2 Money in general

You have to make a fundamental decision. You have to choose whether you organise your money around your life or your life around your money.

J K ROWLING’S ACCOUNTANT, QUOTED IN THE GUARDIAN

Do you live to work, or work to live? Have you saved hard for your pension, paid off your mortgage and are now ready to take it easy and spend time doing just whatever you want? Now that retirement beckons (or has already arrived and is at your door), this is the start of the rest of your life.

Not all of us are in the fortunate position (money-wise) of J K Rowling, but that’s not essential – it is possible to enjoy your retirement on more modest means. What is important is to know where you are financially and not to allow your money to retire at the same time as you. It must continue to work hard for you, so that you’ve got the financial flexibility you need. With the many money-related decisions that have to be made once you stop working, it is crucial to get them right. One recent article in Mature Times (www.maturetimes.co.uk) made sober reading: ‘Inequalities between rich and poor pensioners in Britain are substantial and growing … with the wealthy likely to live disease-free for an extra 17 years, according to experts.’

It is easy to blame falling annuity rates and the rising cost of living having led to a reduction in spending, but this is at the same time as an increase in essential costs. According to research by Aviva in December 2012, the over-55s average monthly spend has fallen from £1,300 at the end of 2011 to £1,241 between October and December 2012. Average spending on eating out, holidays and motoring all reduced in that period while essential spends (debt repayments, food, fuel and light) all increased. As a group, the over-55s seem to be prioritizing day-to-day matters, rather than the leisure activities traditionally associated with retirement.

With increasing longevity, and those of pensionable age desiring the best quality of life for as long as possible, it is not surprising that Aviva (the insurance provider) reports that over three-quarters of pensioners are worried about the rising cost of living and not having enough money to meet their needs. That is why working out how much money you have and what you will actually require is essential at this stage. Whether you are close to giving up work or you are several years away from retirement, the most important thing to do is carry out a serious review of your retirement plans. This will help you work out what options there are for maximizing your future income. The worst thing is to be an ostrich and ignore the situation in the hope that it will never happen.

A very good website with loads of useful advice is ‘This is Money’ (www.thisismoney.co.uk). Here are their top tips for achieving perfect personal finances. This applies generally whatever age you have reached, but is particularly important for those coming up to retirement:

Step 1:	Make a will.
Step 2:	Pay off debts.
Step 3:	Get term life assurance.
Step 4:	Fund your company pension to the maximum.
Step 5:	Buy a house you can afford.
Step 6:	Put six months’ worth of outgoings in a cash ISA.
Step 7:	Any money that is left can be invested in more ISAs.
Step 8:	Find yourself a fee-based financial planner.

The first step, however, should be to focus on your personal circumstances and take a look at ways to plan your finances. If, for example, you are coming up to retirement and have a stable job with a strong company, you are fortunate. Should redundancy be a distinct possibility, the right preparation is crucial. Where possible, while still working, everyone should build up a cash emergency fund (provided you have no debts – apart from a mortgage). This means saving roughly enough money for six months of bills (living expenses): you could start an ISA, and save as much as you can.

Should your income be likely to drop, it makes sense to cut debt costs as much as possible. If you have savings, remember that the government guarantees £85,000 per person per UK-regulated financial institution. If you’ve more than this, you can spread it over multiple accounts. If you have a financial problem that you cannot resolve, there is a free service set up by law with the power to sort out problems between consumers and financial businesses. It is called the Financial Ombudsman Service and there is more information about this in Chapter 6.

To ensure you have a comfortable retirement, you will need to carry out a full financial health check. Its purpose is to give you a clear view of your current financial position. You should get a state pension forecast, then contact the pension trustees of your current and previous employers. Once you’ve done that, work out how much income you are likely to need in retirement. Be as realistic as you can: remember to factor in holidays and any debts you might have. If you have lost track of investments or previous pensions, it is worth spending some time in tracing these.

The ability to manage your money and know how to budget is important. Don’t forget that there are some ‘retirement freebies’ that are well worth taking advantage of: these include travel concessions, some health benefits and help with fuel bills. It’s surprising how much these small things add up to.

The key to managing your retirement well is to know how to make whatever money you have go as far as possible. There are many useful websites brimming with information on retirement issues. It is an excellent investment of your time to do some thorough research in this regard. Details of some of the better ones are listed later in this chapter. Since getting a grip on your finances is vital, depending on the standard of living you want to have, you should do this as early as possible.

