Life
    Money

    Make your wealth last longer

    21 May 2016

    We’re all getting older. We’ve just celebrated the Queen’s 90th as a very special occasion, yet by 2027 there will be a million of us in the UK aged 90 or above, according to the Inter-national Longevity Centre (ILC). Ten years beyond that, 65-and-overs will account for nearly a quarter of the population.

    Longevity is a luxury if it’s accompanied by good health. It also comes with many challenges, not least the need to make your accumulated wealth last longer. The cost of care is a particular concern.

    Around a third of women and a fifth of men aged 65 and over will one day enter a care home, warns the ILC. The latest figures put the average yearly cost for a residential home at £29,250 in England, rising to £39,300 for a nursing home. These figures (from a report by Laing & Buisson) rise to £34,788 and £47,840 respectively in the expensive south-east. Many elderly people will have little choice but to sell their homes to pay for their final years of care.

    Even if you’re fortunate enough to remain in good health and able to continue living independently, you will still need deep pockets. To maintain a basic standard of living, a couple need at least £18,212 a year, while a single person requires £13,600, according to research into minimum income standards by Loughborough University.

    A couple living modestly at home for 20 years of retirement will therefore need a minimum outlay of £364,240; a single person £272,000. And that doesn’t include holidays, or any luxuries at all.

    If these numbers make you feel queasy about funding your longevity, then you need a two-part money plan. The first step is to start saving and keep on saving. The second step is to make those savings go further when you have to start spending them. Here’s a list of ways to help you do both.

    Contribute to a pension

    The secret to pension saving is to pay in as much as you can as soon as you can to take full advantage of the effect of compound interest on your investment returns. A 35-year-old today could need a pension fund of £660,000 if he or she hopes to enjoy anything like the standard of living of people who have already retired, according to pension provider Royal London. The trouble is, the average thirtysomething has so far saved only £14,000 towards that pot, ‘well short of the fund they require to secure a monthly income that will just cover the basic £1,715 cost of essentials in 2050,’ says Royal London. ‘Unless this group start to save more, they could face a retirement in poverty.’

    Whether you have yet to start or you are already contributing to a pension, a good rule of thumb is to put aside a percentage of your gross salary equal to half your age: 15 per cent at age 30, 20 per cent at 40 and so on. If you want be more precise, most pension companies have online calculators that let you enter your age, salary, desired pension income and existing savings to show how much more you should be squirrelling away.

    Combine your pension pots

    Jobs for life being largely a thing of the past, many of us will collect several workplace pensions; each of these will perform differently, but all will carry fees. There should be useful savings to be made by bringing all your defined-contribution pensions together in one place to maximise the potential for investment gains and reduce the proportion being swallowed by unnecessary additional charges.

    However, Which? warns that there are pitfalls in moving your pensions around: ‘As you get nearer to retirement, your pension pots should have appreciated significantly and you may decide that any exit penalties or fees for advice represent significant disincentives to act — after all, you will have less time to recoup the cost before retirement.’ But Jonathan Hewitt at investment house Fidelity International says there are other advantages of bringing nest eggs together in one basket: ‘You’ll be able to monitor and manage your underlying investments more efficiently, which in turn should help you to stay on track to meet your retirement goals.’

    If you’re not sure where to find details about your pensions, try the free Pension Tracing Service on 0345 6002 537 or pension-tracing-service-uk.co.uk.

    Beat paltry savings rates

    Rates on traditional savings accounts and Isas are dismal. The average easy-access savings rate was just 0.59 per cent at the end of April, according to Moneyfacts.co.uk, and the average cash Isa rate 1.24 per cent. But if you’re prepared to accept more risk, you could secure a better return as a peer-to-peer (P2P) lender. P2P platforms such as RateSetter, Zopa and Funding Circle charge you a small fee to lend your money to individual and small business borrowers. In return, you receive of up to 7.3 per cent at Funding Circle, depending on how long you tie up your money.

    And thanks to the launch of the Innovative Finance Isa in April, it’s now possible to take your returns tax-free. The big platforms have announced their Isa rates — the Zopa Plus Isa is projected to pay 6.5 per cent to on five-year loans of at least £1,000 — but the products are not yet available because of regulatory delays

    Meanwhile, a variety of Innovative Finance Isas are already available from newer and smaller platforms, including Abundance and Crowd2Fund.

    The risk with P2P lending is, of course, that borrowers will default. Some platforms have provision funds in place that pay out should this happen, but many others do not. So check the small print, and remember that P2P loans are not covered by the Financial Services Compensation Scheme, so should the platform itself go bust you would not be automatically refunded any of the money you had invested.

    Rewards for spending

    Banks and credit card companies are at war for new customers. And many of their products actually pay you for your spending. For example, the popular Santander 123 current account and credit card both offer cashback across common areas of household spending. As long as you pay in a minimum of £500 each month, the current account pays 1 per cent cashback on direct debits for water and council tax bills.

    If you have a mortgage with the bank, it pays 1 per cent on the first £1,000 of your repayments. It also pays 2 per cent cashback on gas and electricity bills and 3 per cent on mobile and home phone bills, broadband and paid-for TV packages. It also pays in-credit interest of up to 3 per cent on balances of between £3,000 and £20,000. The account comes with a £5 monthly charge, but the cashback and interest should significantly outweigh the cost.

    You can find details of alternative fee-free reward cards and current accounts at the big comparison sites: MoneySuperMarket, uSwitch, GoCompare or CompareTheMarket.com.

    Switch suppliers

    Don’t let your energy, TV or phone provider profit from your apathy. Loyalty doesn’t pay. Providers typically reserve their cheapest deals for new customers so play them at their own game and switch companies regularly so that you’re always a newbie. The comparison site uSwitch says you could save as much as £659 a year just by changing energy supplier.

    Many happy returns

    And finally, ‘living longer needn’t be such a challenge if you make your increased longevity your friend,’ concludes Tony Stenning, head of retirement in Europe for investment company Blackrock. ‘Save as early as possible… and think long-term with your investments. Then hopefully many more of us will be celebrating as fulfilling and happy a 90th birthday as Her Majesty.’