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Paying your bills for the rest of your life
As retirement approaches, it's time to start budgeting for the years ahead and thinking about how you are going to spend all of that hard earned pension money and those retirement savings. Whether you are on a low income or looking to dispose of some sizeable assets, this guide will help you to navigate the financial aspect of the exciting world of post-retirement living.
What help is available for those on low incomes?
Retirees over 60 can claim several different types of benefits for everything from healthcare to bereavement. Age UK
provides a comprehensive list of the various benefits available to help retirees on low incomes. Travel concessions and concessions and museums and galleries are also available for all senior citizens, regardless of whether or not they are required. You can also apply for a pension credit to 'top up' your pension so that it enables you to live more comfortably: details of this can be found at the Citizens Advice Bureau
. For a lot more information, please see our benefits page
How to deal with your assets and investments
If you are lucky enough to have assets and investments to your name by the time that you retire, it's time to think about how to deal with topics such as equity release, and the disposal of those assets and investments. If you own your house, or have a similar asset (such as a garage or an office space that you own), you can obtain a sizeable lump sum to help you to enjoy your retirement by participating in an equity release scheme. This involves retaining the use of your asset (so, for instance, you would continue living in your house) whilst using its value to receive either a lump sum or a continuous set of payments from it. The company or individual providing you with this money would be paid back by you after a specific period - usually, you will pay them back after your death. A useful discussion of the advantages and disadvantages of equity release can be found here
. Investments and assets can be sold off, or they can be used to provide you with income well into retirement. Many retirees choose to rent out a floor of their house, for instance, to supplement their pensions. Beware of sharks!
When you are making investment decisions it is absolutely vital to remember that there has been an explosion of fraud over the last few years, much of it targeting the over-sixties. Many of the scum that operate these scams are very sophisticated with professional-looking websites, and they can sound very plausible. Please don't ever make important investment decisions without checking first with qualified advisors that you can trust - and you should still be careful, a lot of very high profile swindles have been carried out by 'pillars of the community' over the years so take your time and don't be afraid of double, triple, or even quadruple checking before handing over your money. Far too many lives have been ruined by unscrupulous con merchants; particularly over the Internet.
Fancy some SKIing?
SKIing stands for 'spending the kids' inheritance', and it is rapidly becoming a popular way to finance a retirement, particularly among baby boomers. It is estimated that around 1 in 6 senior citizens in the UK are funding their retirement in this way. They typically spend their money on luxuries such as cruises and new cars. However, SKIers who do not have a substantial pension, assets or other nest eggs to back this spending up should act with caution. It is crucial not to get caught up in the 'SKIing' mindset, exhilarating as it may be, and to fritter away all of your money only to find yourself severely lacking in finances just a few years in to your retirement. Placing savings in a high interest account (be careful: 'high interest' often meand 'high risk'), or making some well thought out investments, can help to keep you financially secure for the rest of your lives.
Should you consider an annuity?
Annuities are inverted forms of life insurance. Whilst life insurance pays the insured individual after death, annuity payments are made to annuitants during their lifetime. Professionally, an annuity takes place when one party promises to make a series of specific amounts of payments to a person until the event of death. In other words, it is a financial package that lets you turn your pension funds into regular income when you retire. By getting an annuity, you can be able to turn your pension savings into a guaranteed income for the rest of your life.
These are complex investments and it is vital to get qualified, independent (ie not from an insurance salesperson!) advice before committing yourself.
Who is involved when making an annuity contract?
1. The contract owner or annuitant is the person who buys the contract and pays the premiums. The number of annuitants depends on the type of annuity.
2. The beneficiary is the person who is set to receive the remainder of the annuity, if applcable, in the event that the owner dies.
3. An insurance carrier is the financial institution that collects the funds, regulates the contract and makes payment to the annuitant and beneficiaries.
Types of annuities
A single-life annuity covers you until the event of your death.
A joint-life annuity allows regular payments to you and your partner and it ceases when either of you dies.
An enhanced annuity is for individuals with proven, shorter, life expectancies. It is usually more than the other types.
A value-protected annuity allows you to leave the remainder of your annuity to the person of your choice when you die.
The timing for releasing annuity payments depends on the type of policy.
Immediate annuities do not involve the accumulation stage. Instead, the individual receives payments as soon as the contract is in effect.
Deferred annuities have a systematic withdrawal. The amount invested in these policies is supposed to grow for a specified period of time before payment begins.
Advantages of Annuities
Some of the major advantages of having an annuity are:
•Tax Deferred Status. The fact that annuities have a tax-deferred status makes them unique, from all other types of investments. All the funds accumulated into an annuity are tax-deferred until withdrawal.
•The payouts are guaranteed. No matter your choice of payout and type of annuity, you can relax knowing that you will receive regular incomes until you die or the pot runs dry.
•Protection from Creditors. Annuities are generally free from creditors and probate proceedings. However, you will need to confirm this with your insurance provider.
Although annuities have many benefits, they also come with a few drawbacks to the investors. The main disadvantages of annuities are:
•High cost. Annuities are among the most expensive forms of investments in the insurance industry; they can charge a fee of up to 3%. Although the fees can differ from one type of annuity to the next, they all come at an extra cost to cover management and other services.
•Less liquidity. Most annuities come with stiff regulations. You are likely to be penalised if you want to withdraw before the time stipulated in the contract.
•Commission charges. Most annuities are sold by insurance brokers who usually include a commission fee.
•Taxation. All withdrawals that are not a refund of principal are taxed as ordinary income, regardless of the accumulation period.
•Surrender charges. Annuity contracts have surrender charges which decrease every year, before expiration day. You are most likely susceptible to facing a penalty for withdrawing money for a few years after buying an annuity. The percentage of the surrender charge depends on your insurance provider.
However, surrender charges may not apply in the same way in all conditions. Under certain circumstances, insurance companies allow investors to withdraw some or all the funds in their pot. For example, they may allow an annuity owner to make free withdrawals in the event of a medical or hardship emergency.
At the end of the day, putting away some of your pension to purchase an annuity may, or may not, be the right decision for you. If you want to enjoy receiving a regular income long after retirement, ensure that you do extensive research, including independent professional advice, before deciding.
Looking for life insurance?
Life insurance doesn't have to be unaffordable. This applies even as we get older, since policies are available which are designed to cater for the needs of those approaching, or over, pensionable age.
By shopping around and comparing premiums and benefits you could cut the costs even further. However, which of us have the time or inclination to do that? Luckily there is a better way.
Our partners have access to a panel of insurers, all of which are, of course, fully authorised and regulated by the Financial Conduct Authority, which ensures that the regulated companies meet the highest ethical standards and will work hard to find the best policies for you.
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