Hitting the big 50 is for many people a time when their financial landscape starts to change dramatically. As they look towards retirement, their attitude to risk changes, financial liabilities are very different, and some may even consider downsizing. We will now look at five ways that your finances may change when you hit 50.
1. Traditional mortgages can be out of reach
Since the 2007/8 US sub-prime mortgage crash, we have seen an array of new regulations brought in to protect the mortgage industry. While the introduction of an affordability test makes sense in principle, it has proved detrimental to the financial choices of those approaching retirement in practice. Shorter mortgage periods, higher monthly payments and difficulty passing the affordability test are just some of the challenges. What are your options?
Many of those approaching retirement have lived through and benefitted from a UK housing boom which began in the 1980s. As children fly the nest to start their own families, new careers and new challenges, many parents are left with large multi-bedroom properties. Consequently, downsizing is a serious consideration, often allowing homeowners to acquire a new property mortgage-free. However, for those looking to extract equity from their property, there are other options.
Lifetime mortgages and home reversion schemes
There has been a significant increase in the availability of lifetime mortgages and home reversion schemes, targeted at those approaching retirement. The lifetime mortgage option allows you to release equity without any monthly payments and no affordability test. Interest is rolled up and repaid with mortgage capital upon the sale of your property, which happens on your death or transfer into full-time care.
Home reversion schemes allow you to sell a percentage of your property to a third-party investor. While often at a significant discount to the market value, this offers another way to release equity from your home. Before you die or move into full-time care, you will live rent-free in the property, with the investor receiving their share of eventual sale proceeds.
2. Life insurance for the over 50s
Whether looking to cover outstanding debts or leave your partner & family financially secure upon your death, life insurance for the over 50s is a serious consideration for many. You will notice many insurance companies offer life insurance for the over 50s with no medical. This can be especially attractive for those with underlying medical issues. However, it is essential to compare these premiums with other insurance options.
The life expectancy curve for the UK population has flattened out in recent years. It currently stands at 83.1 years for women and 79.4 years for men.
Consequently, insurance companies can now offer desirable terms to over 50s, knowing average life expectancy is not expected to increase materially in the short-term. This has become an incredibly competitive area of the insurance market. It is now even more critical than ever to take professional financial advice. Make sure your life insurance terms and conditions dovetail as neatly as possible with your life circumstances.
3. Inheritance tax planning is essential
While not necessarily the most comfortable subject to discuss as you approach the “best years of your life”, inheritance tax planning is vital. At the moment the inheritance tax threshold is £325,000 (£650,000 for a couple) upon which you will pay zero inheritance tax. One of the simplest means of retaining a level of control over your assets is to consider gifting in life:
Gifting assets in life
There are various exempt gifts such as wedding/civil ceremony gifts, Christmas and birthdays, charitable contributions and assistance with third-party living costs. You can also give away £3000 worth of gifts per annum, without leaving any inheritance tax liabilities for beneficiaries of your estate. Those looking to gift assets above this level before their death may create a future liability on their estate. The following table details inheritance tax taper relief, which allows the government to draw recent gifts back into your estate:
Duration between gift and death
Inheritance tax liability
Less than three years
3 to 4 years
4 to 5 years
5 to 6 years
6 to 7 years
7 or more years
If you die within seven years of gifting assets to third parties, and your estate is liable to inheritance tax, it will be charged at the above tapered rates on each gift. It is therefore essential to seek professional financial guidance to mitigate any future potential tax liability. In many cases, the cost of this advice could literally pay for itself!
4. Maximise you pension assets for the future
It makes sense to be prepared for your retirement, with many beginning this process as they approach 50. You may have a mixture of defined benefits/contributions pension plans and a state pension to fund your retirement lifestyle. As you approach 50, it is essential to:
- Make full use of your pension contribution allowance
- Consider other tax-efficient vehicles such as ISAs
- Review your risk/reward investment profile
The UK government introduced a range of pension reforms back in 2015. These reforms give individuals more flexibility with regards to pension drawdown and pension investments. However, many people still follow the traditional pension investment path. This involves switching from volatile and medium-high risk investments to more sedate secure investments such as bonds and quasi-cash asset classes.
In some circumstances, you may be able to claw back unused pension contribution allowances from previous years. This subject is not straightforward, and again it is sensible to take professional financial advice.
If you are unsure about your future state pension entitlement, you can check this on the UK government website.
5. Are you claiming your benefit entitlements?
According to Age UK, a staggering £3.5 billion of pension credit and housing benefit remains unclaimed by older people each year. It would appear that a mixture of pride and a lack of awareness have brought us to this scenario. As you approach retirement, it is vital to be aware of your benefit entitlements, and make sure that you claim them. While some payments may be means-tested, you could be entitled to one or more of the following benefits:
- Public transport
- TV licence
- Council tax
- Employment/support allowance
- Pension credit
- Income support
- Universal credit
This is just an example of some of the government benefit payments you may be entitled to, now and in later life. While there have been significant improvements in the number of pensioners living in poverty over the last 20 years, there are still 1.9 million pensioners struggling to make ends meet. While many may struggle in silence, billions upon billions of pounds of benefits go unclaimed each year.
Planning ahead for retirement
It is never too soon to plan for your retirement. That said, once you hit 50, you may see a significant change in your financial landscape, assets, liabilities and family life. It is essential to look to the future, mitigate any potential tax obligations, maximise your income and ensure that you claim all you are entitled to. Over the last 20 years, we have seen a significant improvement in the number of pensioners living in poverty. However, pressure on incomes, and the ever-rising cost of living, is almost certain to push more pensioners into poverty in the short term.
There has never been a greater need for financial planning as you approach 50 and start to look forward to your retirement.