Chapter Fifteen

RETIREMENT AND THE GENERATION TO FOLLOW

Many males complain how unfair it is that women can currently claim their state pensions at 60 while men must wait until 65, especially as women live longer. Many women look sheepish and hasten to change the subject. Yet when the scheme was introduced, it was designed, like most things, for the convenience of men.

At the time, the average husband was four years older than his wife. How could he retire without someone at home to provide his pipe and slippers? The retiring age for a woman was arranged to allow her a few months to put the home to rights after years of skimped housework. Then her spouse could join her in their perfectly run home. His wife would remain on hand to provide his domestic comforts.

Of course, no one forces you to retire at 60 or 65 if you can still find someone to employ you. In my last employment, I worked alongside a vigorous 80-year-old whose legal knowledge commanded wide respect.

If you put off claiming your state pension, you will earn a higher pension when you actually do decide to collect it. This is generally a bad bargain, despite the fact that people are living longer. Generally, people who retire late die first - sometimes because they dreaded retirement so much that they made no plans for it, and sometimes because they are simply worn out.

Retirement is no longer a couple of brief years of well-earned rest punctuated by ever more debilitating illness. A woman can expect to draw her pension for over twenty years.* For the majority of this time, she will enjoy full health and vigour. This is probably longer than she spent raising her family. So how is such a long period to be financed? We have touched on this already in Chapter 10.

PENSIONS AND ANNUITIES

Many people, single or married, can look forward to several pensions. First, the National Insurance one** they contributed to: this might be a single pension to the husband to include an amount for his wife, or it might be two pensions, the wife having earned one by her own contributions.

Then, either could claim a pension from an employment - or several if they changed jobs and the pension was frozen.*** In addition, they could receive pensions from private pension schemes either of them paid into.

Some employers' schemes (also called 'occupational pensions') pay out both a pension from age 60 - for both men and women - and a lump sum at that date. They often offer you the choice. You can select a larger lump sum and a smaller pension, or forgo some of your lump sum in return for a higher pension. Before you decide which to opt for, you should know that there is third choice open to you. You could use your lump sum to buy yourself an annuity.

An annuity used to be a fixed amount of income that you receive every year as long as you live. Obviously, the older you are, the more your lump sum will buy you because you will probably be around for a shorter time to collect your money. Nowadays, by law, annuities must increase a little yearly. So companies have to offer you a smaller amount of income to begin with to pay for this.

To find out whether the annuity choice is worthwhile, go to an insurance broker. Find out how much annuity your lump sum from the pension would buy you. The broker's quotation (the amount of the annuity they offer for your money)  will be free but it will vary from day to day. Even if you are not interested in an annuity, this gives you a guide as to whether to sacrifice part of your lump sum from your occupational pension in favour of a bigger pension or not.

A pension, or an annuity, usually only lasts as long as you do. If you die the day after you start to draw your pension or annuity, your investment is lost. Many pensions provide for a reduced sum to be paid to a named dependant. Working women have often lost out here. The insurance company would agree to pay a widow say one-third of her husband's pension but refuse to consider a widower as a dependant, or the dear friend (male or female) the woman lived with for thirty years and to whom she has left everything she possessed.

The woman paid the same contributions as a man but, even if she lived longer, she did not get at all the same value out of the scheme. Always check, when taking out a policy, who the pension company will accept as a dependant.  Some companies are more flexible than others.

No basic annuity pays reduced amounts to dependants. On the other hand, many schemes provide that a few years' worth of annuity will be paid regardless of the date of death. (So do some pension schemes nowadays.) Check on this beforehand too. Of course, the money goes to the estate of the annuitant (the person who benefited from the annuity). It will pass on to whoever you name in your will, or to your relatives if you made no will. That said, annuity agreements can be written more and more flexibly to provide for dependants. Someone has to pay for this flexibility and it will be you - by receiving a smaller annuity in your lifetime.

If your pension package includes a lump sum, no one forces you to use it to buy an annuity. You can invest or spend it in any way you fancy. The original idea was to provide a sum to pay off your mortgage. Everyone should aim to enjoy a debt-free retirement.

If you paid into a private pension scheme, you may face even more choices when you retire. First, as with an occupational pension, you can choose between a bigger lump sum and a smaller pension or the opposite.

