Long Life Is Creating Its Own Tax Black Hole For The UK
Let’s put aside the financial crisis for the moment – bank bailouts, stimulus packages and the cost of rising unemployment – all of which will have to be financed eventually by the ‘Bank of the Taxpayer’. Even without all the recent Government expenditure and debt due to the economic climate, it looks increasingly likely that taxes will have to rise if only to finance the cost of ever increasing long life.
For example, in 2008 UK Government ministers warned that Britain faces a potential £6 billion a year shortfall in funding for the elderly and disabled unless radical action is taken. This will inevitably lead to higher taxation in the long run, on top of the extra needed to be raised to pay off the expense of the financial downturn.
For instance, the recent heightened awareness of dementia in later life has revealed that caring for sufferers could cost the UK £50 billion a year within a generation, up from the present £17 billion.
According to the 2008 report entitled “Cost of Retirement” written by the Centre for Economics and Business Research for the Life Trust Foundation, the cost of retirement could surpass £700,000 within ten years for those retiring at 65 and living until they are aged 100. For the wealthier wanting to maintain their standard of living, retirement could cost as much as £1.55 million. Currently, retirement in the UK costs a typical household £413,000, and an individual living alone £326,700. The report also pinpoints the cost of early retirement and those finishing work at the age of 50 will need an additional £373,000, or around £25,000 per year, to fund their retirement.
Some of this extra expense will have to be met by individuals themselves but the Government will have to assume responsibility to a large degree. The trouble is the scale of the demographics is changing balance and there are less people of working age paying tax to cover the expense of their elders. It’s not just the cost of degenerating health in old age and associated care costs but all the escalating costs in index-linked state pension payments which may have to be paid for up to 30 or 40 years.
The report also highlights that while current predictions of life expectancy are 85 for a man and 88 for a woman, these are set to rise significantly. The number of those over 80 has been estimated to rise to five million by 2031. The averages alone are deceiving as they do not highlight the real chances of a person reaching an advanced age. For example, someone who is 55 today has a one in four chance of reaching 95 and a one in 10 chance of making 100. Similarly, someone who is 35 today has an almost one in three chance of reaching 95 and a one in seven chance of reaching 100. For every additional year there will be extra expenditure.
The added pressure on the UK Treasury of financing elderly health care and soaring pension payments would be a heavy weight on the Government’s shoulders without the crushing demand of paying for bank bailouts, stimulus packages and unemployment benefit for a record two million or more unemployed. All this has to be paid for and the cost will undoubtedly spiral over the years. The Bank of the UK Taxpayer will have to bear the brunt of increased taxation.
The shortfall between those paying into the tax system now to cover the cost of increased Government spending, including for those in retirement, will be huge. The Government is unlikely to increase taxation to unacceptable levels so will have to find other ways to levy income. This could include stepping up the clampdown on tax evaders and raking in unpaid taxes; an increase in health care funding and putting more pressure on retired people to contribute to pension payments and health care.
The Government is also thinking about introducing a compulsory insurance scheme, run by private firms, to pay for the cost of nursing home care for the elderly, loading even more pressure on taxpayers. More information may well be revealed in the Green Paper on the vision of adult social care in the future due to be published shortly.
People in retirement need to know that they are financially comfortable and secure, but many are finding it hard to supplement their pensions and receive extra income during these economic difficult times. The Bank of England interest rate is at a record low of 0.5% and the European Central Bank interest rate at 1.25% means virtually no interest is being paid on bank deposit accounts – and in ‘real’ terms (i.e. after discounting inflation) they are probably actually losing money on their savings. A survey by the Institute for Fiscal Studies, using a personalised ‘basket of goods’ taking into account the different spending and earning habits, suggested that inflation for the over 60s is currently 10 times the average rate.
Retirees with much of their savings on deposit are being crippled financially and with the prospect of increased taxation in the future they are casting around for a viable lifeline.
Fortunately there are structures available in the EU which can not only provide income and capital growth (depending on the performance of the underlying investments) but also protection from unnecessary taxation. A diversified portfolio of professionally well-chosen funds can be placed in legitimate tax wrappers where capital can accumulate and income grow tax-free; only withdrawals are taxed according to the tax rules of the country in which you are a tax resident.
Deciding on the right portfolio to suit your aims and objectives and your expected longevity should be taken with the help of an authorised and regulated financial adviser. The mix can be altered free of charge according to a change in your circumstances and regular reviews can ensure that your portfolio is working effectively to meet your needs.