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?
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, enjoy our retirement years to the full, etc.
Thanks to advances in science and medicine, it is already common for someone retiring at the age of 60 to live another 30 years, and as medical research and developments progress, life spans are likely to 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. 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 taxation, which are key threats to our wealth, particularly for retired people.
As life expectancy increases, so does the length of time we need our savings and investments to last and provide an income. 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 assuming 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 €9,030.
Your pension funds are obviously a key part of your financial security. The new pension freedom in the UK will give everyone with UK funds the ability to withdraw as much or as little as they want. This is a welcome move, but it is important to ensure that pension funds are used or re-invested wisely, to avoid the risk of depleting your pension savings for your later years.
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.
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 fewer people in work and more people in retirement, there is much less tax coming in to support social services for retired people.
A report from Moody’s Investor Service in August revealed there will be 13 super-aged countries by 2020, up from three today – this includes Portugal, France and Malta. Another 11 countries will join this group by 2025, including the UK and Spain.
A “super-aged” country is defined as one where over 20% of the population is elderly. By 2030 it will reach 34 countries, including the UK.
Moody’s also said that the global working population will only grow by 13.6% from 2015 to 2030, compared to 24.8% over the previous 15 years.
To give an example of the impact of an ageing population, in the UK, a 2011 research paper by the National Institute of Economic and Social Research (NIESR) 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 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.
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. Or if they do, they may have to rise again before too long as governments will still need to increase tax revenue.
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, Cyprus, Malta, the UK and elsewhere 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 – 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. Take advice from a professional tax and wealth management firm.
16 October 2014