Make your money last the distance

Low annuity rates, volatile stock markets and reduced benefits from pension funds have all contributed to a rather gloomy outlook for people planning their retirement.

Growing numbers of companies are cancelling their final salary schemes because of increased life expectancy among scheme members and lower investment returns. Anyone with a personal pension will have seen the value of their fund fall as the stock markets plummeted.

"It is depressing for anyone starting to prepare for retirement right now," says Roddy Kohn, managing director of financial adviser Kohn Cougar. "People are going to have to take more responsibility for their finances and be more pro-active. Their investment strategy will be the key to their retirement planning."

Sally West, policy officer with Age Concern, says retirement should trigger people to take stock of their assets and investments. "Some people have a house which is worth a bit of money but which needs repairing. They may be facing a big drop in income, or need to start claiming benefits. There are 11 million retired people and they are all in very different circumstances."

When you are about to retire and are learning to live on your pension, you need to think about your state of health.

Private medical insurance is an option, but not everyone agrees with it on principle, and this is the time when premiums for medical cover rise sharply.

As for income, even the most generous pension schemes only provide two-thirds of your final salary, and many offer far inferior benefits. So you will have to learn to cope without the perks you used to enjoy - such as company car and paid holidays.

Though your home and motor insurance will be cheaper, other forms of insurance will be much more expensive once you reach your 50s and 60s.

Medical insurance, life cover and critical illness (which pays out on diagnosis of a number of life-threatening conditions including heart attack and cancer) all jump in price, since the older you are, the great your chances of needing to claim on them.

So how do you prioritise? Robert Clayton, director of Cathedral Financial Management in Exeter, Devon, believes you should take stock of what you are likely to receive in retirement and set a budget based on what you think you will need to live on. Then you can work back wards to decide what type of cover you need or can afford.

"Consider how your lifestyle in retirement is going to affect your cashflow." he says. "Some of your expenses will be lower. Your mortgage, which for most people is the biggest financial burden, should be more or less paid off. You will lose the annual cost of a rail ticket or the wear and tear on your car to commute to work.

"What will be your income when you stop working? You need to collate your assets such as state pension, company pension, personal pension, income from property, savings and investments, and draw up a complete picture of what you own. For some people, there won't be any money left over for insurance, and their priority will be to make their money work as hard as possible. For example, the average personal pension fund is £23,000, which would pay out a flat rate of £26 a week to a man aged 65."

Given that you probably have only a few years' worth of mortgage repayments left, Kohn believes that life insurance is a low priority. "You probably don't need it if you are in your 50s or 60s. While you are working you will probably have cover via your employer's death-in-service scheme."

He suggests you give your pension priority over long-term care insurance. "If you have provided for your retirement income properly, the chances are your pension will more or less cover the cost of any nursing home fees. This does mean, however, that you need to think about how to boost your pension, either through extra contributions, taking out additional savings plans and individual savings accounts, or putting money aside for the future."

He says that if you are five or 10 years from retirement, you should think about basic critical illness, which would pay a lump sum if you were diagnosed with a serious medical condition. "Don't buy the expensive insurance with added extras - just go for the cheaper option where you can buy the potential of a £50,000 lump sum for around £50 a month."

As for medical insurance, Graeme Warner, a director of specialist healthcare intermediary Manson Warner Healthcare, says comprehensive medical insurance can be costly - £4,000 or more a year. There are a number of healthcare companies which are friendly towards older people.

He said: "A lot of companies penalise you when you reach your 50s and 60s and only a handful are what you might call OAP-friendly. But there are some who welcome older clients at the expense of younger ones." At the top of the range, though, some retired couples might be paying £4,000 a year for medical cover. Warner says, however, that if they are claiming in excess of that for treatment, even an expensive plan becomes good value for money.

You can also lower the cost of a policy by opting only for inpatient treatment - with the advantage that if you have outpatient treatment but are then sent for an operation, your policy will pay for both.

The tables show that the budget plans cost about two-thirds the price of the comprehensive plans for a couple. Sometimes Manson Warner recommends couples take out individual rather than joint policies in order to get the best deal.

The cost of financing long-term care is a worry for many middle-income couples who will not qualify for state help. The problem with insurance products is that the premiums you pay are lost unless you need to make a claim.

Since long-term care cover is so expensive, people have been reluctant to buy it because they don't perceive it to be good value. This has led insurers to modify the product to include an investment element to make it more appealing.

Clayton says that some people will opt not to buy insurance to cover any potential cost of living in a nursing home. For those who do, there is a range of options depending on your state of health. For example, if you were in good health and paid £40,000 for a long-term care insurance premium, you would receive £10,000 a year towards nursing home fees if you needed to make a claim.

The premium would be invested so that if you did not need to make a claim it would grow and provide a lump sum or a greater level of income towards potential fees in the future. After 10 years, assuming a grow rate of 7%, the fund would be worth £40,600, taking the cost of insurance into account.

It is worth bearing in mind, however, that although the model from the US suggests people live for five years after they enter a nursing home, the average stay is only two to three years in this country.

So your £40,000 premium would more than pay for the cost of staying in a home for an average length of time if fees were £10,000 a year. And with the stock market having fallen so far, few people will currently feel comfortable about parting with £40,000 out of their life savings.

What you can do now

· Take stock of your assets. Work out how much you own and how much income you will receive from pensions and investments.

· What are your liabilities? Do you have any long-term financial commitments, such as paying for children through college or further training?

· Ask for a forecast of your state pension by filling in form BR19 which you can obtain from the Benefits Agency.

· Ask your personal pension or company pension administrator for a forecast of your retirement income based on your fund's current value.

· If there is a gap between your assets and your liabilities and you cannot yet afford to retire, think about how to invest now to enable you to stop work in five to 10 years' time. An independent financial adviser can help you with forecasts and investment strategy, but check how you will be charged for advice.

· Age Concern publishes a number of factsheets, which you can obtain from Age Concern England or from the website www.ageconcern.org.uk.

The charity also publishes a book called Your Taxes and Savings: taking stock, a financial guide for people stopping work.