Your pensions questions

Malcolm tackles your pensions problems

Answered by Malcolm McLean of the Pensions Advisory Service.

Derek Ford has heard that when calculating state pension entitlement it is possible in some circumstances for wives to substitute their husband's national insurance record in place of their own. When does this happen?

Entitlement to state pension normally depends on your own individual record of national insurance (NI) contributions over your working life.

Although it is not a case, as Derek puts it, of substituting one record for another, it is possible for a wife who has an incomplete NI record to claim approximately 60% of her husband's state pension, if this is better for her. At the present time this can only be done when the husband himself reaches state pension age and starts to draw his pension. There were some modifications to this proposed in the recent Pensions Bill -in particular to allow this to happen regardless of whether the husband had started to draw his pension or nor, provided he has reached state pension age.

Otherwise, the only situations where it is possible to substitute another person's national insurance contribution record for your own are on death or divorce. For example, with a divorcing couple, the ex-wife can have her pension entitlement based on her ex-husband's record up to the date of their divorce.

Chandra Raajasuuriya reaches state pension age of 60 in January 2010. By then she will have 32 qualifying years to count towards her state pension entitlement. She is ineligible to plug the gap in her record with voluntary contributions because the missing seven years needed were in the 70s. She wants to know, in view of the new rules she has heard are coming in, if she delayed claiming her pension until 6/4/2010, would this enable her to qualify for a full state pension?

It is true that the recent Pensions Bill outlined proposals to reduce the number of national insurance qualifying years needed to receive a full state pension from 39 (for women) to 30. If the legislation is confirmed this is due to take effect from 6 April 2010.

However, this will not help Chandra. Because she reaches her state pension age before the effective date of the change the old rules remain applicable in her case. She will therefore still be short of the 39 years necessary for her to receive the full state pension (currently £84.25 a week).

She can of course delay taking her pension in order to build up a higher entitlement for the period of the deferment or if she puts off claiming for at least a year, to have the option of a lump sum. Further information on this can be viewed on our website: www.pensionsadvisoryservice.org.uk.

A number of questions have been sent in about the arrangements for cashing-in 'trivial (small) pensions'. Mr Kitchen asks about his wife who is shortly due to retire at age 60. She has a pension from a former employer with a fund value of £14,368. She thought because this was under £15,000 she would be entitled to take it all as cash. She has now been told, however, that the scheme will not agree to do this. Is this right?

Mr Dickson has a personal pension and was originally told he could have a lump sum of £279 in exchange for his pension. The life office have now come back to him and told him because he is due a company pension greater than £750 a year, they cannot offer him the lump sum. He would appreciate an explanation of the rules so he can check whether the life office is right.

In some circumstances it is possible to exchange small pension entitlements for a cash lump sum

In some circumstances it is possible to exchange small pension entitlements for a cash lump sum. The rules for this are laid down by HMRC (Her Majesty's Revenue & Customs). There are four main conditions:

- The total value of all your pension plans must not exceed £15,000 in the current tax year. This will increase progressively to £18,000 by 2010.
- You must be aged between 60 and 75
- All the cashing-in from your different plans must be completed within a single 12 month period
- The scheme rules must provide/be amended if necessary for trivial payments to be made.

In Mrs Kitchen's case it appears she could satisfy the first three conditions but unfortunately for her, not the last. For whatever reason, the scheme has decided it cannot or will not change its own rules to permit this option. As HMRC's regulations are permissive, and not mandatory, they cannot be forced to do so.

As regards Mr Dickson, it is the first condition that is the problem. He has a company pension, in addition to his personal pension, and the total value will exceed the £15,000 limit. This is because HMRC rules require a company pension to be valued for trivial pension purposes, by multiplying it by 20 (or 25 if the pension is already in payment).

Therefore, as the company pension is said to be greater than £750, this on its own takes him over the limit (£750 multiplied by 20 equals £15,000).

For further advice on the trivial pension rules, contact the Pensions Advisory Service's Pensions Helpline on 0845 601 2923.

Brian Crowe is already in receipt of the state pension and also receives a company pension. He keeps receiving through the post information telling him about investing in a SIPP and the tax advantages of such an investment (invest £2,808 and the Government adds £792 - total £3,600). He wants to know whether a SIPP is open to everyone to invest in, even though, like him, they are already receiving a pension or pensions and if the Government contribution really does make this too good an opportunity to miss.

Any United Kingdom resident under age 75 is able to contribute towards a personal pension.

A Self-Invested Personal Pension (SIPP) is a particular type of personal pension, which offers flexibility in investment choices. As such, it is probably best suited to the more sophisticated type of investors who want more of a say in where their money is invested. SIPPs are also not normally recommended for investors with small pension pots.

For a person like Brian who may not have earned income, it is possible to contribute up to £2,808 in a tax year which, with basic rate tax relief added by Government, becomes £3,600. You can pay more, but there will be no tax relief on the excess.

Brian should not be unduly induced by adverts but if he has the money and really is interested in setting up a further pension plan at his time of life, the option is open to him. I would strongly recommend, however, that he takes professional advice before doing so.

Derek from Belfast says he was recently contacted by a firm of complaint handlers who offered, for an upfront fee of £500, to pursue a complaint on his behalf on the basis that he had some years ago been advised to contract out of SERPS and might have been wrongly advised. If they were successful, 12% of any compensation would also be payable to them. Derek wants to know whether this is likely to be money well spent.

