Longevity? What?s The Cost?

03.05.11

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The UK March Budget included the announcement that the government is consulting on linking the state pension age to longevity in order to ?constrain future spending pressures from our ageing so

The UK March Budget included the announcement that the government is consulting on linking the state pension age to longevity in order to ?constrain future spending pressures from our ageing society?. This issue of longevity has serious implications for governments across Europe as the costs of caring for an increasingly older population start to mount up. It also has implications for each of us as taxes may have to increase yet again as a result. Also, as more and more of us will spend up to a third of our lives in retirement, we need our savings to be able to last for longer than we may have expected.

For peace of mind, your savings and investments should be structured to be as tax efficient as possible; to outpace inflation and generate a natural income as needed.

So why is there this need to increase the pension age? According to analysis from the UK?s Department of Work and Pensions, over 2 million people currently over age 50 will reach their 100th birthday. By 2033 23% of the population will be 65 and over. There are already more people aged over 60 than under 16 and this will get worse as more of the baby boomer generation enter retirement and there are even fewer people working and paying taxes.

The week before the Budget the National Institute of Economic and Social Research (NIESR) published a research paper, Generational Accounts in the United Kingdom, which calculated that if public finances are 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 warned that the future bill for the pension and healthcare costs for the UK?s ageing population will dwarf today?s government debt.

According to the NIESR study, Britons over the age of 40 have been net beneficiaries of the state (they receive more from the state than they contribute), leaving a bill of up to ?7.8 trillion for future generations to pick up.

While the average 65 year old has enjoyed a net ?220,000 state subsidy above the tax paid, a new born child will pay ?70,000 more in taxes over their lifetime than they get back in pension/healthcare costs. This increases to ?160,000 for a child born in the 2020s.

The shortfall ?is mostly driven by the upward pressure on spending, especially pensions and health, resulting from demographic pressures?. It is not a result of the recent rise in dept caused by the economic downturn, which only has a ?relatively modest? impact on long-term financial stability.

While there are steps the government can take to reduce the cost to future generations, the study warns: ?Even if retirement is delayed and health spending is related to mortality rather than to age, it does seem likely that substantial further tax increases/spending cuts will be needed for the public finances to be sustainable.?

The Institute?s simulations suggest that taxes need to rise by around 6% of gross domestic product, which is around ?82 billion.

While this sounds bad enough, the NIESR says that UK demographics put the country in a better financial position than much of continental Europe, thanks to a rise in fertility in recent decades. In contrast, Spain has one of the lowest birth rates in the world.

According to a European Commission 2009 report, there are four people of working age in Europe for every person aged over 65, but this will fall to just two people of working age by 2060.

A 2010 study by Spain?s Instituto Nacional de Estadistica (INE) said that the population aged 64 years and over is set to double in 40 years and come to represent 31.9% of the total. The dependency ratio of those not working will rise from 47.8% to 89.6%.

France?s National Institute of Statistics and Economic Studies (INSEE) also warned that proportion of people aged over 60 in France will rise to 31.1% in 2030 compared to 20.6% in 2000.

If you are already retired the state pension age is not an issue for you but longevity could impact on you in other ways. You could be affected by any tax rises the government has to implement to fund its growing welfare costs. Health care systems may also be changed so you have to contribute more to your costs.

Then there is the concern that your savings may not be sufficient to see you right through to the end of your years, or at least not at the standard of living you are used to. Any rise in inflation coupled with a growing life expectancy could have a significant domino effect on the lives of retired people. Your financial planning needs to take into account the possibility of you living longer than you may have expected.

It makes sense for retired people to set up their financial planning to shelter as much of their income from taxation as possible. There are arrangements available to expatriates living in the EU which will provide tax mitigation within a legitimate framework.

The investment opportunities available within these ?tax wrappers? will help you structure your finances with the aim of keeping pace with inflation, so you can combine the various aspects of your financial planning in one exercise.

As always, it is essential that any financial decisions are fully in line with your personal situation and objectives. A professional firm like Blevins Franks would advise on a wealth management strategy to preserve your wealth.

By Bill Blevins, Managing Director, Blevins Franks

15th April 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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