YOUR MONEY Into the seventies in the last in a series on financial planning through life
Sunday 12 November 1995
For most people, the key to financial planning at 70 is to maximise the return from existing assets, as they must last the rest of your life. This may sound gloomy, but people in their seventies have options that are not available to younger people.
These are the main points to consider.
Review your will and plan for inheritance tax. The Law Society estimates that two-thirds of adults do not have a valid will. It is also important to review your will every few years to check its provisions are still appropriate. This removes a source of anxiety after you die, by ensuring that your wishes are respected, and cuts your heirs' tax bill.
Making a will is particularly important if you and your partner are not married, as what is called the law on intestacy (not having a valid will) does not recognise that such partners have a financial claim on your estate. Making a will is also important if you are married and your estate (which includes the value of your home) is worth significantly more than pounds 125,000. Above this, other family members get a claim to part of your estate.
Provided your and your partner's combined estate is under the current pounds 154,000 inheritance tax threshold, no planning beyond a will is needed. If not, planning for the tax should be a priority. It bites at 40 per cent on amounts above pounds 154,000. But there are so many avoidance measures that it has been dubbed a voluntary tax.
One simple loophole to use is the range of gift allowances. Gifts made during your lifetime that are exempt from inheritance tax include any gift to your spouse; any gift made seven or more years before you die; gifts to any number of people up to pounds 250 each per year; and other gifts of up to pounds 3,000 a year.
Although these exemptions are generous - and some are likely to vanish under a Labour government - beware the risk of being too tax-driven. There is little point in saving a few pounds for your heirs if the gift damages the financial quality of your life.
A similar caveat applies to another common technique, which is to split assets between yourself and your spouse so that both of you can use the pounds 154,000 nil- rate band when you die to pass on assets tax-free to your children or grandchildren.
Other techniques range from the relatively cheap and cheerful - writing life insurance policies in trust, for example - to the decidedly expensive and esoteric.
Buy an annuity - but only if you need extra income. Unlike pension funds, where you have to use part of the fund to purchase an annuity (an investment that converts a lump sum into an income for life), buying an annuity using your other savings is optional. Most experts caution against this for men under 70 and women under 75, as the annuity does not justify the capital outlay required.
Unless you need the extra income, you are better off with safe, income- generating investments that do not sacrifice your original lump sum, such as deposit accounts and National Savings Income Bonds or (for protection against inflation) National Savings Index-linked Savings Certificates. You can still use some of these savings to buy an annuity later on if you need.
Use your home to generate extra income. Home income schemes got a deservedly bad name in the late 1980s - the compensation bill for high-risk schemes that were mis-sold to pensioners looking for a secure income now tops pounds 40m. But there are safe schemes available.
They were designed for home owners of 70 or older who need extra income. By mortgaging or part-selling your home, you can get more income for life while continuing to live in it.
There are two main types of scheme. With Home Income Plans (HIPs), you take out a loan of pounds 15,000 to pounds 30,000 secured against your home. The money is used to buy an annuity, which funds the interest payments on your loan and gives you extra income. When you die (or the surviving partner dies, in the case of a couple) the loan is repaid from the proceeds of selling your home.
The table shows the typical levels of income you can expect to get. If you are aged under 70, or in the case of a couple, have a combined age of less than 145, the benefits are not likely to be worthwhile, according to Cecil Hinton, of the independent specialist Hinton & Wild.
Home Reversion Schemes involve selling part or all of the property outright in return for a lifetime income or a discounted lump sum. Importantly, you keep the right to live in the house for the rest of your life.
Use tax allowances to the full. At 74, your personal tax allowance rises to pounds 4,800 a year. Similarly, the additional married couple's allowance goes up to pounds 3,035 if either partner is 74 or older. But you will not get the full benefit of the allowances if your total taxable income exceeds pounds 14,600. If it does, it may pay to switch to savings where the income is tax-free, such as National Savings Certificates.
Typical home income plan payments
Net annual income if:
Taxpayer (1) Non-taxpayer (2)
Woman aged 75 1213 1469
Woman aged 80 1864 2088
Man aged 75 1866 2203
Man aged 80 2799 3168
Couple both aged 75 766 1013
Couple both aged 80 1212 1425
For a loan of pounds 30,000 on a property worth at least pounds 45,000
(1) After basic rate tax at 25% has been deducted.
(2) Assuming total income (including from this plan) is covered by personal and married couple's tax allowance.
Source: Using Your Home As Capital 1996-6, Cecil Hinton. Published by Age Concern England (pounds 4.95)
Tips for the 70s
o Review your will regularly.
o Get advice on inheritance tax planning if you and your partner's combined estate is significantly over pounds 154,000.
o Shop around for the best rates if you want to buy an annuity - rates can vary by 20 per cent or more.
o Consider using your home to raise extra income only if you need that money.
o Use tax allowances to the full.
o Assume your spouse or partner will automatically get everything when you die - they may not.
o Create financial hardship for yourself just to save tax.
o Buy an annuity if you don't need the extra income.
o Buy a roll-up scheme. They are very high-risk.
o Forget to reclaim the basic rate tax deducted from an annuity you've bought yourself if you're a non-taxpayer.
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