Financial planning for later life

In 1987, Peter Laslett introduced the idea of the ‘Third Age’, which is a post-retirement period of life characterised by personal achievement, an active lifestyle and self-direction and the ‘Fourth Age’, being an era often marked by increased dependency and the need for additional health and financial support.

With the cost of living increasing, a change in our approach to working in retirement, an increasing need for care and support in later life and the Government targeting pensions, savings and investments to increase taxes, it is vital that we review our financial plans in our ‘Third Age’, to ensure financial security and comfort in our ‘Fourth Age’.

Later life planning does not need to be complicated, but it does need to be discussed and planned.

So, what should we be thinking about and how do we help ensure a more comfortable ‘Fourth Age’? Let us consider five areas of financial planning that, while relevant at any age, become more critical as we get older.

Investment risk

Not all investment solutions are right for everyone. Some carry higher risks and with increased risk comes volatility and the potential for capital loss. But not all investment solutions require you to take this risk. You may have to sacrifice higher rates of return if you de-risk, but for some this is a necessary step, particularly, if you find it difficult to accept the ongoing rise and fall in the value of your portfolio and the potential for capital loss. That said, your view of risk and volatility can change with understanding and education, so time spent learning about investment risk and the real meaning of ‘volatility’ can be time well spent.

Taxation

The less tax efficient your portfolio, the more tax you will have to pay. So, ensure you use solutions which minimise the tax you must pay. Individual Savings Accounts (ISAs) are the most popular example. If affordable, make sure you use your maximum £20,000 allowance every year (subject to the full allowance being available for both cash and equity ISAs after the Autumn Budget), remember, there is no income tax or Capital Gains Tax (CGT) to pay on withdrawals from your ISA.

But how else might we reduce the tax burden on our hard-earned monies? Life Assurance Investment Bonds defer any potential tax liability on withdrawals (to a maximum 5% withdrawal per year of the original capital invested) and offer investment funds to meet most risk profiles. Consider these solutions to enhance the capacity for growth on your savings and defer or at the very least significantly reduce your income tax liability.

Lastly, there are the more sophisticated, but high-risk investments, which can offer accelerated inheritance tax efficiency, removing the funds invested from your estate over two years. These may also provide income tax relief and the deferment of capital gains tax liabilities. However, such benefits come with increased complexity and significantly more risk. If you would like to know more about these products, please do contact us.

Monitoring, reviewing and testing

Make good use of your professional advice and your professional advisers. Keep an eye on your investments and ensure at least annual reviews. Not only will this give you peace of mind, but there may be relevant legislative and regulatory changes that you need to be aware of. There may also be new financial solutions that come to market, providing you with increased benefit potential. If more peace of mind is required, then request a cash flow model to give you some idea of how long your lifestyle can continue to be supported or how you might plan for that potential increase in your cost of living in later life, when additional care and support is needed.

Health and wellbeing

As we age our health will change. Not always a bad thing when it comes to gaining extra benefit from our savings and investments. With changes to our health the benefits to be received from annuities can increase dramatically. If you are risk averse, healthy and over 75, an annuity can provide you with a secure and guaranteed income for life. However, at any age, if your health deteriorates, ‘impaired life annuities’ that are medically underwritten, can provide annuity rates of 20 to 30% pa when paid directly to a registered care provider (see below).

Taking a break from ‘finances’, now is a good time to review those Wills written before the grandchildren arrived, before our wealth accumulated and before we lost those beneficiaries that predeceased us. Now is also a good time to talk to those close to you about whether they would be able to look after your affairs if you were unable to do so yourself and put your Lasting Powers of Attorney in place. Not forgetting the ‘Expression of Wish’ for your pension, to ensure that your Pension Trustees are aware of your wishes and your loved ones are provided for.

Benefits

Last but most certainly not least, take some time to review the Benefits system and explore those benefits that you have worked so hard to secure. The Attendance Allowance for example, a non means tested allowance for those over State Pension Age who need help with personal care or supervision because of illness or disability. This provides £72.65 per week for those needing help during the day and £108.65 (April 2024 to April 2025) for those needing support during the day and night. Even the humble railcard can provide valuable savings to help reduce the need to withdraw from your invested portfolios. The ‘Age UK Benefits and Entitlements’ web page is an excellent place to start.

When the time comes for some extra support at home or in a care home, don’t rule out annuities, consider the generally unexplored Immediate Care Annuity – solutions, unlike standard annuities, that pay a care company or registered care giver rather than the individual (hence avoiding an income tax liability). With the Government having scrapped the cap on care costs, converting some of your wealth into a guaranteed, index linked, monthly income paid direct to a registered ‘carer’ will remove the income tax liability on this element of your income, saving you 20% or 40% per year on your care cost funding.

Not all the above will be right for you. However, with the support of an experienced Independent Financial Adviser, qualified to provide later life advice, you will create a well-diversified package of tax efficient and risk appropriate solutions. You can rest assured that the time spent in your ‘Third Age’ will give you a more comfortable and financially secure ‘Fourth Age’. Plus, understanding the options available to help reduce your tax liabilities and creating a suitable plan can potentially provide a greater legacy for your children and grandchildren.

Maybe then you too will be enjoying your 116th birthday like Ethel Caterham. Happy Birthday Ethel from everyone at Crowe.

At Crowe Financial Planning UK Limited we will provide you with all the support you need.