Weathering the credit crunch in retirement

Jerry McLoughlin, Principal at Punter Southall Financial Management, gives advice for individuals on a fixed income during an economic downturn.

For pensioners looking forward to relaxing and making the most of a hard-earned retirement the credit crunch is creating numerous problems, not least the difficulty of living on a fixed income when the cost of everyday outgoings continues to be inflated. There are two ways that retirees can approach this to ensure they maintain the standard of living they had hoped for:

a) Reduce outgoings
b) Increasing your income / saving tax

Ways of reducing outgoings:

Review your insurance costs - make sure you are paying the most competitive rates for car, home, general and life insurance - there could be savings to be made. Check out website comparethemarket.com.

Review other costs - it is also possible to review what other costs you could save on items such as gas and electricity, mobile phones, broadband, water rates - check out Uswitch.com.

Review Financials - make sure you have the most competitive credit card and loan rates and if necessary switch providers, making use of 0% balance transfer offers. Be careful of hidden costs when travelling abroad.

Use the car less - petrol and diesel is so expensive at the moment, so why not walk or cycle more.

Grow your own vegetables or shop around for better deals - hedge against the increasing cost of food.

Ways of increasing income:

Check you are receiving the best rates on your savings. However, be careful with investor protection where the maximum compensation if the bank defaults will currently only be £35,000 per deposit holder, so check the financial strength of the provider. Use search engines like moneysupermarket.com to check.

AIG Premier Bond - This is a potential alternative to a high street savings account where you can invest in an onshore bond that can offer high guaranteed returns but with a greater element of policyholders protection. As the contract is covered under the long term insurance rules, the protection offered to policyholders is 100% of the first £2,000 with 90% of the rest of the investment covered. Fixed rates can be obtained between 3 months and 5 years. For example, a 1 year fixed rate would currently attract a 6.49% gross interest.

Use National Savings for secure inflation linked returns - these are estimated to be 8.08% for a higher rate tax payer and 6.06% for a basic rate taxpayer and offers full capital security.

Use investment funds that provide a good income yield - The Schroder Income Maximise fund is an UK equity back fund that aims to generate an income yield of 7% per annum.

Equity Release - This is a complex area of financial planning so needs careful consideration but is a method of releasing equity build up in your home to provide an additional income for the remainder of your life.

Pension Unlocking - If you have not already taken the benefits from your pension schemes, you could look to unlock part your pension either by withdrawing just the tax free cash that is available and deferring drawing income or by drawing the tax free cash and the income. This can be of particular use for people who have no intentions to leave assets to their children / grandchildren as it is likely that it will reduce the value of the estate. This option is only available for the over 50's.

Pension Income: when drawing income, be mindful of the effects of inflation and consider an escalating income.

Variable annuities: Newer more innovative products are being launched to the market place. These offer a more flexible income stream as you are able to vary your income between limits set by HMRC and can alter the income to suit your requirements whenever you like. Be careful as these products are unit linked (asset backed) and require an appropriate investment strategy and regular monitoring as high withdrawals can erode the value of the capital, it is therefore essential that professional advice is sought to ensure that the products suits your circumstances.

Ensure that you make use of your income tax brackets efficiently. For example, if you are married/civil partnership and one of you pays higher rate tax, and the other pays basic rate tax, ensure that income producing assets are held by the partner paying the lower rate of tax. This can be easily implemented by carrying out an inter-spousal transfer, which does not generate any liability to income or capital gains tax.

If you are en-cashing contracts or policies that may be liable to income tax ensure that it is held in the name of the partner paying basic rate tax. You can achieve this by either setting up the policy from the outset in that person’s name or by transferring the asset by inter-spousal transfer prior to encashment. Please note that this will only work up to the higher rate tax bracket. Gains in excess will be charged to higher rate tax, but nonetheless this could still reduce the overall tax position due to the balance that falls into the basic rate tax band.

Be careful not to fall into the age allowance trap if you are over age 65. This is a decrease of your personal allowance which is taxed at an effective rate of 33% on any income in excess of £21,800 (which is taxed at a rate of £1 for every £2). Therefore between the ages of 65-75 income in excess of £27,790 will reduce your personal allowance from £9,030 to the current basic personal allowance of £6,035. Over age 75, income in excess of £28,090 will reduce your personal allowance to £6,035. Particular things to note are encashments from Investment Bonds.

Where possible if you have made capital losses you should use these to offset any capital gains. You should bear in mind that capital losses can be carried forward indefinitely but must be fully used before the application of your Annual Exemption – currently £9,600.

Pension contributions - Ensure that you claim your higher rate tax relief. If you are a higher rate tax payer and you make contributions to a Personal Pension scheme (including Stakeholder Pensions and Group Stakeholder / Personal Pensions) you should be reclaiming the additional 20% higher rate tax relief via your tax return. It's amazing how many individuals do not claim higher rate tax relief. For example, if you are contributing £250 per month (net of basic rate tax relief) to a personal pension plan you are entitled to a further £62.50 per month tax relief if you are a higher rate tax payer.

Gifts to charity if completed in the right way can reduce your income tax bill if you are a higher rate taxpayer. If you make a gift to charity you can reclaim the higher rate tax relief via your tax return, whilst the charity is able to reclaim the basic rate tax relief for their benefit.

For more information, visit psfm.com