Ashleigh Court

Retiring baby boomers are setting out a new model for later life

The UK is witnessing the march of a new type of retiree as the first post-war ‘baby boomers’ pass the old Default Retirement Age of 65. According to Aviva’s latest Real Retirement Report, more than one in three (39 per cent) over-55s are continuing to receive a wage and nearly half are intent on using their extra earnings to travel more when they finish full-time work.

Data from the latest census in 2011 showed there were 754,800 people aged 64 in England and Wales, and almost 6.5 million people are turning 65 over the next decade compared with 5.2 million in the previous decade. The spike is due to the post-war birth rate soaring when the armed forces returned from the Second World War, with the new-born generation dubbed the ‘baby boomers’.

Pushing back the boundaries
Allied with improved health care, more people are remaining active as they approach retirement age, and the report shows how they are pushing back the boundaries at work and in their leisure time.  23 per cent of 65- to 74-year-olds were still wage earners in December 2012, compared with 18 per cent when the report first launched almost three years ago in February 2010.

Fuelling the rise of income and savings
With 55 per cent of 55- to 64-year-olds also still in employment, compared with 41 per cent in February 2010, this trend looks set to continue as more baby boomers pass the age of 65. It has already fuelled the rise of income and savings among over-55s during the last three years. The typical over-55 now has an income of £1,444 each month along with £14,544 in savings (December 2012), compared with a monthly income of £1,239 and savings of £11,590 in February 2010.

Enjoying the fruits of your labour
Despite 80 per cent being concerned by rising living costs over the next six months (December 2012), the UK’s over-55s are determined to enjoy the benefits of extending their working lives. Nearly half (44 per cent) plan to use their extra time in retirement to travel more, while 42 per cent are focused on spending more time in their gardens.

Socialising is high on the agenda for many over-55s in retirement, with 37 per cent planning to invest extra time in their families and 33 per cent keen to socialise more with friends.

The most common motivation
They also have philanthropic intent: two-thirds (66 per cent) of over-55s would be interested in carrying out charity work or volunteering once they have retired. The most common motivation is to give something back to the community
(49 per cent) and to stay active by getting out of the house (48 per cent).

A new model for later life
It’s clear that the first baby boomers are setting out a new model for later life, and getting the most out of their improved physical health and the freedom to continue working for longer. Many people find that staying active in a job helps to keep them young at heart – with the bonus being that it boosts their earning and savings potential in the process.

The key to making the most of this opportunity is for people to start planning for their 60s and beyond well in advance. In this way, rather than accepting the old retirement stereotypes, you can have the freedom of choice about whether you continue to work or not, rather than feeling forced to carry on out of the demand to meet financial commitments.

New rules mean women could increase their pension income by over 20 per cent

The new 20 per cent uplift in capped income withdrawals will come into force on 26 March this year, and people could start to see the benefit of this uplift from the start of their new income year following that date.

New gender neutral rules
An income year is driven by the date a person first started taking income withdrawals from their pension. While people do not need to take any action for this uplift to take effect, women could see their income rise by over 20 per cent as a result of the new gender neutral rules, but they need to take steps to achieve this.

Changes to the maximum capped income calculation as a result of gender neutrality commenced on 21 December 2012. The factors that determine the amount of income withdrawals that men and women are permitted to take from their pension each year is now identical, which means the position for women has improved significantly.

Extremely beneficial for women
To benefit from the new gender neutral rates, an income recalculation point is needed for women. It could be extremely beneficial for women to take this action, especially if more income is needed to live on.

The 20 per cent uplift in pension income will happen automatically, However, women can now benefit from enhanced gender neutral terms, so if applicable to you, it is important you find out whether triggering a recalculation could increase your income even further.

Some pension schemes have the flexibility to recalculate the income annually, making it easy for women to take advantage of this enhancement. For those who are in a scheme that does not offer annual reviews, you could still trigger a recalculation by transferring new money into your capped income fund, but you should always seek professional financial advice to ensure this is the best option.

Tax planning checklist 2012/13 for you,
your family and your business

Make sure you take advantage of the wide range of year-end tax planning opportunities available this year. Here is our checklist of the main top ten areas to consider for you, your family and your business.

For myself AND my family I have…

Made the most of my 2012/13 Individual Savings Account (ISA) allowance

Taken advantage of increased pension contributions to reduce taxable income

Ensured that I have a tax-efficient gifting strategy

Used my annual capital gains tax exempt amount

Reviewed my estate planning and my Will

For my business I have…

Extracted profit from my business at the lowest tax cost

Made sure my staff remuneration packages are tax-efficient

Carefully considered the timing of asset purchases and sales

Recorded any appropriate constructive obligations in respect of employment awards

Planned the purchase of business equipment to take full advantage of capital allowances

Are you satisfied you are paying the minimum tax necessary? 

As everyone’s circumstances are different, we would be delighted to review yours with you so we can help you make the maximum tax savings. To discuss how we could help ensure that you are not paying any more tax than you absolutely need to, please contact us for further information.

