The Cost Of A Ripe Old Age


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We hear reports of new potential cancer treatments around the corner that could change the face of the disease for the better. Stem cell technology could be leading the way towards a continuous

We hear reports of new potential cancer treatments around the corner that could change the face of the disease for the better. Stem cell technology could be leading the way towards a continuous supply of new organs. This has got to make you wonder how long we will be capable of living in the not too distant future.

We?ll have to wait and see how things turn out, but in the meantime we are already living longer in the West and it will become increasingly common for someone retiring now at age 60 living for a further 30 or 35 years.

Assuming that our minds are sharp and we are healthy, this does have appeal. However there are implications at government, company and personal levels with the key issue being: how will we be able to afford it?

In addition, retirement is becoming ever more expensive for an increasing number of people. For example, at the end of last year a Sunday Times article, ?The Double Burden for the Baby Boomers?, reported on a ?sandwich generation? of people who not only have the financial responsibility for themselves but also for their elderly parents and adult children who still often pull on the purse strings in their efforts to get onto the housing ladder.

As the populations of the western economies gradually live longer, combined with lower birth rates, this inevitably results in a lower ratio between the percentage of the population in work and the percentage that is retired. Historically, those in work have paid taxes which have immediately re-circulated to pay old age pensions, NHS pensions etc. Likewise tax revenues have been immediately applied to the running costs of state sponsored healthcare.

The potential shortfall between the current level of taxes levied and the potential pensions and healthcare costs in the future is a much debated topic.

If there was an issue before, arguably it has just got a lot worse. We?ve seen significant amounts of government funding to support the ailing banks. Actually, let?s re-phrase that: the governments have used tax revenues to prop up the banks which would have otherwise have been used for other purposes such as schools, hospitals, doctors, police, fire fighters. Even if governments have borrowed money to support the banks, this will be repaid from future tax revenues.

To make matters worse, UK interest rates are now at just 0.5% and European rates are not much better. Government tax revenue from bank interest is therefore falling. Lower fuel costs mean lower tax revenues. Higher unemployment will mean less people paying tax and a higher level of benefits for governments to pay out. The UK has temporarily reduced the rate of VAT, which will further reduce tax revenues and people are spending less throughout Europe resulting in less revenue coming in from VAT.

Although these factors will impact each of the countries within the EU in different ways, there is an argument that given everything that has happened to date, coupled with the future outlook, there will be strong pressure for governments to pursue higher taxation policies in the future to balance the books. This problem could be further exasperated in the event that more government funding is required to prop up ailing banks.

In the US, Barack Obama has said that he will pursue an aggressive policy against offshore centres in order to give more transparency and enable the Internal Revenue Service (IRS) to collect all the taxes due from US citizens. This is a sign of a major government trying to ensure that all taxes are paid before they possibly consider tax increases in other areas.

The UK launched a review into the long-term opportunities and challenges for its crown dependencies and overseas territories as offshore financial centres covering financial supervision and transparency; fiscal arrangements; financial crisis management and resolution arrangements and international cooperation. Although the review initially focus on banks, given that the UK government became embroiled in the collapse of the Icelandic bank Kaupthing, it will nevertheless be interesting to see whether it develops into something more akin to the US strategy.

What does this mean for you?

Assuming that increased longevity is a continuing trend and governments commence higher taxation policies once the current slowdown ceases, one of the key ingredients to protecting your wealth will be to ensure that your money is treated as tax efficiently as possible, when it is accumulating and also when you need to draw an income from it.

From the action taken by governments recently, it?s clear that the old offshore world of investing in tax havens and not declaring interest or gains is dead and buried. Legislation in most countries, including Spain, France, Portugal, Cyprus and the UK, results in a tax liability on your worldwide assets irrespective of whether you remit the funds into your country of residence or not. European governments are aggressively sharing information. The Savings Tax Directive was introduced to either impose a withholding tax on interest or dividends or force disclosure to the taxman in the country in which you are tax resident. The fact that the rate of withholding tax rises to 35% in 2011 is a clear indication of the reducing attractiveness of jurisdictions including Jersey, Guernsey and Isle of Man.

So what may be the solution for protecting your assets from tax?

There are authorised and legitimate tax shelters available throughout the EU which are not deemed contentious by the local tax authorities and offer investors a wide spread of different investment options based on attitude to risk, investment time horizon and investment objectives. From a tax perspective they offer the opportunity to legitimately accumulate assets in a largely tax free environment and can be particularly tax efficient in respect of withdrawals and income following assessment to local taxes in the country in which you are tax resident.

Clearly, everyone has their own particular situation and objectives in respect of sheltering their assets from tax to protect them for the future, so authorised professional advice should always be taken from an authorised reputable and established company such as Blevins Franks.

by David Franks, Chief Executive, Blevins Franks

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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