FOOL'S EYE VIEW
Help Others To Help Yourself

By Stuart Watson (TMFTiger)
December 4, 2001

Great Titchfield Street, London – I'm currently helping an elderly relative with their finances. Purely from my own perspective, I've found it both revealing and quite frightening. It has helped reinforced the benefits of keeping things simple and that you cannot afford to rely on the government to provide for you in your old age.

Let's call the person in question Mrs T. She's better off than most. She owns her own house and has some cash in the bank courtesy of moving into a smaller property several years ago. But that's pretty much where the good news stops. Like many other people, Mrs T made little provision for her retirement. An old annuity brings in a small amount, but her main sources of income are the State Pension and the interest earned from her bank account.

You don't appreciate many things until you can no longer do them. The documentation sent out by banks, insurance companies, utility suppliers and the government is hard enough for young(ish) eyes. But try to work it all out with failing eyesight and/or when you've never really had to worry about money before because someone else did it for you. It's a scary prospect.

Benefits

The revamped Benefits Agency website is well designed and enables you to see what benefits you are entitled to, and how much they might amount to. But I suspect most pensioners would struggle with the site and would have to rely on a visit to their local DSS office. The trouble with most benefits is that you have to be aware of them to make a claim in the first place and then you have to go through all the paperwork. One of the most useful benefits is Attendance Allowance, payable should you require someone to assist you carrying out day-to-day tasks. It varies from £37 to £55 a week.

The basic pension is pitiful, currently just £72.50 a week. There are minimum guarantees to boost this but these soon disappear if you have little in other income or assets. The additional pension credit proposed in last week's pre-budget statement will make some difference for those who have a saved a little, but even this disappears if you have more £135 per week in income. Once this change comes into effect in 2003, over half the pensioners in the country will be entitled to between £100 and £135 a week -- that's £5,000 to £7,000 a year. It goes without saying that this is a massive reduction from what most of us are used to living on.

Bills

Paying bills via direct debits is a must. Not only do you get payment reductions, but the less paperwork, the better. However, you still need to keep an eye on them. I found one supplier had recently increased the monthly payment from £20 to £70 for no apparent reason and caused a credit of £500 to be built up. Needless to say, a letter suggesting the amount should be 'reviewed' is already in the post.

Insurance and bank accounts need checking too. A quick scan on the home and contents insurance cover note revealed that the property was insured for less than half its value. As this is the main asset remaining, this seems to be an unacceptable risk. Of course it will cost more to increase the level of cover but it's money well spent, if only for the peace of mind it gives.

As banks introduce new types of accounts to draw in fresh business, they put others out to pasture. Even though rates are low at the moment, it's still worth switching to a high interest account. Remember that whilst rates are ahead of inflation your money is growing in terms of spending power, even though it may not seem that way! In Mrs T's case, a scour of the bank's website and one visit to the local branch boosted the amount she was receving by almost a third.

It's also worth reviewing bank statements to see how much is being spent, on average, each month. You can then set up a simple spreadsheet to compare this to what is coming in and so determine if any action needs to be taken. In Mrs T's case, it may be. One option may be to use part of the cash to buy an annuity. It means losing some capital, but the extra income this generates may mean that no further capital is spent in the future and hence the long-term financial situation is a lot more stable. A move to a smaller property is also an option, although often not a popular one due to the upheaval it involves.

The Message

Until you take a good look at how difficult it is to live on state benefits, it's easy to be complacent about your own retirement. We've said it before and we'll keep on saying it until the population at large gets its financial socks on! Recent surveys show that, as a nation, we're still not saving anywhere near enough for our old age. If you take only one message away from reading the Motley Fool, then it should be: Please don't leave your retirement planning until it's too late.

More: Pensions Centre | ISA Centre