The cost of bringing up a child until they reach the age of 21 has hit an all-time high

Having children has never been more expensive, with the cost of bringing up a child until they are 21 at an all-time high of £222,458. This is more than £4,000 up on last year and £82,000 (58 per cent) more than ten years ago, when the first annual Cost of a Child Report [1] from protection provider LV= was published.

Biggest expenditure for parents
Education and childcare remain the biggest expenditure for parents. The cost of education* (including uniforms, after-school clubs and university costs) has increased from £32,593 to £72,832 per child in the last ten years – a 124 per cent increase. Childcare costs are also up from £39,613 in 2003 to £63,738 today – a 61 per cent increase.

From birth to age 21, parents spend an average of £19,270 on food and £16,195 on holidays – which now cost 4 per cent more than last year. In fact, in the last decade, costs have risen in all areas of expenditure apart from clothing, which has seen a 5 per cent drop.

Looking after the pennies
Mums and dads all over Britain are tightening their purse strings, with more than three-quarters of parents (76 per cent) forced to make cutbacks to make ends meet. While many are reining in spending on luxuries such as holidays (45 per cent), more than a quarter are also cutting back how much they spend on essentials such as food (27 per cent).

Of those parents who are cutting back, 68 per cent have switched to buying cheaper or value goods. Vouchers and discount codes are also popular, with 56 per cent of these parents using them to save on shopping bills. Many are also trying to boost their income, with 40 per cent selling personal items online or at car boot sales.

Pushing parents’ finances to the limit
The cost of raising a child continues to soar and is now at a ten-year high. Everyone wants the best for their children, but the rising cost of living is pushing parents’ finances to the limit. There seems to be no sign of this trend reversing. If the costs associated with bringing up children continue to rise at the same pace, parents could face a bill of over £350,000 in ten years’ time [2].
Over the last ten years, London (£239,123), the South East (£237,233) and the East of England (£233,363) have remained the three most expensive places to raise children. Ten years ago this was closely followed by Wales, whereas now it is Northern Ireland (£232,883).

Families in the South West have seen the biggest hike in costs, now paying £100,077 more per child than they were ten years ago.

Keeping up with the latest technological advances
Forget dolls and train sets. Today’s children want the same toys as their parents, and the popularity of smartphones, tablets and laptops is adding to the expense of raising a child.
Many parents feel under pressure to keep up with the latest technological advances – even for children as young as three years old. Almost a third (28 per cent) of parents have bought their child an electronic gadget in the last 12 months, with around a fifth (18 per cent) paying out for a laptop or tablet. The average yearly amount parents spend on these gadgets for their child is £302.

Protecting the family’s financial future
Many families are responding to financial pressures by saving less and spending less. Two-fifths (40 per cent) of parents have reduced the amount they are putting towards savings and a further 26 per cent (up from 22 per cent last year) have cancelled or reviewed insurance policies to try to save money.

Almost half (47 per cent) of parents have no life cover, income protection or critical illness cover in place. While 36 per cent of parents do have life cover, only 11 per cent have critical illness cover and a meagre 6 per cent have income protection.

Catastrophic implications on the family’s finances
The cost of raising a child won’t always be the first thing parents think about when deciding to have a family, and regardless of the cost, people wouldn’t change having children for the world. But parents considering cancelling insurance such as life cover or income protection as a way of saving money need to think long term. It could have catastrophic implications on the family’s finances if either parent became unable to work or was no longer around.

The cost of raising a child has increased rapidly over the last decade and looks set to continue rising. It is imperative that parents make sure they financially protect themselves and their family and seek professional financial advice to talk about what best suits their needs.

[1] The ‘cost of a child’ calculations, from birth to 21 years, have been compiled by the Centre for Economics and Business Research (CEBR) on behalf of LV= in December 2012 and are based on the cost for the 21-year period to December 2012.
The report also includes omnibus research conducted for LV= by Opinium Research from
11-13 December 2012. The total sample size was 2,013 UK adults. Results have been weighted to nationally representative criteria.
[2] If the cost of raising a child continued at the same pace as the last ten years (58 per cent increase), in 2023 the cost would be £351,483.
* Does not include private school fees.
Parents who send their children to private school can add £106,428 for a child at day school, and £195,745 for a child who boards, to the overall cost of raising a child.

An important requirement, especially if you’ve
retired or are approaching retirement

How do you generate a reliable income when interest rates are stuck at all-time lows and the Bank of England’s quantitative easing policy of ‘printing’ money is squeezing yields on government bonds (gilts) and other investments?

Your ability to generate income
With more of us living longer in the UK, maintaining our standard of living in retirement and funding holidays and outings requires some careful planning. Have you considered how a longer lifespan and rising inflation could affect you and your ability to generate income?

Generating an income from your investments will be an important requirement, especially if you’ve retired or are approaching retirement, or if you need to supplement your salary or have a relatively short investment timeframe.