Then, you may have the choice between a higher but unchanging pension for life and a lower, 'with-profit' pension. This latter is linked in with the profits the pension company makes year by year. You share in these profits, if they make them, so they pay you a little more pension a year. Of course, there is no way of knowing how much in advance.

As if this were not enough choice, you can transfer your pension entitlement (called your 'fund' or your 'pool' ) lock, stock and barrel to another pension company if it offers you a better deal than the company you saved with.The first company must tell you how much your pool is worth. You tell this to any other company you fancy and ask how much lump sum and pension they will offer you for it.

Not many people work through all this. They are usually too flummoxed - like a country cousin dazzled by her first visit to Oxford Street. If you think your pension scheme has been mismanaged or your pension wrongly calculated there is pensions ombudsman to help you. www.pensions-ombudsman.org.uk/

ANNUITIES BASED ON PROPERTY VALUES

If, when you know your full retirement income, you think it will not provide enough to live on and you have exhausted any possibilities of state aid, then you should consider your home. Should you move to a smaller house or flat to release some of its value, or split a floor into flats and sell them off?

Many elderly people scrape along in poverty in a house far too big for them, difficult and expensive to maintain, out of sentiment. Many even choose a house for their retirement on the basis that it could sleep all the children and grandchildren at Christmas - and then they never come, or not all at once.

There are schemes around that offer you an annuity based on the value of your home. You continue to occupy it, in complete security, for the rest of your life. Some schemes even allow you to enjoy the annuity and then hand on the property, or part of the value of it, to your children.

Basically, don't consider these schemes at all until you reach 70. The payers are gambling on the length of your life. They know that people live longer and longer, so they have to offer you a poor return to protect themselves. Above 70, such schemes can provide a useful arrangement.

WIDOWS AND INHERITANCE

In the normal course of events, married women can expect to be left widows. Some husbands will have taken care of everything, made a will,  reduced the inheritance tax payable as much as possible and perhaps set up a trust for their dependants. Others will have shrugged their shoulders and done nothing, or at best left a will leaving everything to 'the wife'.

This is a popular arrangement, but it carries a hidden snag. True, there may be no tax to pay on the death of the husband. What he left to his wife is ignored when calculating the size of his estate and working out the inheritance tax to pay.   But when she dies her estate will be so swollen that the tax may be enormous - far more than if a little had been paid on the first death and a little on the second.

Twenty years may pass before she joins him in the family vault. On the other hand, the two may go together - perhaps in a car crash. In this case, the law assumes that the elder, usually the husband, dies first. His wife inherits with her dying breath and leaves a large estate, a major chunk of which will be gobbled by inheritance tax.

Even if the wife is the elder and they go together, if all the assets stood in her husband's name, the same huge tax bill will loom. He can only leave assets to people who are themselves alive, so the husband-and-wife exemption cannot apply. This may not leave much to go to the children.

So what? you may think. The children will be lucky to get a bean. But suppose there is a family business or a family farm, and that some of the children, or even grandchildren, work in or on it? If it has to be sold off, cheaply and in a hurry, to pay the tax, the children will not appear so lucky. They will lose their livelihood and the product of many years of work, in exchange for some loose cash.

PROVIDING FOR THE NEXT GENERATION

A widow needs help and professional advice. Unless she pays for it, her solicitor will do no more than follow the terms of the will and dish out the money. The ideal person to help would be an accountant experienced in tax planning. He would liaise with her solicitor and stockbroker if she has one.  Depending on the widow's age, she normally faces the following dilemma.

She wants to give everything to her children but she is afraid that, if she does so, she will leave herself short - if not now, then in ten years' time.

Most women in this position don't seek professional advice. They compromise by drawing up a will leaving everything to the kids on their death, and inheritance tax takes its heavy toll.

Besides, with modern life expectancy, by the time Mother dies at 85, her children may have already reached their sixties and retired.  They may themselves be affluent and established, with all the difficult years of child rearing behind them. A little money  which could have made all the difference twenty years before may mean far less to them today.

So how can you provide for the next generation?

The problem should have been tackled years ago, but many men refuse to consider it. 'Never!' many have snapped back at me when I suggested the classic remedy. 'If I give her any of my possessions, she'll take off tomorrow with the milkman.'