Doing the sums

How do you get an objective view of your financial affairs? One sensible way is to draw up a budget showing your income and outgoings. To make a proper assessment, you need to draw up several lists:

expected sources of income on retirement;
essential outgoings;
normal additional spending (such as holidays and other luxuries).

The following should also be considered:

possible ways to boost your retirement income;
spending now for saving later.

You should also try to factor in some of the variables and unknowns, which are much more difficult to estimate. The fluctuations in the world’s economies do not help, but two of the most important items to consider in retirement planning are tax and inflation. Things like stocks and shares, property prices and energy costs go up as well as down and all these affect retirement finances. Emergency situations can arise, the most likely being illness, so, if possible, special provisions should be made. The big question (which no one can answer) is how long you, your partner or any dependents might live.

If you base your calculations on current commitments and expenditure, remember your lifestyle and spending habits may change considerably. To get the figures into perspective, think how you will live in retirement. You should spend some time working out what items will still represent a significant percentage of your budget, and which will no longer be so important. There will be a number of areas where savings can be made, such as buying a new fuel-efficient car, instead of running two older vehicles. There will be others where extra outgoings need to be included. The most practical way of using the list is to tick off the items that will definitely apply to you and, where possible, write down the expenditure involved. While this will be no more than a draft, the closer you are to retirement the more sensible it is to do this exercise. Repeat it as often as necessary, and certainly update it each time you obtain more facts and information.

If retirement is imminent, then doing the arithmetic in as much detail as possible will not only reassure you but also help you plan your future life with greater confidence. You’ll feel better knowing how you stand financially. Don’t forget that there are probably a number of options open to you. Examining the figures written down will highlight the areas of greatest flexibility. One tip, offered by one of the retirement magazines, is to start living on your retirement income some six months before you retire. Not only will you see if your budget estimates are broadly correct, but since most people err on the cautious side when they first retire you will have the bonus of all the extra money you will have saved.

If retirement is still some years ahead, there will be more unknowns and more opportunities. When assessing the figures, you should take account of your future earnings. Perhaps you should also consider what steps you might be able to take under the pension rules to maximize your pension fund. You could also consider whether you should be putting money aside now in a savings plan and/or making other investments. Imprecise as they will be, the budget planner estimates you make in the various income and expenditure columns should indicate whether, unless you take action now, you could be at risk of having to make serious adjustments in your standard of living later on. To be on the safe side, assume an increase in inflation. Everyone should, if they possibly can, budget for a nest egg to help cover the cost of any emergencies or special events that may come along.

Possible savings

Once you stop working you could save quite a lot because there will be a number of expenses you no longer have. These include travelling costs to and from work, meals out, business clothes, and other work-related incidentals such as drinks with colleagues, staff collections and entertainment. Other costs, such as National Insurance Contributions cease on retirement, and unless you choose to invest in a private plan, your pension payments will also stop. It is important to check (once you retire) what your tax coding is because you may well move to a lower tax bracket.

Extra outgoings

If you are spending more time at home once you retire, your utility bills will increase. You may also find you spend more on outings, hobbies and short breaks and holidays. There is so much choice in retirement these days that as long as you budget well in advance you should have enough money to do all you want. Looking ahead, home comforts become increasingly important and you may want to think about paying other people to do some of the jobs that you previously managed yourself. Anticipating such areas of additional expenditure is not being pessimistic; actually it is the surest way of avoiding future money worries. Once you’ve worked out your retirement income and expenditure in detail you should be able, with a bit of adjustment and compromise, to manage well.

TABLE 2.1

Items	Estimated monthly savings
National Insurance Contributions	_{………………………}
Pension payments	_{………………………}
Travel expenses to work	_{………………………}
Bought lunches	_{………………………}
Incidentals at work, eg drinks with colleagues, collections for presents	_{………………………}
Special work clothes	_{………………………}
Concessionary travel	_{………………………}
NHS prescriptions	_{………………………}
Eye tests	_{………………………}
Mature drivers insurance policy	_{………………………}
Retired householders insurance policy	_{………………………}
Life assurance payments and/or possible endowment policy premiums	_{………………………}
Other	_{………………………}
TOTAL	_{………………………}

NB: You should also take into account reduced running costs if you move to a smaller home; any expenses for dependent children that may cease; other costs such as mortgage payments that may end around the time you retire; and the fact that you may be in a lower tax bracket and may not be liable for National Insurance Contributions.