Fixed interest
The most popular forms of income investment are bonds (which are also known as ‘fixed interest’ investments) and cash, both of which pay a regular, consistent rate of interest either annually, twice a year or four times a year. You can also obtain an income from shares in the form of dividends, and many equity funds are set up solely with the purpose of generating a stable income. Importantly, equity income funds often aim to achieve not only stability, but also an increasing income in the long term.

Good cash flow
Income stocks are most usually found in solid industries with established companies that generate good cash flow. They have little need to reinvest their profits to help grow the business or fund research and new product development and are therefore able to pay sizeable dividends back to their investors. Examples of traditional income-generating companies include utilities, such as oil and gas, telephone companies, banks and insurance companies.

You should remember that these investments do not include the same security of capital that is afforded by a deposit account.

10 income investing tips

1 Sustainable long-term dividend growth – Investing in businesses when the growth potential is not reflected in the valuation of their shares not only reduces the risk of losing money, it increases the upside opportunity.

2 Inflation matters – Always bear in mind the detrimental effect of inflation. Corporate and government bonds offer higher yields than cash but returns can be eroded by inflation. Investment in property or equities provides a vehicle to help achieve an income that rises to keep pace with inflation.

3 Consider international diversification – A small number of UK companies account for approximately 40 per cent of UK dividend payouts. This compares with over 100 companies in the US, for example, that provide the opportunity to increase the longevity of dividend growth.

4 Patience is a virtue – Investing for income is all about the compounding of returns for the long term. As a general rule, those businesses best placed to offer this demonstrate consistent returns on invested capital and visible earnings streams.

5 Reliability is the key – Select sectors of the equity market that do not depend on strong economic growth to deliver attractive returns to investors.

6 High and growing free cash flow – Look for companies with money left over after all capital expenditure, as this is the stream out of which rising dividends are paid. The larger the free cash flow relative to the dividend payout the better.

7 Dividend growth – In the short term, share prices are buffeted by all sorts of influences, but over longer time periods fundamentals have the opportunity to shine through. Dividend growth is the key determinant of long-term share price movements – the rest is sentiment.

8 Cautious approach – Profits and dividends of utility companies are at the whim of the regulator. Be cautious of companies that pay a high dividend because they have gone ex-growth – such a position is not usually sustainable indefinitely.

9 Investment diversification – The first rule of investment is often said to be ‘spread risk’. Diminishing risk is particularly important for income-seekers who cannot afford to lose capital.

10 Tax-efficiency – Increase your net income by using an ISA (Individual Savings Account). The proceeds from ISA income is free of taxation, thereby potentially improving the amount of income you actually receive. UK dividend income has been taxed at source at the rate of 10 per cent and this cannot be reclaimed by anyone. The proceeds from ISAs are also free from capital gains tax, allowing you to switch funds or cash in without a tax charge.
The economic environment has been particularly unforgiving for investors who need to generate an income. The Bank of England reduced interest rates to a record low level as the financial crisis deepened – and savings rates followed.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

This important one-off decision has long-term consequences if you get it wrong

If you save through a private pension, when you approach retirement age you’ll have to decide what to do with the pension fund you have built up. If applicable to you, one option is to buy an annuity. It’s important to find an annuity that suits you and provides the best deal because, after your property, an annuity is probably the biggest purchase you will ever make.

An annuity is the annual pension that many people buy with their private pension pots when they retire.

Purchasing your annuity is an important one-off decision that has long-term consequences if you get it wrong. You may not receive the best deal if you just take the annuity offered by the insurer that has been investing your money.

Lack of advice might be costly
You only have one opportunity to shop around for your annuity. Once you have committed to an annuity provider and started to receive an income, the decision can’t be reversed. So it is essential that you shop around and obtain professional financial advice to help you through the process.

Last year, the National Association of Pension Funds (NAPF) announced that the lack of advice in this area might be costing half a million retirees each year as much as £1bn in future pension income.

Failure to shop around
The NAPF pointed out that the failure of someone to shop around – or being unaware they were able to do so – might reduce their annual pension income by a third.
The insurance industry has now agreed to reform its annuity practices, and from 1 March this year insurers will have to conform to new guidelines set down by the Association of British Insurers (ABI).

New guidelines will require insurers to:

Provide clear and consistent information, including details on how to shop around for an annuity

Highlight the details of enhanced annuities – the higher pension income available to those with shorter
life expectancy

Signpost clients to external advice and support
that is available

Give a clear picture of how their products fit into the wider annuity market

The point of retirement
Insurers have been obliged since 2002 to draw their clients’ attention to the fact that they can shop around for an annuity at the point of retirement.

One of the ways in which people may end up with too small an annuity is by not taking into account their own medical circumstances. Having conditions as seemingly manageable as high blood pressure or diabetes could qualify you for an enhanced annuity, which could pay you more income because your average life expectancy may be less.

Live better in retirement
If you are approaching your retirement we can take you through the process step by step to find the best annuity for you. Your retirement should be a special time when you do those things you never had the opportunity to do before. So it’s essential you think and plan carefully, as the decisions you take now cannot be undone later. If you are concerned about your retirement provision, please contact us to review your current situation.