Malcolm Mclean tackles your pension questions
It's our first 'Ask the Expert' after the summer break, Malcolm Mclean from the Pensions Advisory Service.
As usual, click on one of the questions in blue below to skip straight to that answer, or scroll down the page to read them all.
But first, here are a number of changes affecting pensions taking effect from 6 April 2010.
The main ones are as follows:
- Qualifying conditions for the full rate basic state pension will change so that everyone whose state pension age is on or after 6 April 2010 will need only 30 national insurance (NI) qualifying years as opposed to the current requirement of 44 years for men and 39 for women.
- The state pension age for women gradually increases from 60, so by 6 April 2020 it will be 65 years. You can check your state pension age on TPAS' state pension age calculator at: www.pensionsadvisoryservice.org.uk
- Home Responsibility Protection will be replaced by a system of weekly NI credits.
- The ability to claim a pension based on your spouse's NI record will no longer be dependent upon them having actually claimed their own state pension. You will both simple need to have reached your respective state pension ages. It will also be the case that men and civil partners will now be able to claim a state pension on the same basis.
- Eligibility for the State Second Pension (S2P) will be extended to foster parents, people awarded child benefit for a child under age 12; people looking after someone with a qualifying disability for at least 20 hours a week. They will be treated as though if they were earning at the same rate as something called the low earnings threshold, for S2P purposes. Additionally, people will be able to combine earnings with credits for caring and/or incapacity within a single tax year in order to build up S2P entitlement.
- The earliest retirement age allowable by a private pension scheme will rise from 50 years to 55 unless retirement is because of ill health or someone has a protected pension age. This means anyone in an occupational scheme who had an unqualified right to draw their pension below 55. That right must be in the rules on 10 December 2003, and you must have had the right on 5 April 2006. If you have individual pension policy these plans can retain a retirement age lower than 50 in respect of 'special occupations' (e.g. footballers who can retire at age 35), as long as that right existed before 5 April 2006.
- The ability to claim an increased basic state pension because of an adult dependent will end.
I am 65 years of age and retired. I receive the full basic state pension having paid national insurance (NI) contributions for over 44 years.
My wife is 58 and works full time. Because she has only paid the "married woman's stamp" whilst in work, she will only qualify for a state graduated pension of 20p a month when she reaches pension age.
I have heard my wife could get a pension of about £60 a week based on my record of contributions but have not been able to obtain any confirmation of this.
I would be grateful for any enlightenment you can throw on the matter.
There are actually two issues that Bill should consider; whether it's possible to claim extra pension now, because his wife is less than 60 years; and the situation that will apply once she reaches her state pension age.
A man can get an increase in his state pension for his wife if she is under her state pension age and her earnings are less than £64.30 a week. If however husband and wife are not living together the earnings limit becomes £57.05.
From 6 April 2010 it will no longer be possible to claim an increase of your state pension for another adult. If however you're already entitled to this on 5 April 2010 you will be able to keep it until you no longer meet the conditions or until 5 April 2020, whichever is first.
Once Bill's wife reaches her state pension age she will be able to claim a basic state pension for herself based on approximately 60% of Bill's pension. Her exact state pension age will depend on her date of birth as women's state pension age is gradually increasing from 60 to 65 in the decade starting 6 April 2010.
I would like to know whether the practice of vesting - investing in a pension and immediately taking 25% in cash plus an annuity is worth doing.
I will be 75 in August 2010.
The ability to do what Julian is proposing, i.e. putting money into a pension plan, obtaining Government tax relief on the investment, and then immediately drawing cash and buying an annuity, can only be done before age 75. It also the case that some pension providers, require the monies to be invested for a minimum period of time before they will allow the policy to be used to pay benefits.
The obvious advantage is the increase in your investment as a consequence of tax-relief. Tax-relief on gross contributions is available on contributions equivalent to 100% of your earnings or £3,600 whichever is lower.
For example, you pay £2,880 to the pension policy. The Government adds tax-relief and consequently your contribution is boosted to £3,600. You then take 25% as a tax-free cash sum, i.e. £3,600 x 25% = £900. The balance of £2,700 is then used to buy an annuity i.e. a pension for life. This means that you have bought an annuity worth £2,700 at a cost to you of only £1,980 (£2,880 less £900 cash = £1,980).