TABLE 2.2

Items	Estimated monthly costs
Extra heating and lighting bills	_{………………………}
Extra spending on hobbies and other entertainment	_{………………………}
Replacement of company car	_{………………………}
Private health care insurance	_{………………………}
Longer or more frequent holidays	_{………………………}
Life and permanent health insurance	_{………………………}
Cost of substituting other perks, eg expense account lunches	_{………………………}
Out-of-pocket expenses for voluntary work activity	_{………………………}
Other	_{………………………}
TOTAL	_{………………………}

NB: Looking ahead, you will need to make provision for any extra home comforts you might want and also, at some point, for having to pay other people to do some of the jobs that you normally manage yourself. If you intend to make regular donations to a charity or perhaps help with your grandchildren’s education, these too should be included in the list. The same applies to any new private pension or savings plan that you might want to invest in to boost your long-term retirement income.

Expected sources of income on retirement

Your list will include at least some of the following. Once you have added up these figures, you will have to deduct income tax to arrive at the net spending amount available to you:

Many people have difficulty understanding the tax system, and you should certainly take professional advice if you are in any doubt at all. However, if you carefully fill in your expected sources of income and likely tax implications in Tables 2.3 and 2.4, it should give you a pretty good idea of your net income after retirement and enable you to make at least provisional plans. Remember too that you may have one or two capital sums to invest, such as:

the commuted lump sum from your pension;
money from an endowment policy;
gains from the sale of company shares (SAYE or other share option scheme);
profits from the sale of your home or other asset;
money from an inheritance.

TABLE 2.3

A. Income received before tax
Basic state pension	_{…………………….}
State graduated pension	_{…………………….}
SERPS/State Second Pension	_{…………………….}
Occupational pension(s)	_{…………………….}
Stakeholder or personal pension	_{…………………….}
State benefits	_{…………………….}
Investments and savings plans paid gross, eg gilts, National Savings	_{…………………….}
Other incomes (eg rental income)	_{…………………….}
Casual or other pre-tax earnings	_{…………………….}
TOTAL	_{…………………….}
Less: Personal tax allowance and possibly also Married Couple’s Allowance	_{…………………….}
Basic-rate tax	_{…………………….}
TOTAL A	_{…………………….}
B. Income received after tax
Dividends (unit trusts, shares, etc)	_{…………………….}
Bank deposit account	_{…………………….}
Building society interest	_{…………………….}
Annuity income	_{…………………….}
Other (including earnings subject to PAYE)	_{…………………….}
TOTAL B	_{…………………….}
Total A + Total B	_{…………………….}
Less: higher-rate tax (if any)	_{…………………….}
Plus: Other tax-free receipts, eg some state benefits, income from an ISA	_{…………………….}
Investment bond withdrawals, etc	_{…………………….}
Other	_{…………………….}
TOTAL NET INCOME	_{…………………….}

TABLE 2.4

Unavoidable outgoings
Items	Estimated monthly cost
Food	_{……………………..}
Rent or mortgage repayments	_{……………………..}
Council tax	_{……………………..}
Repair and maintenance costs	_{……………………..}
Heating	_{……………………..}
Lighting and other energy	_{……………………..}
Telephone/mobile/internet	_{……………………..}
Postage (including Christmas cards)	_{……………………..}
TV licence/Sky/digital subscription	_{……………………..}
Household insurance	_{……………………..}
Clothes	_{……………………..}
Laundry, cleaner’s bills, shoe repair	_{……………………..}
Domestic cleaning products	_{……………………..}
Miscellaneous services, eg plumber and window cleaner	_{……………………..}
Car (including licence, petrol, etc)	_{……………………..}
Other transport	_{……………………..}
Regular savings and life assurance	_{……………………..}
HP and other loan repayments	_{……………………..}
Outgoings on health	_{……………………..}
Other	_{……………………..}
TOTAL	_{……………………..}

NB: Before adding up the total, you should look at the ‘Normal additional expenditure’ list, as you may well want to juggle some of the items between the two.

