This piece first appeared in The Daily Telegraph on 20 January
The text here may not be identical to the published text
It may not seem very exciting to start your retirement with an audit – but it could save you a lot of grief later. For most of us work is like a bicycle – we keep upright as long as we travel along. But what happens when we stop? Where will the money come from? How will we live? What can we afford to do? It does not take much for the dream of giving up the nine-to-five to seem more like a nightmare of boredom and poverty. So start with an audit, then you know where you stand.
The basic state pension rises to £72.50 a week from April this year and most people who have worked for almost all their lives will get that much. The pension still discriminates between men and women – women can claim their pension at 60 while men reach pension age five years later. You need to have full National Insurance contributions for all but five years from the age of 16 to get a full pension – but if you stayed on at school you can get credits up to age 18. And at the other end of life, men get up to five years credits if they do not work after 60.
Almost all working women pay full contributions now, but around 100,000 still pay the reduced rate married woman's contributions which do not count towards a pension. But all is not lost. They can claim on their husband’s contributions to get a 60% pension, or if they are divorced or widowed they can use his contributions up to the end of the marriage or his death to get a full pension.
On top of the basic state pension there are extra bits – most people retiring now will have some graduated retirement benefit and SERPS - even people who opted out of SERPS will, oddly, still get something from it for years before 1997.
You can find out what state pension you will get, and what you can do to improve it, by asking for a retirement pension forecast on form BR19. If you have access to the internet you can print off the form from the Department of Social Security website www.dss.gov.uk or even complete it online. Or you can ring 0191 218 7585.
There is other help from the state – once you are 60 the Government itself will guarantee your income should not fall below a certain level. From April that rises to £92.15 a week for a single person and £140.55 for a couple, though if you have savings over £6000, those amounts are reduced. You may also get extra help if you are disabled or look after someone who is. And you may get a reduction in your council tax or rent. All these things can seem very hard to qualify for, but if you don’t ask you will never know.
Even the Chancellor joins in. In the tax year you reach 65, you are immediately allowed another £1455 a year before you have to pay any tax. That is worth £320 a year to most taxpayers. This concession is withdrawn completely if your income is above around £21,000 a year.
Free or cheap
As well as state benefits, many other goodies arrive at the age of 60 or 65. You can get money off fares on coaches, trains, buses and even aeroplanes – if you ask. Many offer straight reductions to people over 60, others – such as rail – insist you buy a card first. For local buses contact your local council. You can also get money off the entry price to museums, stately homes, sports facilities, even cinemas and theatres. Once you have got used to admitting you are– whisper it – a ‘senior citizen’, prices come down.
Nowadays, more and more people who retire have their own pension to top up the state provision – and just as well! There are two main sorts of pension you may have paid into. If you have worked for the state – either local or national – or for a large company your pension will probably be related to your salary around the time you retire. Typically you might get an eightieth of your final pay for each year you have paid into the scheme. Alternatively, your pension may simply be a pot of money that you have paid into and which then has to be converted to a pension. How much you get will depend on the size of the pot, of course, but also on how you convert it into a pension. Normally that is done by using the pot to buy an annuity – a guaranteed income for life. In recent years the income you get for a given amount of money has fallen sharply as interest rates have dropped and life expectancy increased.
Maybe you have also paid in for extra pension through ‘additional voluntary contributions’ or AVCs. Or you may have paid into a personal pension – either as an employee or as self-employed. These are all the ‘pot of money’ kind of pension.
To find out how much your various pensions may be, think who you have worked for – even in the distant past – and consider if you have pension rights that built up then. You can get help to track down old pension schemes through the Pensions Schemes Registry, PO Box 1NN, Newcastle upon Tyne NE99 1NN.
Your company scheme should tell you what your pension could be when you retire. And if you have taken out extra pension through AVCs or a personal pension plan, then contact the insurance company that ran it – they should be sending you annual statements anyway. But remember that any estimates about future pensions, especially those that have to be bought in the market, are just that – estimates based on rates of interest that are prescribed by law.
Remember that you can normally draw a lumpsum from your pension fund when you retire. It is tax-free and it may be a useful way to reduce your debts such as mortgages, credit cards, or loans. It may make sense to reduce outgoings by paying them off.
And check that your savings are earning a top rate of interest – the best accounts are operated over the phone or the internet.
Boost your income
However much pension you get, it almost certainly won’t be enough. So you may want to consider if you can do something to boost it – a sort of talent audit! Are there things you have done as a hobby that can be turned into money? Writing, teaching, accountancy, cooking, music, painting – all can be turned into a paying hobby.
And then of course there is your home. That can be a source of valuable income. First, you could consider using the value of your property to raise income directly. Under these deals you sell a share of the value of your home to an investment company and use the proceeds either to spend or invest. As property prices rise – and the money runs out – you may want to sell another share. Nowadays these schemes allow you to move or even go into a residential care or nursing home. Of course, you may end up using all the money your heirs may expect to inherit. But it is your money and most children would rather you did that anyway! Only deal with companies that are part of the Safe Home Income Plans – SHIP – organisation. Contact them through Hinton and Wild on 0800 32 88 432 or its website www.hinton-wild.co.uk.
Second, you could trade down – moving to a cheaper area or a smaller property or indeed both – to release capital from your home. Be careful what you do with the money you release and remember that the cost of moving is itself high. An alternative is to keep your home, rent it out and use the rental income to buy somewhere else. That only works if your original home is in an area with a strong rental market. You could even try buying to rent, using your existing home as collateral. Many mortgage companies offer mortgages to people of any age who want to ‘buy-to-let’. Compare them at www.moneyextra.com.
Third, remember that a big home may not be a liability. You could let some of the rooms in it – either directly by separating them off into a small flat or by simply having a lodger.
Retirement is a big change. And like most changes the more you plan and think the more successful that change will be.
20 January 2001