Plan for the swinging sixties

The fourth in a series on financial planning through the stages of life

"WILL you still need me, will you still feed me, when I'm 64?" The Beatles' lyrics focus on the emotional, rather than the financial side of retirement planning. "Will you still pay me an adequate pension?" lacks pop appeal. But the question is an important one.

The majority of people will retire at some point in their sixties, and good planning is the key to making that retirement financially comfortable.

Before you retire, it's worth using any spare savings to top up your pension. True, the extra investment will have only a relatively short time to grow before you need to draw on your accumulated pension pot. But the fact that pension contributions attract tax relief and the money accumulates tax-free still makes this a financially sound option. The tax rules governing top-ups are fairly complex, and there is a range of options to choose from, so get independent financial advice first.

When you retire, there are several main points to consider.

o Defer your claim on the state pension. You don't have to draw on it as soon as you reach the statutory retirement age (at present 60 for women and 65 for men), although many people do so because they need the income. If you can afford to wait, you can increase the income you eventually get by around 7.5 per cent for every year you do not claim. However, you must start claiming once you reach 70 (for men) or 65 (for women).

o Be cautious about deferring drawing other pensions. In the case of personal pensions you can defer locking into an annuity - an annual pension income for life - until you are 75. Annuities are something of a gamble. If you live a long time and buy an annuity when rates are high, you've got a bargain. Rates are high when longer-term interest rates, measured by gilt yields, are high. But if you die soon after buying the annuity, you've exchanged a lump sum of capital for not much income. And if you buy when rates are low, as is currently the case, you're locking yourself into a relatively low income - once you've bought an annuity, you're stuck with it for life.

However, deferring buying an annuity doesn't necessarily solve these problems. In particular, it involves a fair degree of investment risk. If you're unlucky, this could reduce your income when you finally come to buy an annuity. Most experts advise only going this route if your pension fund is large or is one you're happy to take some risks with, rather than relying on it as the main source of your retirement income.

o Take a cash lump sum if you have a personal pension. You can take up to 25 per cent of a personal pension fund as a tax-free lump sum. Retirement annuity contracts, the predecessors of personal pensions which became available from 1988, offer a similar option, although the rules on how big a lump sum you can take are more complicated. In both cases, the fact that the lump sum is tax-free - unlike the income from the annuity, which is taxable - means that it's "definitely worth doing", according to Craig Foreman of accountancy firm Touche Ross. With company schemes, the benefits or otherwise of taking any lump sum on offer depend on the terms of the individual scheme. If in doubt, get advice.

o Shop around for the best annuity rates. Most personal pension plans, and a few company schemes, allow you a free choice of annuity provider. If you have this freedom of choice (usually called an open-market option,) use it - you could increase your income by up to a quarter.

The table shows the best current rates for a straightforward annuity which will pay a level income until you die, and for one which will pay a reduced income (two-thirds the size of your pension) to your spouse after you die. You can also get annuities which, for example, pay an inflation- linked income, or one that increases by a set amount each year. But they mean a lower initial income.

o Beware of inflation. Most retired people want as much income as possible from their savings. But anyone retiring in the mid-sixties can expect a retirement of 15 to 20 years, with an increasing need for income to meet nursing-home fees and the like.

It's important to keep a wary eye on inflation, which can eat into the long-term value of your savings. Inflation has averaged more than 6 per cent since the Second World War. At its current level of around 4 per cent, each pounds 100 of capital will be worth (in terms of buying power) just pounds 66 a decade from now.

Many high-income investments, such as savings accounts, National Savings Income Bonds and Pensioners' Bonds, and the new corporate-bond PEPs, aim to return your initial investment.

To protect you better against inflation, it is therefore worth considering having some of your savings in share-based investments, such as most PEPs, which offer the prospect of long-term growth, albeit at some risk to your capital, as well as growth in the income paid out.

o Use tax allowances to the full. You qualify for a increased personal tax allowance (up to pounds 4,630 for the current tax year) once you reach 65. Similarly, the married couple's allowance increases when either partner reaches 65. But you won't get the full amount of the extra allowances if your total income, which includes any taxable income from investments, is above a certain amount (currently pounds 14,600) - the extra allowance will be reduced by pounds 1 for every pounds 2 by which your total income exceeds this limit. If you fall into this category, it may be worth switching from investments which have taxable income into those with tax-free income.

o Think about inheritance tax. Estates worth more than pounds 154,000 are taxed at a flat rate of 40 per cent on that excess. But there are a number of tax-avoidance techniques, some of which are fairly straightforward. So it's worth paying for independent advice if your net worth is significantly more than pounds 154,000.

Top annuity rates

ANNUAL INCOME (pounds )

Age 60 Age 65 Age 70

Male, single life

Royal Life 5,100 5,665 6,432

Sun Life of Canada 5,122 5,642 4,561

Canada Life 5,014 5,599 6,391

Female, single life

Royal Life 4,735 5,150 5,763

Sun Life of Canada 4,676 5,066 5,614

Stalwart 4,721 5,039 5,478

Joint life, 2/3 widows pension

Royal Life 4,607 4,985 5,536

Sun Life of Canada 4,590 4,941 5,435

Generali 4,559 4,920 5,423

The rates shown are for a non-smoker buying an annuity with pounds 50,000. Source: Annuity Direct

Tips for the 60s

DO/DON'T

Top up your company or personal pension with spare savings.

Delay - the longer you leave it, the less the effect of each added pound.

Find out at what age it is in your best financial interests to draw on the state and any personal pension.

Defer drawing on a personal pension if it's money you can't afford to take some risks with.

Take the tax-free lump sum available with all personal pensions.

Take a lump sum from a company plan without taking advice.

Shop around for the best annuity rates if you have a choice.

Buy the annuity paying the highest immediate income, without considering one that starts lower but will rise in time.

Make full use of personal tax allowances.

Forget to reclaim the tax deducted from deposit accounts if you're a non-taxpayer.