Unavoidable outgoings

No one will have the same list as another, since one person’s priority is another’s luxury. For this reason, the divide between ‘unavoidable outgoings’ and ‘normal additional expenditure’ (see page 16) is likely to vary considerably with each individual. Almost everyone will want to juggle some of the items between the two lists or add their own particular requisites or special enthusiasms. Whatever your own essentials, some of the following items will certainly feature on your list of unavoidable expenses:

Normal additional expenditure

This could include some of the following:

TABLE 2.5

Normal additional expenditure
Items	Estimated monthly cost
Gifts	_{……………………..}
Holidays	_{……………………..}
Newspapers/books/CDs/DVDs	_{……………………..}
Computer (including broadband)	_{……………………..}
Drink	_{……………………..}
Cigarettes/tobacco	_{……………………..}
Hairdressing/beauty treatments	_{……………………..}
Toiletries/cosmetics	_{……………………..}
Entertainment (hobbies, outings, home entertaining, etc)	_{……………………..}
Miscellaneous subscriptions/membership fees	_{……………………..}
Gifts, charitable donations	_{……………………..}
Expenditure on pets	_{……………………..}
Garden purchases	_{……………………..}
Other	_{……………………..}
TOTAL	_{……………………..}

NB: For some items, such as holidays and gifts, you may tend to think in annual expenditure terms. However, for the purpose of comparing monthly income versus outgoings, it is probably easier if you itemize all the expenditure in the same fashion. Also, if you need to save for a special event such as your holiday, it helps if you get into the habit of putting so much aside every month (or even weekly).

Possible ways of boosting your retirement income

Few people can afford to turn away extra income these days, yet there are really only three possible ways to give your retirement finances a boost: these are from your home, work and investment skill.

Your home

Your home offers several different options: moving somewhere smaller, taking in lodgers or raising money on your home. All the possibilities are explored in greater detail in Chapter 8, Your home.

Work

How about continuing to work? There is plenty of scope here for earning money, even in these difficult times. You could talk to your employer to see what options there are for you to remain with your present organization.

Alternatively, retirement for you may offer the chance of setting up on your own. Becoming self-employed or setting up a business may sound attractive but there are start-up costs to be considered. There is a lot more information on work, and how to get it, in Chapters 10, 11 and 12.

Investment

Everyone can try this but if it is unfamiliar territory, what is most important is to get good advice from a trusted professional to help you find the most suitable investment opportunities for you. Chapter 5 sets out the various forms investment can take.

Money – if you are made redundant

With job losses still continuing, and many people fearing being made redundant, much of the information in the earlier part of this chapter is equally valid whether you become redundant or retire in the normal way. However, there are several key points with regard to redundancy that it could be to your advantage to check.

From your employment

You may be entitled to statutory redundancy pay

Your employer is obliged to pay the legal minimum, which is calculated on your age, length of service and weekly pay. To qualify, you will need to have worked for the organization for at least two years, with no age restriction. Redundancy pay is 1.5 weeks’ pay for each year worked if you are over 41 years, up to a maximum of £430 a week.

Ex gratia payments

Many employers are prepared to be more generous. As long as it’s not more than £30,000, statutory redundancy pay is not taxable. Any payment over this limit is subject to tax and National Insurance.

Benefits that are not part of your pay

Redundancy may mean the loss of several valuable benefits such as a company car, life assurance and health insurance. Some insurance companies allow preferential rates to individuals who were previously insured with them under a company scheme.

Holiday entitlement

You could be owed holiday entitlement for which you should be paid.

Company pension

Company pension scheme members normally have several choices. See the ‘Company pension schemes’ section in Chapter 3, Pensions.

Your mortgage

Your mortgage lender should be notified as soon as possible and might agree to a more flexible repayment system. Check whether your mortgage package includes insurance against redundancy. There is help available from the state if you are claiming benefits, such as income support or income-based Jobseeker’s Allowance. Those claiming these benefits could have their interest payments covered for two years if their mortgage is below £200,000. However, no help is available to pay off the capital of your mortgage.

Other creditors/debts

Any creditors that you may have difficulty in paying (electricity, gas, a bank overdraft) should be informed as early as possible in the hope of agreeing easier payment terms. There could be an argument for paying off credit card bills immediately, even if this means using some of your redundancy pay.