A disadvantage is that you are effectively giving up £2,880 disposable income in return for £900 and a small pension. Also, the number of annuity providers willing to give an annuity in return for a small fund is few. Many are not interested in funds of less than £5,000. It may therefore be the case that the annuity rate offered is not competitive.
Why are state pensions, which one has paid for the whole of one's working life, frozen if one goes to live in places such as Australia or New Zealand?
For state pensions to be increased if the recipient resides abroad it is necessary that there is a reciprocal agreement between the UK and the other country, or it is a country within European Economic Area.
Countries where reciprocal agreements currently exist are:
Barbados, Bermuda, Bosnia-Hercegovina, Croatia, Israel, Jamaica, Jersey and Guernsey, Mauritius, Montenegro, Philippines, Serbia, Turkey, USA, and the former Yugoslav Republic of Macedonia.
Countries where pension payments to expats are frozen include Australia, Canada, South Africa and Hong Kong.
Teachers Pensions are linked to the RPI in September.
What happens if this is in negative territory? Will my pension go down?
We contacted Teachers' Pensions and asked. We were given the following reply:
"Public Service Pension upratings are linked by primary legislation to those for State Second Pensions, not the State Pension.
Decisions on the uprating of benefits for April 2010 will be taken at 2009 Pre-Budget Report, taking account of the rate of inflation over the year to September 2009. In the event that average prices fall over this period as measured by the RPI, all benefit rates will be protected at least in nominal terms (i.e. not reduced on account of deflation), thereby providing an increase in support in real terms. Government has also committed to increase the Basic State Pension by the higher of 2.5% or RPI."
I was recently made redundant and my final salary pension scheme which I paid into for 15 years and which I have been told was a very good scheme has closed down.
It went into the hands of an independent trustee company, who have been given the task of managing the fund (us members had no say in this happening). The old company trustees have "handed over" the managing of the fund to this company.
The fund will now be held for 2 years and then put into a government protection fund.
Members will lose around 10% of the pot of money for administration charges.
I am considering asking a financial advisor to look at my options.
My questions are:
Is all this the only option we have ?
Can we negotiate the admin costs ? or pay nothing ?
Will the financial advisor be able to help ?
It appears from what Mark is saying that his former employer has become insolvent and the pension scheme left behind has insufficient monies to pay the pension benefits that have been promised. When this sort of thing happens it is necessary that an independent trustee is appointed to takeover the running of the scheme. Independent trustees do however have to be paid for their work and the pension scheme's assets are the only source for doing so.
It seems that the scheme qualifies for what is known as the Pensions Protection Fund (PPF). The PPF was set up from 6 April 2005 to help members of pension schemes whose employers had become insolvent.
Mark suggests that pension benefits will reduce by 10% because of administration charges. I suspect that the real reason is the level of protection that the PPF can give members. Broadly speaking the PPF aims to provide; 100% of benefits for members over their scheme's normal retirement age and 90% (i.e. a 10% reduction) of benefits for members below, subject to a cap of approximately £28,700 at 65, except if early retirement was on the grounds of ill health.
If our understanding is correct and the scheme is now being assessed to see whether it will be eligible to enter the PPF, then it is unlikely that there are any other options, such as transferring away, that Mark can now consider. Consulting an independent financial adviser (IFA) might be helpful in looking at Mark's financial position overall but it is unlikely that an IFA would be able to give alternative recommendations in respect of the arrangements already in hand for closing down the pension scheme.
Could you please explain the rules relating to tax free lump sums in relation to occupational pensions?
For example, is it permissible to take preserved benefits from one pension below the £16,500 threshold before taking one's main occupational pension or alternatively take the transfer value to purchase an annuity?
R J C Wilson
It is permissible for all pension schemes to pay tax-free cash sums on retirement of up to 25% of the capital value of their benefits. However, all occupational pension schemes are subject to their own rules which in some cases mean that less than 25% is allowable.
I think Mr Wilson may have become confused with rules on what is known as 'triviality lump sums' which are unlikely to apply in his case. This allows people to take the whole of their pension entitlement in return for cash but only if the total value of ALL their private pension provision is less than 1% of something called the lifetime allowance. In this tax year this means £17,500 (it was £16,500 last year). It's also necessary that they are aged between 60 and 75 years and their pension rules allow such a payment.
