"Whatever your financial position is today, it can rapidly change."
Old age brings many financial benefits but comes with lots of uncertainty.
For example, in one announcement recently the BBC stirred up a hornet’s nest when it announced that over-75s will, from July 2020, have to pay for their TV licences unless they are in receipt of Pension Credit.
This has led to campaigns, against the proposed change including petitions, and raised awareness of Pension Credit itself. Pension Credit is a benefit that 1.3 million of the poorest pensioners do not claim. It has also, in my opinion, shone a spotlight on the uncertainties of finances in retirement.
For someone who is just above the Pension Credit limit of £163 a week, paying £154.25 for a TV license will mean just under a 2% increase to their spending at a stroke. Put another way they could be required to live 52 weeks a year on a little over 51 weeks’ income. This will present challenges.
We have had a House of Commons Committee looking at intergenerational fairness and the FCA has a discussion paper looking at generational finance differences. Would a future Government also be willing to take away some of the benefits provided to older people?
Let us look at just three of those benefits - free bus travel; free prescriptions and free TV licences to the over 75s. Each has its own personal value to the recipient. So, a bus pass is of no value if you live in the country three miles from the nearest bus route. Free prescriptions provide no benefit if you are not on medication. If you don’t watch television you don’t need a TV license. However, they all have a value if you take advantage of them - especially if you are on a restricted income.
For example, should you live in London, the quality of the public transport network means its Freedom pass has two values. The amount that would otherwise be paid for the free travel undertaken and the value of the freedom it provides.
For some pensioners these three benefits could be worth £600 a year or more. For someone with an annual income of £12k a year, this would be a 5% increase to their personal spending. What’s more, bus fares, prescription charges, and TV licenses are things you would expect to increase year on year. Removal of these benefits would be a shock to individual’s finances.
Will these and other old-age benefits be removed? Who knows? What this illustrates is that whatever your financial position is today, it can rapidly change. Options that are available to respond to such changes while working may not be available or sensible in retirement.
Let’s look at a case study. Sue is 77 and has income just below the pension guarantee credit threshold. Her brother dies and leaves her a modest sum of money which she decides to use as a rainy-day fund. The notional income it generates lifts Sue to just above pension guarantee income threshold. This means that after July 2020 she will lose her free TV license. I leave it to you to calculate the notional rate of ‘tax’ she will be on because of the notional income she is not receiving. And this is just because she is being frugal.
More generally, in retirement cars need repairing or replacing; homes need repairing; boilers need replacing. If you are on a relatively low income how will the significant outgoings caused by such events be met? It does not have to be a large outgoing that can blow a retirement off course. A sudden increase in the individual’s personal inflation rate could mean that someone who is just about managing turns into not managing.
This is where the BBC announcement on over-75 can be useful to retirement income planners. It opens up the conversation about how shocks occur. While the loss of a TV license may not be catastrophic to all retirees, many other events will. How can flexibility be built into their retirement income plan?
Over 70% of retirees own their own home. Throughout retirement, they need to be continually asking whether - on current plans - they will need to use some of the equity in their home? If they are content to release equity, how will they do it? And, when will they do it?
This brings us back to TV licenses. If the individual is over age 75, and on pension credit, using some of the equity in their home could result in them losing their free TV license. Very few will want to thank the BBC for that.