Templemore reader, Mr L and his wife are in the envious position of having earned 6.5 per cent gross (about £13,000) on their £200,000 savings for the last two years. This attractive deposit has matured, however, and rates have now dropped by 2 per cent, wiping £4,000 off their gross deposit income, bringing it down to £9,000 a year.
Although Mr and Mrs L also receive a contributory state pension (worth about £7,300 a year) and their home is paid for that, £4,000 is money they have become accustomed to living on. Naturally, they are loathe to see it disappear suddenly. Like so many other pensioners, they need to look at alternative deposit and investment options if they are to maintain their standard of living.
We asked two of our regular contributors, John Crowe, director of the personal financial services division of the consultants KPMG and John Gilmartin, of Gunn Robinson O'Higgins, the Dublin fee-based brokers what alternatives they would suggest.
"I am going to assume that your readers, given that they are in their 70s have a low risk profile," says Mr Crowe, "which limits their options. I think they need to consider a combination of good deposit rates the 4 per cent net return from An Post and possibly one of Anglo Irish Bank's creative deposits which passes on any benefits of a rate increase, but not a fall in rates and then a really secure, high earning with-profit bond. "I interest rates are too low and the costs of trackers about 8 per cent are too high these days. Instead, I think it would be very hard to beat the Equitable's five-year with-profit bond. The returns have been superb and capital is guaranteed after five years though there is a 3 per cent entry cost."
To maximise the investment yield he recommends that they put half their £200,000 on deposit and the other half into The Equitable Life five-year with-profit bond. Mr Gilmartin shares Mr Crowe's enthusiasm for the Equitable Life's with-profit bond, and widens this to also include Scottish Provident's product. Mr and Mrs L are not in a position to assume much risk, but given that they are in their mid-70s they also need to realistically look at their long-term financial needs.
"A lot of older people don't realise that their income needs are going to decrease rather than increase as they get older. They are going to become less rather than more active and their expenses are going to decrease," he says.
Elderly people sitting on substantial cash deposits and other assets such as property, need to try to maximise deposit rates and investment yields from conventional routes like post office and bank accounts or life assurance bonds. They also need to look at whether they can afford to draw down some capital on an annual basis to supplement their income without running out of money in their extreme old age.
This can be done, says Mr Gilmartin by investing in with-profit bonds in which maximum income is drawn down, but the bulk of the capital assuming healthy investment is preserved over, say, 10 years.
Releasing equity in property is another option. Releasing £25,000 or even £50,000 out of a property worth more than £100,000 would make all the difference for an elderly person or couple on a limited income. Whether invested or simply drawn down on an annual basis, this kind of cash injection would make all the difference between just "getting by" and enjoying retirement.
Finally, purchasing an annuity is also a possibility for elderly people with a substantial amount of cash, says Mr Gilmartin. In Britain, where these products are more common, they work on the principle that the fund, say £100,000 is guaranteed to pay out £25,000 a year for five years (£125,000) after which the annuity income and capital is forfeit. The extra £25,000 is all that is taxable (at £5,000 a year) because the £20,000 per annum payment is regarded by the Revenue authorities as your own capital.
Even if one partner, or both dies, during the period, the payments are guaranteed for the five years. If the couple survives the five years, their £100,000 will have been spent, but the other £100,000 is still intact and ideally, has been wisely invested to increase in value to make up much or all of the loss of the other £100,000.
