Make your money last as long as you do: five questions you ought to ask yourself
As life expectancy improves, so does the length of time needed to extend your income in retirement. Taking the appropriate steps can help you to enjoy the lifestyle you want for as long as you require.
Today, most people can expect to live longer than generations previously. Data by the UK Government show the average life expectancy of men aged 65 in 2019 at 83.8 and women at 86.1 – the highest ever recorded at this age. They counted more than 600,000 Britons aged over 90 and 13,330 centenarians, 13% more than the previous year.
While this is good news, improved life expectancy has some drawbacks. Simply put, can we afford the costs of living longer?.
You can evaluate whether your resources are on track to last your life by thinking about these five key questions.
How much retirement income do you need?.
Do you want just enough every month to live comfortably in your retirement, with perhaps a little extra to allow for some luxury now and then? Would a moderate income be sufficient as long as you have access to “rainy day” or emergency funds?.
If you are still working, will your savings and pensions cover your lifestyle needs, or are you planning to cut back when you stop working?.
Remember to consider the impact of inflation on minimizing your spending power yearly. As an example, you spend EUR5,000 a month. Assuming an inflation rate of 3% a year, in 10 years’ time you would need about EUR6,720 a month to maintain the same spending, and EUR9,030 in 20 years.
2. How much would you like to leave behind?
If you want to leave a lasting legacy for your family or other heirs, you must ensure you do not spend it in your own lifetime without compromising your own quality of life right now.
A holistic approach to financial planning, which takes estate planning into account together with your wealth management and tax planning, can prove invaluable.
3. How can you make your investments and savings last?
You should assess whether your investments, assets and savings are working as hard as they can for you, and are protected from unnecessary taxation.
As an example, are you making the most of the tax-efficient opportunities available in your country of residence, or are you holding UK assets that attract higher taxation and possibly even deliver less growth?
If you are a business owner, have you started planning a tax-efficient exit strategy to get the best out of your years of hard work?
There are also considerations of currency. Taking income in sterling while spending euros in your day-to-day life makes your money susceptible to conversion fees and exchange rate risks. Explore arrangements that offer the flexibility to hold investments in more than one currency and convert if it suits you.
Don’t underestimate inflation here too. While it is appealing to choose low-risk investments in your later years, your capital still needs to keep pace with the cost of living, and cash in the bank is unlikely to do this. Your Lawsons Equity can recommend a diversified investment strategy to meet your situation, goals and risk tolerance.
4. How can you get the most out of your pensions?
For most people, pensions are the key to funding retirement, so you have to take extreme care to do what is right for you. The UK State Pension, which is currently worth a maximum of ₤ 9,350 per year, is probably not going to fulfil your requirements alone.
While you should assess your options, your best approach could be to take no action at all, especially if you have a “final salary” pension that guarantees an income for life. In any case, beware of the possibility of “liberating” your pensions before you are 55, as they are likely to be scams.
Retired expatriates can gain from transferring UK pensions to an EU/EAA-based Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvesting a lump sum into arrangements that comply with your residence. As well as tax efficiency, this can provide estate planning advantages and flexibility to take income in sterling or euros. However, there are many variations in products and jurisdictions that may affect the advantages
If both you and the QROPS are based in the EU/EEA (European Economic Area), transfers into QROPS are currently tax-free. Otherwise, the UK government charges a 25% ‘overseas transfer charge’. If, as many are speculating, the UK extends this charge to the EU/EEA region after the Brexit transition period ends in December, there could be limited time to transfer without tax penalties.
So if you decide a transfer is suitable for you, take action as soon as possible, bearing in mind that transfers can take months to finalise to lock in today’s benefits and prevent unnecessary taxation.
Take personalised, UK-regulated pension advice to find the most suitable approach to your goals and circumstances.
5. How can you limit the impacts of taxation?
An undesired side effect of rising life expectancy is a general trend for tax increases, as governments struggle to finance escalating pension and health care services for ageing populations.
Higher taxation can pose a serious threat to your financial security in retirement. Look for compliant arrangements that are offered to expatriates in your country of residence, which can significantly minimise taxation, making your money go further for you and potentially your chosen heirs. For the best results, you should seek personalised, cross-border advice.
Regardless of your stage of life, good financial planning can help you afford the lifestyle you want for as long as you want, so you can focus on enjoying your time abroad. To schedule a no obligation initial consultation with one of our financial advisors, click here.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested
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