If it is possible to be paid a trivial lump sum 25% of the payment is tax-free, the balance is taxed as income.
I have read that it is possible for someone over 50 to take 25% of their pension fund prior to the new tax year as a lump sum and then to re-invest this into another pension fund and get tax relief ("pension recycling"). Is this possible? If so, can it be done with SIPP funds? What are the effects of going down this route?
It is possible to do what James is suggesting, but anyone considering doing so should be aware that there could be tax consequences as the Revenue do not like the concept of people receiving tax free benefits and using them to fund further tax relievable contributions.
This is a very complicated area but the broad principle is that if someone receives a tax-free lump sum and then because of it, the amount of contributions paid into a pension scheme is significantly greater than it might otherwise be, a tax charge could arise. It would be wise for James (and anyone thinking of doing something similar) to tread carefully and take financial advice before committing himself.
Do I have to buy an annuity with my personal pension when I retire and take my state pension at 60 next month?
At the moment, I will be entitled to pension credit as things stand as I have insufficient NI contributions and I'd like to wait till I am 75 to buy an annuity when hopefully my pension fund has made back lost ground.
Personal pension plans can usually be used to provide benefits at any time between the ages of 50 (55 from 6 April 2010) and 75. So, it is not necessary that Sarah buys an annuity at age 60. However Sarah should check that there are no downsides to not taking benefits at her selected retirement age, if that is 60. For example some plans include guaranteed rates when converting the fund into an income but only if this done at the selected retirement age. Also, it may possible that an adjustment could be made, known as the market value reduction, if, again, the policy is used at a time other than that originally specified when the policy was taken out.
Sarah should be aware that when calculating eligibility for Pension Credit, assets not in payment but potentially available, are taken into account and this would include her personal pension, whether or not it was paying her an income.
Can you tell me if benefits from the state-earnings-related-pension-scheme can be paid, in full, to widows/widowers? I believe that this benefit has been "raided" by the government and that only a proportion is then "inherited" by widows?
I have just over £30 a week made up of SERPS and the old graduated pension scheme.
Can you advise me on this matter?
It used to be the case that a widow could inherit 100% of their husbands state earnings related pension (SERPS) on his death. But that is no longer the case and changes in legislation made some time ago mean that the amount inherited has over time reduced.
How much that can be inherited depends on when Adrian was born. If he was 65 on or before 6 October 2002 his wife will inherit 100% of his SERPS. If Adrian's state pension age is on or after 6 April 2010, the amount than can be inherited will be 50%.
If he was 65 between those two dates a proportionate amount can be inherited.
I started a With Profits Personal Pension Plus back in 1985 to end on my 65th Birthday in 2014. I am now 60 and semi retired with a small income under the tax threshold from working and living mainly off savings. I am still paying into my pension but cannot claim tax relief on my pension contribution. I have contacted the pension company and the Inland Revenue about this and they both say I have to claim from the other party so I am stuck in the middle and not getting the tax relief on my contributions.
Is this common or is my situation unique.
The situation Peter described is not unique but might be capable of being resolved.
As Peter started contributing in 1985 I think the type of plan he has is what is called a Retirement Annuity Contract (RAC). Contributions to RACs are normally paid gross and tax-relief is given via the individual's tax code. However, if Peter's earnings are not taxable, no tax-relief can be given this way.
What Peter could investigate is to see whether it's possible to change his method of paying contributions to the 'relief at source' basis, whereby contributions are paid net of basic rate tax and tax-relief is then claimed by his pension provider from the government and added to his contribution. He should therefore contact his pension provider and put the question to them. However there is no requirement that providers of RACs use this basis and a decision as to whether to switch to a different way of contributing rests with them.
Why is it not illegal for the UK Government to discriminate against men aged 60 to 65 by refusing to pay them the state pension which women receive at the age of 60?
No, the present situation is not illegal. Different state pension ages for men and women are temporarily allowed for under EC/EU rules (EC Directive 79/7/EEC art. 7) and the UK will be equalising male/female state pension ages at 65, phasing in the change from 2010 to 2020. This was enshrined in UK law by the Pensions Act 1995.
The views expressed are those of Malcolm Mclean, not the BBC.