There has been some concern in recent times about the activities of professional complaint handlers

There can be no certainty that any claim for compensation based on an argument that you were misadvised to contract-out would be successful. In fact, so far, I understand there have been relatively few successful claims. There is, therefore, more than a little risk that paying an upfront fee of £500 would not be in your best interests.

In any event, there is a free process which you can use if you feel you have a case. Initially you should complain to the company who provided you with the advice. If you remain unhappy after they respond, you can then ask the Financial Ombudsman Service (FOS) to decide your complaint. Their agreement to investigate and their ultimate decision will not depend on the involvement of a professional complaint handling company.

There has been some concern in recent times about the activities of professional complaint handlers. New legislation in the form of the Compensation Act 2006 will require businesses providing complaint handling services to be regulated and authorised to conduct such business. This will take effect from 6 April 2007 and it is intended that it will be an offence to operate without authorisation from this date.

P. Getty wants to know whether in general it is advisable to transfer pension rights. He has almost nine years' pensionable service in a former employer's scheme and in exchange for transferring this, has been offered four years in his current employer's scheme. Both schemes are final salary. It is usually possible to transfer former pension rights into your current employer's scheme or into a personal or stakeholder pension plan arrangement.

Transfers should only be considered where there is some clear advantage in doing so. Obviously the main factors to take into account would be a comparison of the pension being given up and the credit offered in return. But you should also take account of associated benefits such as death cover and the level of increases in payment, which may vary from scheme to scheme. Whilst on the face of it four years in exchange for nine may not sound like a good deal, you need to take into account that the value of the four years additional service improves with each future pay rise.

Another factor could be the financial viability of the respective employers and the potential risk of insolvency. Although the degree of protection has been considerably improved in recent years due to the introduction of the Pensions Protection Fund, the enforced closure of a scheme because of the insolvency of the employer could still result in financial loss for members, particularly those under the scheme's normal pension age.

Before arranging a transfer you should normally therefore consider seeking independent financial advice. These are complicated matters and it is important you understand all the pros and cons. For more general information you can obtain a leaflet about transferring from the Pensions Advisory Service by calling their Pensions Helpline on 0845 601 2923.

Keith from London says that he recently received a letter from his former employer offering him a cash sum of £2,000 if he were to transfer his preserved pension entitlement out of their final salary scheme to another arrangement. £2,000 is a lot of money and Keith is tempted, but he wants to know is it a good idea? His current employer does not offer a pension scheme and therefore if he were to transfer, it would have to be to a personal pension.

It is normally not advisable to transfer from a final salary scheme to a personal pension as the cost to match the benefits given up is likely to be much higher than the transfer value offered, even if the incentive to transfer is taken into account. Keith may also be giving up valuable associated benefits such as a widow's pension, as well as a guarantee that his pension will keep pace with inflation.

It is normally not advisable to transfer from a final salary scheme to a personal pension

However, £2,000 is indeed a lot of money and I can understand why Keith is tempted. Nevertheless it is important that he understands the implications of accepting the offer. In particular he needs to think very carefully about the benefits he will be giving up, and the likely, probably reduced, benefits, he might obtain in their place.

Whilst it is not normally advisable to transfer from a final salary scheme to a personal pension, high earners worried about the financial strength of their employer may be tempted because of the limited protection available from the Pensions Protection Fund. This is, however, a rare example where taking the incentive may make financial sense. In all cases, it is important that financial advice is obtained so that the pros and particularly, the cons are properly understood.

Terry Brice is a member of his company's pension scheme. He has recently received a letter saying his company plans to introduce a 'SMART' pension arrangement and he has to decide whether to join or to opt out. He has been given very little information. What are the pros and cons?

What Terry is probably referring to here is a form of 'salary sacrifice' arrangement, under which the scheme member gives up part of their salary in return for a larger contribution to their pension scheme by the employer. This would effectively reduce the employee's salary but with that loss of salary being made up by the increased contribution from the employer.

The main advantage of this sort of arrangement is that both employer and employee achieve a saving in their national insurance (NI) bill as their NI contributions are now based on the employees' lower salary.

This is a legitimate arrangement, which has financial advantages for both the employer and the employee. The arrangements have to be approved by HM Revenue & Customs (HMRC) which is not always forthcoming and depends on the precise terms being proposed.

There can be downsides, however. A reduced salary may affect other things such as the level of life cover being provided, which would normally be expressed as a multiple of the salary in payment (e.g. four times salary). Mortgage offers and redundancy payments may also be adversely affected.

In deciding whether to opt out or stay in, Terry needs to enquire what precisely is being offered and establish the financial advantages to him. He then needs to weigh this against the potential disadvantages referred to above and decide which is most important to him.

Geoff Woodall from Bolton wants to make a comment about the Pensions Protection Fund (PPF). Following the insolvency of his former employer, his pension scheme has recently entered the PPF. Geoff who is drawing an early retirement pension has learnt he will lose 40% of this. He says 'the fallacy that the media keep on trotting out, that the PPF only reduces pension payouts in the worse case to 90% of the previous benefit needs to be corrected'.

Geoff has a point and, as I commented in an answer to an earlier question, the protection available from the PPF is limited in certain respects. Members already over their scheme's normal pension age and those in receipt of an ill-health pension have 100% of their pension protected. But for members under the scheme pension age, including those who have taken "ordinary" early retirement, protection only covers 90% of their benefit at the outset and there is similarly only limited price protection after that Also, payments in this category are subject to a cap of £26,050 which is itself proportionately reduced each year for members under age 65.

Information about the PPF can be read on the Pensions Advisory Service website: www.pensionsadvisoryservice,org.uk.

The opinions expressed are Malcolm's and not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.