Inheritance tax is calculated on the size of an estate. This is the value of everything a person owns on his or her death, including the family home, furniture, car etc. The bigger an estate, the more tax to pay. The astronomical increase in house prices has meant that hundreds of people who thought they were too 'ordinary' to worry about a tax on the super-rich are now at risk.

Each individual possesses his or her own estate. So, if the husband owns everything and the wife nothing, his estate will be enormous and hers tiny. If they own half each or everything jointly, both estates may be small enough to fall below the inheritance tax limit (currently around £263,000  at 2005 figures) This way both escape tax altogether. If one or both still exceeds the limit, they will at least only suffer tax on a smaller amount.

One valuable asset that is not included in a person's estate is any pay-out from a life insurance or life assurance policy. Why not? The deceased did not own it. It was only after - in fact, because of - death that the pay-out arose. This fact can make an investment based on life insurance or assurance more attractive. The pay-out goes directly to the named person (who need not be family at all) free of any taxes.

Normally, if a husband transfers his building society account, say, or the country cottage to his wife's name, she can do what she likes with it, including selling it. Many men will not risk this, especially if their marriage is at all shaky. Who can blame them? They may have promised during the wedding service, 'With all my worldly goods I thee endow (provide),' but they did not really mean it.

Some men do make transfers but keep quiet about them - like Sid, a carefree man in his fifties, jaunty and optimistic. He had a trick of patting his back pocket meaningfully if asked an awkward question. Sid ran a timber business but did not bother to insure his stacked yard against fire.

'Waste of good money,' he would snort year after year. 'It'll never happen.' He felt the same about wills, pensions and the future in general. If I sent him pension details, he tore them up neatly and posted the bits back to me. Then one day Sid shuffled into the office a different man.

'I give in,' he sighed. 'Do your worst.'

'Why?' I could not help gasping.

'Had to go to the doctor,' he mumbled. 'He says I've got this heart.'

So I set to work as fast as possible, liaising with Sid's solicitor, who, as staggered as me, drew up Sid's will.

Sid's son Phil had worked for his dad right from school. The daughter-in-law worked for Sid too and was much brighter than her husband. Mrs Sid held some shares in the limited company and so did her daughter, but Sid wanted Phil alone to step into his shoes.

So we transferred company shares from father to son - not all at once, or there would have been heavy tax to pay. It took several years.  Sid worked on as before, knowing he could go any time.  Only his attitude had changed.

One day Sid's daughter-in-law delivered some signed share transfer forms back to me. At the doorway, she hesitated. Then she tilted her head and launched herself. ' I don't understand. What does all this mean?'

'Your husband owns the business,' I explained. 'Now he controls more shares than your father-in-law.'

'So?'

'He has the final say. He makes the decisions. He's in charge.'

Her face clouded, then brightened. 'That old devil. He never told us. He'd have kept the reins on tight until his dying day. Now we'll see. Thank you very much indeed.' She marched out, her head held high.

So, you may own things you never even knew about. The only way to find out for sure is to look at the original documents.

If you are widowed and your husband was one of the 'I'll be gone, so why worry?' school, all may not be lost. Remember the deed of family arrangement I mentioned in Chapter 8? If all the beneficiaries agree - and if everything went to the widow, she will be the only one - the will can be rewritten to reduce the tax payable in the future.

One common solution is to rewrite the husband's will to leave the children and/or grandchildren the first tax-free £263,000. Then the remainder is used to set up a trust, often the sort of trust called an 'accumulation and maintenance trust'.

WHAT IS A TRUST?

A trust is a legal arrangement, set up  by a solicitor, whereby one person looks after another's assets. For instance, baby Joanne was orphaned when both her parents died in a plane crash. She inherited all their possessions but clearly cannot make any decisions about them.

The people who manage the trust for her are called trustees, perhaps her uncle Bill, her grandmother and her parent's solicitor. They control everything until Joanne comes of age. When this happens, the trust will be broken. In other words, it comes to an end and everything left is handed over directly to Joanne as beneficiary.

Some of Joanne's inheritance will have been spent on her in the meantime, for her maintenance, education, holidays, clothes and even pocket-money. How much can be spent and on what depends on the terms of the trust. Some trusts lay down strict rules; others give the trustees wide discretion to act as they think best at the time.

