It is never too late to plan. The main thing is to make sure that you live comfortably within your means.

One of the major concerns that people have when they retire is how they are going to live on their income. For most people this income will be their pension. Whilst some people make plans for their financial future well before they retire, others do not.

Upon retirement your only source of income may be your pension, in which case you will need to carefully balance this with expenditures, reducing these if necessary to ensure that you are able to meet them. Remember if your income is low, you may be entitled to additional benefits as discussed in the previous chapter.

On the other hand, when you retire you may find yourself with a large amount of cash, having taken all or part of a company or private pension as a lump sum. You could of course put this money straight into the bank. However, it will be more beneficial to you if you make it work for you to earn more through investments of various types.

1 PLANNING YOUR INCOME AND OUTGOINGS

When you retire you will have a set, regular income such as your pensions. You will also have regular outgoings or expenditures, for example gas, electricity, rent, council tax, telephone and so on. Where some expenses differ slightly from month to month, use an average figure. With this information you can work out your budget, normally on a monthly basis. This will show you how much you have left over after paying your known outgoings.

Using simplified figures, a typical monthly budget may look something like this:

This shows that there is £800 each month for other expenses such as entertainment, clothes, repairs, holidays and so on.

You may wish to take this a stage further and produce what is known in accounting terms as a cash flow forecast. This is really a series of monthly budgets but can include other less regular expenses. Again using simple figures, a cash flow forecast might look like this:

This shows the planned income and outgoings for the next six months. Simply add the balance or residue for each month to the income for the next. To keep a check, compare your actual income and outgoings with the plan and adjust future plans accordingly.

Budgets and cash flow forecasts will enable you to plan for the future and ensure that you have funds to meet unexpected expenses.

2 INVESTING FOR THE FUTURE

Before making any investments, you must decide what your requirements are. You may need a regular income, one or more lump sums at future dates or a combination of these. You also need to decide how much you can afford to invest and whether this will be made as a lump sum at the beginning or a series of smaller amounts at regular intervals. This will determine the type of investments which will suit you best.

Banks, building societies and other financial institutions offer a wide range of products designed to meet all needs. These range from simple schemes where you can invest and withdraw your cash at will, but earning only a low rate of interest, to investments in stocks, bonds, etc offering a much higher rate but with restricted withdrawal facilities or maturing at set dates in the future. It is worth remembering that the higher the interest or return, the higher the risk. You could earn a great deal of money by investing in stocks and shares but you could also lose everything, as investors in Lloyds found to their cost several years ago.

You must decide how much of a gamble you are prepared to take.

If you are not sure what to do, take professional advice. Individual Savings Accounts, or ISAs, are a way to save and invest tax-free. The scheme was introduced by the government in April 1999 and replaces TESSAs and PEPs and is guaranteed for at least ten years. There are two main types of ISA, the Mini and the Maxi.

• Mini ISAs. There are three separate Mini ISAs:
  • cash: which builds up interest similar to a savings account
  • life insurance: money invested on life insurance policies
  • stocks and shares: money invested on the stock market.
• Maxi ISAs. These are a combination of the above.

Depending on the type you choose there are limits to the amount you can invest.

ISAs are available from banks, building societies, other financial institutions and even some supermarket chains. Read their literature carefully to make sure that they meet the CAT standards. These are voluntary standards introduced by the government to ensure that the providers are giving you fair charges, easy access and decent terms. The literature will also give details of maximum and minimum amounts that can be invested.

ISAs were introduced to encourage everyone to save for the future. The main benefit is that, unlike other investments, the interest earned is free of all tax.

3 REDUCING THE TAX BURDEN

Unfortunately, retirement does not necessarily mean that you will escape the clutches of the Inland Revenue. You may still be liable to pay tax on your income. However, your Personal Allowance, also known as Age Allowance, increases from the age of 65 and again from 75.

• Non-taxable income. The state retirement pension is not liable for income tax. As we have already seen, interest received from ISA investments is also exempt from tax.
• Taxable income. All other income received from private or company pensions, share dividends, earned income, etc is liable for income tax if the total exceeds the Age Allowance.
• Capital Gains Tax. Profit made from selling assets such as shares and property, with the exception of your home, may be liable for Capital Gains Tax. However, there is an Annual Exemption. If the total profits for the year do not exceed a figure set by the government, currently £7,100 per person, no tax is payable. Therefore to avoid having to pay this tax, plan your sales so that the Annual Exemption is not exceeded. Alternatively, hold some of your assets in your spouse‘s name, then each of you could sell them and thereby double the profit before reaching the exemption figure. The tax payable on the excess profit depends upon the number of years for which the assets have been held. Assets held for two years or less are liable to 100% tax, assets held for ten or more years are liable to 60%. This is known as Tapering Relief.
• Inheritance Tax. This is covered in detail in Chapter 6.

If you are unsure of your tax situation, seek help from a qualified accountant or your local Inland Revenue office.

4 TAKING FINANCIAL ADVICE

If you have a sum of money that you wish to invest you would do well to take professional advice from an expert. There are basically two types of financial advisers.

• In-Company. These people are employed by a bank or other financial institution and, whilst giving you sound advice, will only be promoting their company‘s products.
• Independent. Not being tied to a particular bank or building society, they will be able to offer a wider range of investment products to suit your requirements.

Before seeking advice:

• Choose your adviser carefully, preferably on recommendation.
• Determine your needs, eg a regular monthly or annual income.
• Decide how much you wish to invest and what risk you can afford to take.

It is sensible to take advice from more than one consultant to enable you to compare their recommendations and decide exactly what is right for you.