Provided we are of sound health and mind, most of us would relish the prospect of a nice long life. We would have more time to enjoy the company of our loved ones, see our family grow
Provided we are of sound health and mind, most of us would relish the prospect of a nice long life. We would have more time to enjoy the company of our loved ones, see our family grow as our grandchildren have children of their own etc. Those who moved away from the UK retirement will wish to have as much time as possible to enjoy their new life.
Thanks to advances in science and medicine, it is already becoming more common for someone retiring at the age of 60 to live another 30 years, and as medical research progresses life spans will increase.
There are however financial implications at both personal and government levels, with the key issue being: can we afford it?
Governments will need to raise more funds to cover their pension obligations and increasing health care costs, and tax revenue will play a key role in this. On a personal level we will need to ensure that our wealth will last us comfortably right to the end of our days, even after inflation and (very possibly increasing) taxation.
Tax and inflation are key threats to our wealth, particularly for retired people. You should consult with Blevins Franks to ensure your finances and assets are set up to provide protection from both as much as possible.
We all need to be aware that as life expectancy increases, so does the length of time we need our savings and investments to last and provide an income. The longer you live, the further your money will need to stretch and the higher the possibility of it running out early. The last thing anyone wants is to have to reduce comforts and items like private healthcare in their later years.
Your financial planning needs to take inflation into account. If, for example, you typically spend around ?5,000 a month nowadays, and should we assume a personal inflation rate of 3% per annum, in 10 years? time you could need around ?6,720 a month to maintain the same spending and in 20 years around ?9,030.
From the government?s point of view, rising life expectancy will only add to the already high burden on the State.
The more older people there are, the higher the national health bill for the Treasury, not to mention the need to pay out state pensions for longer than in the past.
Governments rely on taxes to fund their costs. In the past, there were more people in work than in retirement. Taxes were largely collected from the working population, who pay both income tax and national insurance/social security. Today, with less people in work and more people in retirement, there is much less tax coming in to support social services for retired people.
So, what are governments to do? One solution is to increase tax revenue, and there are already steps towards this.
In February, UK Health Secretary Jeremy Hunt said that the tax free threshold for UK inheritance tax would be frozen until 2019. This is expected to generate an extra ?1 billion for the Treasury each year, which will be used to help fund care for the elderly.
The inheritance tax nil rate band has already been frozen since 2009 as an austerity measure, whereas before it increased every year with inflation. This is effectively a tax rise in real terms, and will cost thousands of families up to ?95,000 or more ? if the threshold increased with inflation, it would reach ?420,000 by 2019.
We have also seen a massive step up in the global campaign against tax evasion.
In Spain, its new overseas asset reporting law may have come about as a means of increasing tax revenue to help improve the current economic woes, but it will continue to be play an important role in providing money for the state once the economic crisis is over and the government moves on to tackle the issue of longevity costs.
Many of the current high tax rates in Europe were introduced to help lower budget deficits, but we should not rely on them to fall back to pre-crisis levels once it is over. Governments will still need to increase tax revenue.
In the UK, for example, a research paper by the National Institute of Economic and Social Research (NIESR) in 2011 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.
Retired people should set up their financial planning to shelter as much of their income and wealth from taxation as possible, ensuring that all methods used are fully legitimate.
There are arrangements available to expatriates living in the EU which 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 combat the effects of inflation.
The investment opportunities available within these ?tax wrappers? will help you structure your finances with the aim of keeping pace with inflation ? thereby allowing you to combine the various aspects of your financial planning in one exercise.
As always, it is essential that you ensure that any financial decisions you make are fully in line with your personal situation and objectives. Advice from Blevins Franks will help you get your affairs in order and ensure that you get your tax planning right from the outset.
20 February 2013
The 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; an individual should take personalised advice.