Jobseeker’s Allowance (JSA)

Even if you are hoping to get another job very soon, you should sign on without delay. Your National Insurance Contributions will normally be credited to you. This is important to protect your state pension. To qualify for JSA you need to be under state pension age and must either have paid sufficient Class 1 National Insurance Contributions or have a low income. You must also be both available for and actively seeking work.

Current information about JSA and other possible benefits can be found on the Gov.uk website (the gateway for government advice): www.gov.uk. Redundancy Help can provide answers to queries on all aspects of redundancy; website: www.redundancyhelp.co.uk; and another useful agency is The Citizens Advice Bureau advice guides; see website: www.adviceguide.org.uk.

Money left unclaimed

It is estimated that there are over £15 billion worth of unclaimed assets in the UK. During the course of this year millions of pounds of unclaimed money will be handed over to the Treasury because there are no clues as to who it belongs to. Some funds are in unclaimed benefits and entitlements, others are unclaimed lottery prizes, the remainder is money such as legacies from wills, funds from pensions and insurance policies where there is no next of kin to claim them. More than one in 10 people think they may have forgotten assets and many people do not know how to begin to trace their money.

There are now a number of useful websites to help you. Experian’s Unclaimed Assets Register (UAR) has lots of helpful information: www.uar.co.uk. For lost building society accounts, see The Building Societies Association website: www.bsa.org.uk. Try www.mylostaccount.org.uk, which aims to reunite savers with lost or dormant bank accounts. Which? magazine also gives information and advice on how to track down missing accounts and unclaimed money: www.which.co.uk. You could also look at www.findersuk.com.

Extra income

The number of state benefits and allowances available to help many pensioners that are not claimed is staggering. Many pensioners live on low to middle incomes and have been hit hardest because of falling interest rates, the rising cost of living and public spending cuts. Despite just under half of all pensioners being entitled to pension credit – a top-up for people on low incomes – a third of people don’t claim it; 1.8 million pensioners live in poverty yet millions of pounds of pensioner benefits go unclaimed each year. Age UK (Britain’s largest charity dedicated to the needs of the elderly) suggests the reasons for this are that many pensioners are unaware of the range of benefits available, or don’t realize they are eligible. They also think the process too complicated and intrusive or are simply too proud to claim.

While many of these benefits are ‘means tested’ some, such as Disability Living Allowance, are not dependent on how poor or how wealthy you are. Moreover, even when means testing is a factor, for some of the benefits income levels are nothing like as low as many people imagine. Because this information is not widely enough known, many individuals – including over a million pensioners – are not claiming help to which they are entitled and for which in many cases they have actually paid through their National Insurance Contributions.

A number of voluntary organizations, benevolent societies and charities also provide assistance to individuals, sometimes in cash or sometimes in the form of facilities, such as special equipment for disabled people. Details are given in the relevant chapters. For further advice and information on benefits check the following websites:

Department for Work and Pensions: www.dwp.gov.uk.

Jobcentre Plus: www.gov.uk – search ‘Benefits’.

Citizens Advice Bureau: www.citizensadvice.org.uk.

Age UK: www.ageuk.org.uk.

Making your money go further

If you enjoy browsing the internet and this chapter has whetted your appetite for research on the matter of retirement planning, the following websites cover a broad range of topics relating to your finances and retirement:

www.adviceguide.org.uk;

www.everyinvestor.co.uk;

www.financingretirement.co.uk;

www.moneyadviceservice.org.uk;

www.moneyexpertise.co.uk;

www.moneyweek.com;

www.oscaruk.co.uk;

www.thisismoney.co.uk;

www.which.co.uk.

Useful reading

The following publications are especially for those coming up to retirement and the recently retired.

Your Guide to Retirement – Making the Most of Your Money is a comprehensive guide to help you manage the transition from work to retirement. It is published by the Money Advice Service; website: www.moneyadviceservice.org.uk.

Wise Guide – Life-improving Advice for the Over-65s is the practical pensioners’ handbook to benefits, debt help, discounts and lots more, published by Independent Age; website: www.independentage.org.

An excellent book for those wanting detailed information about planning their finances is Talking about Retirement by Lyn Ashurst, published by Kogan Page. The author is an authority in her field and gives a comprehensive and detailed study of a careful and planned approach to the retirement process, based on about 50 case studies. For more information and other recommended titles on retirement and associated issues published by Kogan Page, see www.koganpage.com.