8 August 1997

PENSIONS:DONT RELY ON FARM

RELYING on the farm as your pension is a common mistake and one that can lead to hardship and family tension.

"Sometimes you might have four generations trying to live off 80 cows – it doesnt leave much for great granddad," observes Quentin Straghan.

From his base at Sherborne in Dorset, Genus consultant Mr Straghan advises dairy producers on preparing for retirement. All too often he sees even those who have made some pension provision find that in the end it is not enough to support them.

"There is invariably a shortfall," says Mr Straghan. "And for people who are middle-aged now, the state old age pension may be means-tested by the time they retire."

The key is to plan pensions as early as possible, and to be realistic about your circumstances and future needs. With over 1000 different pension policies to choose from it is not easy to decide whether one or another is best for your purposes, admits Mr Straghan, but he has some pointers:

&#8226 use only an independent financial adviser who is free to sell you policies from a wide spread of life offices, not a tied agent who can only provide policies from one source.

&#8226 get the IFA to confirm in writing this is the case, and to confirm any other details on which you are unclear.

&#8226 avoid high, regular monthly premiums which may cause cash flow problems in future – it is better to make smaller regular contributions and top up with lump sum payments when you can afford it.

&#8226 check whether the policy you favour allows such flexibility.

&#8226 inflation must be accounted for in your pension plans – if you have £20,000 today, at 5% inflation for 15 years, it will only represent spending power of £10,000.

"There are many farmers with no pension provision, and others who have been paying say £34 a month for many years into a pension policy, only to find that it is worth just £5,000 to £6,000 a year on retirement, and they need in the region of £20,000 a year to live on," warns Mr Straghan.

One idea in such cases would be for children taking over the farm to supplement the parents pension by paying a consultancy fee, which for income tax purposes is earned income. Mr Straghan advises against linking this to profits, or profit sharing, because of the unpredictability of future farming fortunes.

"An alternative is to look at letting the farm to the children on a FBT – it is efficient for Inheritance Tax purposes and would provide a rental income for the parents. A further option is to ask the children to raise cash to buy part of the farm."

Sorting out arrangements such as these is not a straightforward task, and can lead to friction, so the use of an outsider to guide discussions may be helpful, suggests Mr Straghan. "Different members of the family will have different aspirations, and may not always be clear about these within the family."

Planning early is essential. Drawing up a realistic budget of what living costs will be in retirement is one of the first steps.

"A personal cash flow should be drawn to include the true cost of running a car, electricity and house insurance, the telephone and house repairs – part of these are lost in the farm accounts while the person is in business."

Housing is a critical question, especially for tenants. "A lot dont retire, and darent retire, because they would have nowhere to live. A lot are also buying homes rather than investing in a pension, relying on the sale of cows and or quota to provide a lump sum on retirement."

Where there are sons or daughters to take over the farm, it is often not big enough to provide a living for them and to fund the retirement of the parents.

Parents may feel that they also have to provide for non-farming children. Unless it is a very large holding, rather than splitting up the farm, or saddling the farming offspring with debt in the form of rentals to those outside the business, Mr Straghan advises some other form of investment to benefit non-farming children.

This could be in the form of life insurance, the benefit of which may then pass to the non-farming child on the death of a parent. Alternatively, the parents retirement home could be left to him or her.n

All too often dairy farmers fail to make adequate pension provision to support retirement. Suzie Horne reports

Budget Update

FOLLOWING Chancellor Gordon Browns first Budget, those who have made any pension provision need to review it, as fund growth is likely to be hampered by the abolition of tax credits on dividend income for pensions funds.

This effectively means that the income element building up in funds will be cut by 20%, and unless prospective pensioners are willing to accept lower pensions, they will have to consider making larger contributions to make good the shortfall, say advisers.

Genus Management consultant Quentin Straghan… the key to pension planning is to start early. Dont rely on the farm as your pension.