Provided we are of sound health and mind, most of us would relish the prospect of a nice long life. There are however financial implications at both personal and government levels, with the key issue being: can we afford it?
We are living longer. The European Commission’s 2015 Ageing Report projects that, in the EU, average life expectancy at birth for men is expected to increase by seven years, from 77.6 in 2013 to 84 in 2060. For women, life expectancy is projected to increase by six years, from 83.1 in 2013 to 89.1 in 2060. Advances in science and medicine mean it is becoming more common for someone retiring at the age of 60 to live another 30 years – or more.
You need financial security to enjoy your retirement and your pension funds are a key part of that. The new pension freedom in the UK gives everyone with UK funds the ability to withdraw as much or as little as you want but you need to take care. If you need your pension savings to provide an income for life, you need to be sure that whatever you decide to do with them now, that you will have enough to see you comfortably through to the end of your days.
It is also essential to protect your savings and investments from inflation and unnecessary taxation. Inflation is a key threat for retirees. It reduces your spending power year after year.
If, for example, you typically spend about €5,000 a month, and assuming a personal inflation rate of 3% per annum, in 10 years’ time you could need about €6,720 a month to maintain the same spending and in 20 years this will have risen again to €9,030. The longer you live, the more damage inflation can do.
Longevity is also a big concern for the state. Rising life expectancy means that governments will need to raise more funds to cover their pension obligations and increasing health care costs. According to the EU, 30% to 40% of healthcare expenses are already being spent on people aged 65 or above.
Governments rely on income tax and national insurance/social security from a working population to fund their costs. However, a recent European Commission report says that the share of the population of working age is expected to decline steadily until 2050, while those aged 65 years or over will increase, accounting for 28.7 % of the EU’s population by 2080 compared with 18.5 % in 2014.
So, what are governments to do? One solution is to increase tax revenue. In the UK, a 2011 research paper by the National Institute of Economic and Social Research (NIESR) calculated that for public finances to remain sustainable, taxes will have to rise by £82 billion each year to pay for the pension and healthcare promises made to baby boomers.
It also said that a child born today will pay £70,000 more in tax than they receive from the government in benefits and services to help pay for the shortfall in funding. A child born next decade will pay an extra £160,000. In contrast, those aged 65 have received £220,000 more from the state than they paid in.
The UK government has already frozen the tax-free threshold for inheritance tax until 2019, to generate an extra £1 billion for the Treasury each year to help fund care for the elderly. This was effectively a tax rise in real terms, affecting thousands of families.
In Portugal, the Health Minister Paulo Macedo indicated earlier this year that tax hikes will be necessary to finance increasing healthcare costs. This is an issue other countries will be faced with in the not too distant future.
We have also seen a massive step up in the global campaign against tax evasion, as well as increased local efforts in countries like the UK, Spain, France and Portugal. This will help governments significantly increase tax revenue. In his March Budget speech, the UK Chancellor George Osborne said that he wanted to raise £5 billion from anti-avoidance and evasion measures by 2017-18.
January 2016 will see the start of a global automatic ‘exchange of information’ regime. Tax authorities will receive financial information automatically on everyone, which they will compare to what you include on your tax return to check you have properly declared your income and assets.
Retired people should set up their financial planning to shelter as much of their income and wealth from taxation as possible. There are arrangements available to expatriates living in Spain, France, Portugal and elsewhere in the EU that will provide tax mitigation within a legitimate framework. Reducing the amount of tax you have to pay will make your money go further and help fight the effects of inflation.
It is essential that you take advice from a professional tax and wealth management firm to make sure your assets are as tax efficient as possible and you have the income you planned for your retirement.
Click here to contact us for personalised advice