The additional tax breaks provided for in Wednesday's Budget speech will help a little, but for many pensioners, it is a struggle to stretch their small pensions and savings to meet their daily funding requirements.
Cost-of-living increases mean far more to them than to the working community because of their dependence on deposit interest rates for any additional income.
Mrs L from Dublin is acquainted with a number of elderly women for whom she acts as a voluntary adviser, mainly regarding their social welfare and financial entitlements.
"Most of these elderly widows (over 80 years) have small incomes of between £5,000 and £8,000. Most are just above the tax exemption limit but would have medical cards. They would have had very short employment lives (if any) and retired, or their husbands retired before 1974 and so were not in the PRSI system and do not get State contributory pensions. They mostly live on their `nest eggs', the value of which is too high to qualify for a non-contributory old age pension.
"Mostly, they all need regular income rather than capital growth with the minimum of management by them. Independent tax advice usually ends up costing them."
Mrs L, who has done her homework is asking specifically about the advantages and disadvantages of savings and investment options such as Special Savings Accounts and Special Portfolio Investment Accounts, Post Office savings, shares (and the CGT impact if they are sold).
Over the past six years the financial advisers Family Money has consulted about the money problems facing elderly people have all said the same thing - they need the best income return from their funds and they need it to be accessible. Someone in their 80s, on a low income, should not have funds tied up in stocks and shares, especially those which pay low dividends.
Cashing in those shares will incur a Capital Gains Tax (CGT) bill on the capital gain - but shares held longer than a year are subject to indexing which will reduce the size of the tax bill. (CGT is a self-assessment tax and the onus is on the elderly person and no one else, to report the income gain to the Revenue authorities.) In spite of the tax bill, selling all or some of the shares will release important capital which can be put on deposit short term and/or be drawn down to supplement income.
The next question is, which deposit?
In his latest report, the Ombudsman for the Credit Institutions recounted a case of a woman in her 80s, now deceased, who had left £80,000 in a very low interest bearing deposit account. (Her relations had claimed that the bank had been negligent in allowing her to leave so much money in such an account.)
This woman was perfectly happy leaving her money where it was and resisted every attempt on the part of the bank to switch it to a better yielding account. But it does make a great deal of sense to investigate alternative deposit rates - even in a saver's own bank.
Special Savings Accounts (SSAs), for example, come in a number of different guises - from 30-day demand to two-year fixed rate accounts and are all subject to a lower DIRT rate of 15 per cent. If a person is over age 65 with an income below the taxable threshold this tax can be claimed back. The best rate SSAs apply to the highest sums; the maximum that can be held in such an account is £50,000 or £100,000 for a couple.
The only drawback to an SSA is that a withdrawal cannot be made for the first three months after opening the account and 30 days notice of any withdrawals must be given. SSAs can pay regular, quarterly, half-yearly or annual interest and the rates often reflect the frequency of interest drawdowns.
The Post Office is another deposit alternative and a handy one for elderly people who collect their pensions there. An Post offers a range of secure deposits, including SSAs, demand and investment products such as Savings Certificates and Bonds. Interest rates are relatively competitive but no interest is paid if they are encashed within the first six months. Saving certs can also be adapted to take a half-year income.
The advent of European Monetary Union in 1999 could result in a further lowering of interest rates between now and then. This would further reduce many elderly people's incomes, which is why interest-bearing accounts should be reviewed now and alternatives investigated.
Our reader, Mrs L rightly raised concerns about the cost of advice. Accountants are not always the most suitable people to offer investment advice since taxation is usually their speciality.
Most conventional life and pensions brokers will not be very interested in the women they advise because they are not in a position to buy the commission-paying investments which brokers sell. However, banks and building societies (but not the Post Office) do pay small finders' fees to brokers passing business their way. It may be possible to engage one to find an appropriate deposit account for savings. Specialist brokers, National Deposit Brokers, also provide such a free service and can be reached at 2989211.
Ideally, elderly people should hire a fee-based financial adviser to review their financial situations and come up with some realistic and creative solutions. The advisers this column consults are all fee-based and do not charge for their first consultation. Fees are usually charged at an hourly rate of £50 and £100. While this may be too high for many elderly people on low incomes, the fee may be offset by any finders' fee received from a bank or building society for switching funds into a higher yielding account.
Most fee-based advisers are prepared to renegotiate their fees for clients on low incomes or in hardship. Aside from reviewing any savings and investments, a good financial adviser will also examine whether clients are claiming all their tax deductions, allowances and social welfare benefits.
There are difficulties in the State in realising any of the assets tied up in a private residence, but a potential solution is for any children of the client to raise another mortgage on their own property, using their share of the inheritance from their parent's home as collateral with their lender. The capital raised (or better still, interest on the invested capital) can then be paid over to the parent to supplement their income.
Another option is for the children to set up a deed of covenant in favour of their elderly parent. The amount paid over results in a gross tax reduction for the coventor and where the recipient's total income is less than the income tax threshold it is possible for them to reclaim all or some of the tax payable on the covenant.
