Later life financial planning: everything you need to know

Why is later life financial planning important?

Your retirement may last more than half as long as your whole career. And like your career, it will go through different stages – so you should plan carefully for these.

You may notice little difference in the early years of your retirement, other than having more free time to do the things you enjoy. However, as the years pass you will need to make suitable adjustments to your lifestyle, and perhaps also to your financial plans.

Most of us will need to consider at least a number of the steps below as we move into old age.

Review your pension choices

After you’ve been retired for a while, you may need to change how you access your pension(s).

If you have mainly defined contribution pensions, it’s a good idea to review your strategy every couple of years.

You should in any case do so if there are significant changes in your own circumstances or the economy.

For instance, if you are taking income via a drawdown scheme, ask your financial adviser to check its performance and work out how much longer it is likely to last.

Your adviser may recommend making adjustments (either to the scheme or to how much you withdraw) or a more radical change such as buying an annuity.

Switching to an annuity in later life may suit you, as by then you may prefer security over flexibility. Your age should also mean you get a better annuity rate, and if you have health issues you may qualify for an enhanced annuity.

However, if you already have an annuity or a defined benefit pension currently in payment, you won’t be able to make any changes to this.

Downsizing your home

Though you may stay on in the family home at least to begin with, many people in retirement choose to move home either sooner or later. Reasons may include:

• Relocating to a nicer part of the country / a different country
• Finding a smaller home
• Moving to a more manageable home, e.g. a bungalow

Another big motivation for downsizing may be to release some of the value of your home. Along with your pension, your home is probably your biggest asset, so downsizing can provide much needed funds for your retirement.

Before making any decisions, talk to an independent financial adviser. Your adviser can help you map out your spending and income over the coming years, and estimate how much money you can free up. Remember that moving house is itself a costly process; your adviser can tell you if it will really be worthwhile.

Equity release

If you’d rather continue living in the family home, you can still use it as a source of money to fund your retirement. Unlocking the value of your property while continuing to live there is called equity release.

There are two main kinds of equity release: a lifetime mortgage, and a home reversion plan.

Lifetime mortgage

This is a loan secured against your home. You receive a tax-free lump sum to spend as you wish, and the loan is repaid from the value of your home when it is sold. You can usually borrow between 20% and 60% of the property’s total value – typically, the older you are, the more you can release.

Remember that the loan will accumulate compound interest, so the amount repaid on the sale of the home will be greater than the sum you received.

Home reversion plan

This is where you sell part or all of your home to a specialist company in exchange for a tax-free lump sum.

A guaranteed lifetime lease entitles you to continue living in the property rent-free for as long as you wish. If you retain ownership of any portion of the property, you also benefit proportionally from any increase in its value.

Bear in mind that a home reversion plan will pay far less for your home than you would receive if you sold it on the open market. The minimum age is also higher for home reversion than it is for a lifetime mortgage.

Both of these types of equity release have their advantages and disadvantages. A financial adviser can tell you which type of scheme is likely to be best value for you, and also to choose the best provider.

Also be sure to pick a scheme with a ‘no negative equity guarantee’, to prevent your family from receiving a bill if house prices should fall.

Lasting Power of Attorney

It is highly advisable to set up a Lasting Power of Attorney (LPA) while you are still fit and healthy. Should you become unable to manage your financial affairs yourself, LPA will allow another trusted person (e.g. your spouse) to do so on your behalf.

It is important to realise that your spouse or other family will not have automatic access to your finances should you become incapacitated, if no LPA exists.

The only way for them to do so would be to apply through the Court of Protection, which can be a long and frustrating process.

Remember that you can only arrange LPA while you have full mental capacity, so you should do so well in advance. LPA can prove invaluable at any age – not just in later life. Talk to your solicitor about setting it up.

You should also consider setting up a health and welfare LPA which can cover medical and other healthcare decisions. This can also be set up by a specialist solicitor.

Making a will

You should keep your will updated as a matter of course, but in later life it becomes even more important. Your will ensures your beneficiaries will inherit your estate according to your exact wishes.

If you die without a will, then the wrong people may inherit your wealth. It will also take far longer for any beneficiaries to inherit.

Making and updating your will allows you to donate to charity and make provisions for any other intended beneficiaries who would not otherwise receive anything.

Detailed tax planning with a specialist solicitor can also help to reduce the inheritance tax bill for your family, by making sure you make use of all available exemptions and allowances.

Contact a solicitor about making or updating your will – the time, effort, and costs will save your family significant time and money later on.

Estate planning

When you die, your estate could be subject to inheritance tax (IHT) if it’s worth more than the inheritance tax threshold. However, by planning ahead you may be able to reduce the amount your family must pay.

You can reduce the size of your taxable estate with various methods, e.g.

• Lifetime gifts
• Trusts
• Charitable giving
• Tax planning as part of writing a will
• Other forms of planning

You can also take out a life insurance policy to pay any likely IHT bill. Note that your pension is not currently subject to IHT, but the rules are changing. From April 2027, inherited pension wealth will be subject to IHT.

A financial adviser can give you all the help you need with estate planning. Find out more about inheritance tax here.

Long term care

Many people in their final years will need some form of long-term care. This may be in a residential home, or may simply involve a visiting carer.

If you end up needing long-term care, you will probably need to fund at least some of it yourself, and perhaps all of it. Common funding options include:

• Income (e.g. private and state pensions)
• Investments
• Equity release
• Selling or renting out your home

Another option is an immediate care plan. Similar to a retirement annuity, this is a product that pays a guaranteed regular income for the remainder of your life, and which may increase with the cost of your care.

Do I qualify for state-funded long-term care?

You may qualify for local authority funding to pay for some or even all of your care. However, if your savings and assets are above a certain level (assessed via a means test) then you will have to pay for all your care yourself.

Bereavement

If a close family member should die, it may be your responsibility to make practical and financial arrangements.

First of all, you will need to:

• Obtain the medical certificate
• Register the death
• Arrange the funeral
• Notify government organisations

Most local authorities have a Tell Us Once service so you don’t have to contact a lot of different places.

If your spouse or civil partner has died

If your spouse or civil partner dies without a will, then inheritance will follow intestacy rules. Otherwise, you will inherit according to the will. In either case, you will not have to pay any inheritance tax.

You may also be entitled to some or all of their pension, though this will depend on what kind of pension they had and whether or not it was already in payment. Talk to a financial adviser if you are unsure about whether you can inherit your partner’s pension.

If you were not married or in a civil partnership

Unmarried partners, apart from civil partners, will not inherit anything unless your partner named you as a beneficiary in their will.

This is why it is vital for partners who are not married (or in a civil partnership) to make wills.

Financial arrangements after bereavement

Bereavement has many financial implications for the surviving partner. Things may be particularly difficult if the deceased partner handled some or all of the couple’s finances. In addition, the needs of the surviving partner may be different in the future.

The surviving partner may be left to sort through a great deal of financial information, which can be an additional stress at an already difficult time.

Things to consider include:

• Life insurance payments
• Mortgage / loan repayments
• Pension pots
• Pensions already in payment
• Savings and investments that were not jointly held
• Property and other assets

The surviving partner may be left to sort through a great deal of financial information, which can be an additional stress at an already difficult time.

A financial adviser can take this burden off your hands and ensure that everything continues to be arranged in your best interests.

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