Some trusts last a lifetime - perhaps the beneficiary is insane.

Originally designed to protect the weak, trusts are now widely used in tax planning. Many wealthy families set up one or several trusts. One may be based in Britain, another abroad. You don't have to die before a trust can be set up. If you wanted to, you could set one up tomorrow. The person who sets up the trust and puts his or her assets into it is called the settlor. A settlor can also be a trustee.

Take the case of Eleanor, who was recently widowed in her sixties and found that her husband had left far more than she ever dreamed of, and all to her. When she goes for advice, she has to give details of her three children, four grandchildren and their likely futures. Then, just as in any investment planning, Eleanor must spell out in detail how much she thinks she needs to live on and her own future plans.

The adviser may recommend first that she changes her husband's will by deed of family arrangement. Perhaps she should leave some money directly to her son who wants to expand his business, and to her daughter who intends to marry shortly; maybe some money directly to her talented young granddaughter to send her to ballet school. Obviously the decisions and reasons are Eleanor's, but the adviser can ensure that minimal tax is paid, now and in the long term.

Next, the adviser will insist that Eleanor keep enough capital in her own hands to ensure she can live comfortably from the income it generates. She need not own her own home (see below).

With the rest, the adviser may suggest she set up an accumulation and maintenance trust. Eleanor chooses the beneficiaries: her children, her grandchildren and perhaps her disabled sister Mary, who is very hard up.

Eleanor also chooses the trustees. These are of course people whose judgment she feels she can rely on. One of them will be her own solicitor, accountant or other adviser. Another will be Eleanor herself, so she has a continuing say in how her trust - the Eleanor Rose Spenser Family Trust - uses its money.

Trusts are as flexible as acrobats. For examples, Eleanor may put her family home into it, reserving a life interest for herself. This means she keeps the right to live there for as long as she wants to. But, as the property belongs to the trust, the trust pays for its upkeep. There may be extra income tax for Eleanor to pay, but, if her adviser knows his stuff, they will be peanuts compared to the inheritance tax the family will not pay.

Trusts are rather like limited liability companies - the law looks on them as persons in their own right. Trusts pay their own low tax. They may continue to exist long after the original settlor, trustees and beneficiaries are all gone.

In general, a trust allows you to set aside, invest and use your own money, as you like, for the benefit of the people you choose, legally beyond the clutches of the Inland Revenue - even after you have died.

It also gives a family the weapon to act together to stop one reckless idiot dissipating the family fortune, even if he was born the eldest son. It means that a widow can both spend her money for the benefit of the family and ensure that she will never go without for the rest of her life.

Too good to be true? There are drawbacks, but these are minor. It will cost you to set up a trust and to pay for accounts to be prepared for it each year. It is broadly worthwhile were the total capital is over £500,000. Bear in mind that this figure includes the family home, the husband's business and absolutely everything else. It could be worthwhile at a lower figure if the widow really has no clue and does not want any worry, but simply wants an assured income and a chance to help her children.

Elderly people are often very reluctant to hand over ownership of assets. They look on their possessions as their last hold on power, their last chance to have a say. They are frightened that apparently loving children will turn cold as soon as the loot, or the house, is safely theirs. Mother fears that, having suddenly become a nuisance, she will find herself packed off to a distant 'home'.

And quite frankly, it happens.

Sometimes a trust can offer a happy compromise. Mother knows she has a say, and professional people will continue to watch over her interests. She is also reassured to know that if she goes suddenly, the family will not be plunged into financial chaos.

Like all parents, Eleanor may still be plagued with the perennial problem:

How can I treat all my children fairly?

This is another question that needs the wisdom of Solomon, especially when the children's circumstances, needs and desires are widely different and changing. And is fair treatment always equal treatment?

Not in the view of one old farmer client I dealt with. 'I treat my six childer just the same,' he croaked to me. 'Double portions for my sons and single portions for my daughters. That's fair.'

*In 2000 the average woman could expect to live beyond 80 and this is increasing all the time.

** I have lumped together for clarity, the basic state pension and the additional state pension (previously called SERPS and now called the state second pension). For details on a stakeholder pension see glossary.

*** This means that you stop making contributions. You cannot claim back the money you have paid in up to now. It stays invested with the pension company and continues to grow. When you retire, you receive a pension.

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