Jeremy Gates looks at how older workers fearing for their financial future can protect their assets

THE decision by oil giant BP to cancel payment of its dividend to shareholders for the rest of this year – the three quarterly payments which will be lost could top £5bn – will cause more pain to small investors than mighty pension funds.

There is no shortage of strong companies paying decent dividends right now, so pension funds might hope to make up some of the shortfall from BP – virtually demanded by a furious President Obama – elsewhere. In any case, much of their money is stashed in bonds, gilts and cash.

However, for the 50-plus generation, the age group which tends to rely on dividend payments, this damage could be a bit harder to repair.

They could lose as much as £525m by December, 2010, says Capita Registrars Private Investor Watch. Capita reckons 12m retail investors in the UK are sitting on an average portfolio of just under £14,000 each so BP may be responsible for a sizeable chunk of their income.

They are not suffering alone. Suddenly, the tables seemed to have been turned drastically for millions nearing the end of their working lives.

It probably began with the collapse of private sector pension schemes, and worsened when house prices began to fall from autumn, 2007. Then the value of savings plunged when the base rate hit 0.5%, in March, 2009.

Further punishment for this embattled group is likely in tomorrow’s Emergency Budget, when Chancellor George Osborne is expected to bump up Capital Gains Tax (CGT) on profits from shares and buy-to-let properties.

No wonder Unbiased.co.uk – a website which promotes the services of independent financial advisors – names retirement planning as “the number one advice driver” among potential customers seeking expert advice on money matters.

In every area, it seems, the over-50s are losing out badly.

Inflation is grim for everybody, but Alliance Trust Research Centre says 50 to 64-year-olds face a rate of inflation which is some 35% higher than the official rate, largely because this group spends relatively more of its disposable income on transport.

Tax rises? Aviva’s quarterly Real Retirement Report says that 64% of over-55s “are more afraid of tax increases than serious illness or the death of their partner.”

Clive Bolton, at-retirement director for Aviva Life, says: “Many people in this age group are concerned about the rising cost of living, due to their relatively fixed income.

“This age group is particularly exposed to any sudden VAT increase or changes to fuel charges. Our report really shows how vulnerable they feel to any sudden increases.”

Those outside final pension schemes in both private and public sectors are most exposed – partly because they haven’t saved anything like enough, and partly because annuity rates which determine their retirement income are plunging.

In 1990, says Scottish Widows, a £100,000 pension fund bought a fixed income for life of £15,600 per year.

Today, a similar fund pays annual income of just £5,860. Savers need a pension pot of three times the size to generate the income they got 20 years ago.

At annuity specialists Partnership, head of retirement products Philip Brown says: “Well over two-thirds of all those in the post-50 age group have less than £30,000 in an annuity – which, at today’s rates, means an annual income of just £2,000 a year, or £40 per week.

“The burden on an already heavily stretched state is going to be massive.”

With the average wage around £26,000, Philip Brown says that somebody at that level retiring today might expect a state pension of less than £6,000 a year, plus a private pension of around £2,000 a year.

It means they “will be obliged to live on a reduction in income of up to 70% when they stop work.”

In many cases, of course, the fall in income is not as drastic as these figures might suggest – for many people are likely to do part-time jobs in their 60s as they gradually scale down work commitments.

There are other measures which over-50s can consider to avoid a savage cut in living standards.

“One hopeful aspect”, says Laith Khalaf, pensions analyst at financial advisors Hargreaves Lansdown, “is that many people enjoy a rise in their disposable income beyond 50: as their earning power peaks, children are leaving home, the mortgage may be nearly paid off.

“Suddenly, for many, there is scope to save a larger proportion of take-home income; at 50, with tax breaks, and the potential for your money to grow, there is a compelling case for paying more – if possible – into a pension.

“Closer to 60, or beyond that date, you might prefer to put spare money into ISA savings accounts holding cash, equities or bonds, which provide tax-free income and capital gains and offer more flexibility than pensions.”

Meanwhile, as the threat of a sovereign debt crisis hovers over Europe and threatens a second Lehman-style collapse, those nearest to retirement might consider the case for de-risking their pension fund by moving money out of shares, and into cash and fixed interest investments, which are less likely to lose value just before an annuity is purchased.

Step two to boost income in later life is pretty obvious as well: when the moment comes to buy an annuity, maximise future pension income by using Open Market Option (OMO), which means asking a professional adviser to search the market to find the provider prepared to pay the highest income.

In many cases, this is a free service for consumers – for the fee for the advisor is paid by the company which eventually supplies the annuity.

Says Philip Brown, at Partnership: “In 2009, around 62% of all annuities were internal transactions – which means nearly two in three people accepted the pension offered by their original pension provider and failed to search out the best available annuity on the market.

“These customers are far less likely to have access to ‘enhanced’ annuities which pay out more for specific medical conditions. Only 0.5% of internal annuities are enhanced.”

However, as taxes rise to plug the enormous gap in Britain’s public finances, perhaps the big lesson for over-50s is that they will have to take much greater care in arranging savings and holding other assets which are outside their pension.

Just how much care will probably be painfully evident after Mr Osborne’s statement on Tuesday.

Says Laith Khalaf, at Hargreaves Lansdown: “At 65, everybody has a tax-free annual allowance of £9,490 – that’s nearly £20,000 per couple.

“In a typical marriage in this generation, the main breadwinner will have pension contributions and therefore income in their name, while the partner has a lower income.

“It is important to arrange income so that both partners make the most of their tax-free allowance.”

This could be a useful defence when Mr Osborne tries to boost his CGT takings tomorrow: shares can be passed from husband to wife by a “bed and spouse” arrangement which could significantly reduce eventual CGT liabilities.

Alternatively, if higher CGT rates do not apply until April 5, 2011, many people may try to “bed and ISA” their equity holdings – selling shares to qualify for a lower tax rate on capital gains in 2010/11, then holding the same shares inside ISA shelters in future years to stay beyond the grasp of higher CGT rates.

With the annual ISA limit standing at £10,100, several brokers say that many of their clients now hold most of their shares within ISA wrappers. That is an obvious defence against the tougher CGT regime which awaits us beyond next Tuesday.

INFORMATION: Hargreaves Lansdown’s Top 10 Retirement Tips guide is available on 0117 980 9940 and www. H-L.co.uk; Partnership (0845 108 7240 and www.info@partnership.co.uk).