Giving your retirement savings a spring clean can bring peace of mind, support your offspring financially, and trim your tax bill. Faith Glasgow explains how to go about it.
For many older people who have retired on decent pensions with plenty of savings and are living comfortably within their means, there may seem little reason to worry about over the state of their finances.
After all, they have more than enough to live on, so why spend precious time fussing over tax breaks, investment performance or estate planning? Particularly for those who have never been particularly interested in this area, the ‘why bother’ argument may feel pretty powerful.
But the fact is that circumstances can change: deteriorating health, the death of a partner or the need for a care home could put unforeseen strain on the household finances. And if you want to help your children or grandchildren, it makes a lot of sense to do it as tax-efficiently as possible.
Of course, one solution is to pay a financial adviser to get your financial affairs in order and then oversee them. But if you’re prepared to do a bit of work yourself, here are some relatively straightforward but potentially valuable steps you can take.
1) Get a perspective on your situation
It may seem tedious, but it’s really useful to do a rain check on your financial position, including the value of your various assets and their tax status, your income sources and your typical outgoings.
Consider also how that position might change in future. For example, your income would be likely to fall if one partner died. As Henrietta Grimston, associate director in financial planning at Evelyn Partners, explains: “This could be an absolute loss of pension income, or a reduction, such as a spousal benefit on a final salary pension.”
She adds that it’s even more important for non-married couples, where there may be no benefit paid to a surviving partner.
- 8 things you must know about building a retirement portfolio
- When it’s time to start spending: how to spend your wealth and cut your tax bill
A rain check is also a useful exercise in administrative terms. If something happens to you and your partner or family members have to take over management of the finances, will they know where to find all the paperwork? Do make sure they know what’s kept where.
2) Keep a cash buffer
If you know how much you’re receiving and spending, it becomes much easier to work out how much you should hold in cash.
A cash cushion is important in the event of unexpected expenses such as car, roof or boiler replacement. Equally, if you’re reliant on investment income as part of your pension or in addition to it, having cash readily accessible means you can avoid touching your investments when markets are in a slump.
That’s particularly important if you normally take more than the ‘natural’ income generated by your investments, because when the market falls, you’ll have to cash in more units or shares to maintain your regular income, which can do serious long-term damage to your portfolio.
3) Longer-term savings
“As you age, it might be sensible to gradually shift towards less-risky investments. A portfolio that was appropriate in your 50s or 60s may not be the best fit in your 70s or 80s,” she says. That’s because your appetite for risk tends to diminish as you become more reliant on investment income; moreover, your time frame is also likely to be shorter.
Furthermore, given the impact of inflation on investments over the long term, it’s important to ensure that your long-term savings are working hard and keeping up with increasing living costs as well as with your changing needs.
- Could your pension be the solution to your inheritance tax woes?
- Give away your wealth to save mega tax bill: your guide to gifting rules for IHT
To put that into context, if you had £100,000 in cash, then after 10 years with inflation at 3% it would be worth less than £75,000 in terms of today’s purchasing power. If it were invested and growing at say 5% a year, then despite the impact of inflation it would have purchasing power of £122,500 in 10 years’ time.
Ben Yearsley, investment director at Shore Financial Planning, suggests Troy Trojan as an obvious fund choice if that’s your main concern. “Keeping pace with inflation is the core principle,” he says. “It invests in quality equities, gold and index-linked bonds.”
4) Tax-efficient routes
There are several simple ways to minimise the amount of tax you have to pay on savings and investments in retirement.
An obvious one is to make as much use as you can afford to of your £20,000 ISA allowance. Even if you don’t have any spare money to invest, you can use your allowance to bring any existing taxable holdings under the tax-free shelter through a process known as Bed & ISA.
That means cashing in some shares each year within your annual capital gains tax (CGT) allowance (currently £6,000 but falling to £3,000 from 6 April 2024) and reinvesting the proceeds into your ISA.
Second, avoid moving more money than you need out of your pension (where it can grow and generate income free of tax) and into a taxable savings account.
Finally, if you have several sources of retirement income, Grimston suggests: “Just because you have saved into a pension during your working life, that may not be the most efficient place to take your retirement income.”
Pensions do not count as part of your estate (although if a pension is inherited, the beneficiary may pay income tax on what they receive), so if you’re worried about inheritance tax (IHT) issues it could make sense to use up your ISA and any taxable investments first.
5) Canny gifting
Many comfortably-off older people are keen to make life a little easier financially for their children and grandchildren by making lifetime gifts to them, rather than leaving the whole inheritance until after their death. That way, they also get to enjoy seeing the family benefit.
As Hooper observes, there’s a further advantage: “This can be a sound way to reduce the size of your estate and potentially lessen the amount of inheritance tax at 40% to be paid after you're gone.” However, you should ensure that you have enough for your own current and future needs.
It’s also important to understand that although you can give as much as you like to anyone you want, if you die within seven years of making the gift, it could potentially still be counted as part of your estate for IHT. Provided you survive those seven years, the gift falls out of your estate altogether at that point.
- Tips on gifting and inheritance tax
- Grandparental giving: sharing your wealth and seeing the benefits
If your gifts are relatively modest, it’s possible to use a range of gifting allowances to ensure they are exempt from IHT.
These include the £3,000 annual gift allowance (which can be carried forward to the next tax year if you don’t use it), the small gifts exemption, which allows you to make any number of gifts up to £250 provided they are not to the same person, and wedding/civil partnership gift allowances.
Provided you are living on less than your regular income, you can also make use of the ‘gifts out of surplus income’ allowance. This allows for regular gifts of any value from income, provided they don’t impact your own standard of living, and can be a really valuable way of passing on assets tax-free over the years.
6) Estate planning
As well as thinking about IHT, do make sure you have other key documents in place and up-to-date. These include your will, and also lasting power of attorney, which gives your children - or another nominated individual - power to make decisions about your money or well-being if you are no longer able to do so.
Hooper suggests that a living will (also known as an advance decision), which is a legal form you complete if you wish to refuse medical treatments that could keep you alive, is also worth considering.
- Care home fees: 9 things every spouse or partner must know
- Financial planning for two – an enduring way to say I love you
“Additionally, it's a good idea to review the nominated beneficiaries on things such as pension pots and life insurance policies,” she adds. That’s because events such as divorce or remarriage, or changes in circumstance, can mean that the beneficiaries you named 20 years ago are not necessarily those you’d choose today.
Finally, if you’re overhauling your finances, take a look at the insurance you have in place – home and contents, life cover, medical cover – and consider whether it’s still needed, or whether you should be modifying the terms or setting up other policies (insurance to cover care home or hospice costs, for example).
A retirement financial spring clean may sound like hard work, but it will set your finances on the right path and could make things much easier for you and your family now and in the years to come. And remember, a financial planner can provide practical help and guidance all the way if you need it.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.