If you are in a company scheme, you get tax breaks on pension contributions (including your and your employer's contributions) of up to 15 per cent of your earnings. You can either take out an additional voluntary contributions (AVC) plan from your employer, or a free-standing AVC (FSAVC) plan from an insurer. The latter tend to be more expensive, but offer greater flexibility if you switch jobs. If you have got a personal pension plan, the simplest option is to increase your contributions. The Inland Revenue sets limits on the maximum you may contribute which, as with so many tax rules, are not famed for their simplicity - the annual ceiling for people in their fifties varies from 20 to 35 per cent of net earnings.
q Review your savings and investments. Check whether your current mix of investments suits your needs. Are you happy with the mix between safe, immediate-income products like savings accounts and riskier, medium-term growth products, such as unit and investment trusts? Many people's natural inclination is to lean towards the safe haven of their building society, and it is a good idea to keep at least an emergency fund there, ready for instant access. But equity-based investments, like unit trusts, have historically produced much better returns than savings accounts. If you are choosing unit or investment trusts, look for funds with good performance records, investing in areas with which you feel comfortable.
q Use the tax breaks on offer. Once you have decided on your investments, exploit the available tax breaks that fit those investments. The main tax shelter is the Tax Exempt Special Saving Account, or Tessa (essentially a five-year savings account offering tax-free interest on savings of up to pounds 9,000 in total) and a personal equity plan (PEP). You can invest up to pounds 6,000 a year in a general PEP, which can be used to hold most mainstream unit and investment trusts. All returns from PEPs are tax-free.
q Review your insurance cover. Many people in their fifties understandably start worrying about the costs of long-term nursing-home care. But tread warily - as Nick Conyers of Pearson Jones, an independent adviser, says, "The policies are very expensive and the risks are not that steep." The odds of needing residential care are around one in six and most people only stay short-term.
q Plan for inheritance tax. This applies only if your estate, which includes your home, is significantly more than the pounds 154,000 inheritance tax threshold.
q Write your will. If you die intestate (without having made a will) it can create serious problems for your family.
Tips for the 50s
Check what your current pension entitlements are.
Assume your pension will give you an adequate income in retirement.
Top up your company or personal pension if you can afford to.
Act without getting good, independent advice.
Switch without checking that the saving will cover the cost of the move within around 12 months.
Review the cost of your life insurance; you may be able to cut your premiums by switching insurers.
Cash in any endowment policy that is linked to your mortgage; there are usually hefty penalties.
Make use of tax-efficient investments such as PEPs and Tessas.
Invest for tax breaks alone.
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