Malcolm McLean knows plenty about pensions
Malcolm McLean, appearing for the last time on Working Lunch, answers your questions on how best to save for your retirement.
Click on one of the questions in blue below to skip straight to that answer, or scroll down the page to read them all.
1. I will retire next month. I have two small pension funds (sub £30k each) that I am in a position to be able to defer until the annuity rate improves. What funds are available to allow me to transfer both of these two funds into, so that they will be protected from the tax man and hopefully grow? Also, should I defer anyway to see what else the government is proposing for pension funds?
You will not pay tax on these pension funds unless or until you convert them into an annuity. To get a better deal on an annuity you might consider transferring one of the funds into the other although it would be wise to take financial advice before doing so as this may produce less diversification of your investments. The question as to when is the best time to take an annuity and the type of annuity that best suits you is another area where you may wish to contemplate seeking professional financial help.
The government is currently consulting on changes to the requirements to convert pension funds into an annuity and these may affect you. Further details will no doubt be available soon at the end of the consultation period.
2. How can the government be allowed to dictate to non-governmental pension funds that they should up-rate their pensions according to CPI rather than RPI inflation?
The government is responsible for pensions legislation which lays down the parameters under which pension schemes must operate. The requirement to provide some inflation proofing for private pensions in payment is laid down in legislation and until now the retail prices index (RPI) has been used. The government is now proposing that from next year price inflation for this purpose will be assessed by reference to the consumer prices index (CPI) which historically has tended to be lower than the RPI.
This will affect the minimum level of pension increases required by law, but there is no indication that the government plans to pass legislation which will override existing Trust Deeds and Rules governing pension schemes. So whether the schemes mentioned in the questions above will be affected will probably depend on what is already laid down in each scheme's Trust Deed and Rules. If, for example, the Rules specify that increases must be in line with changes in the RPI, that may well have to continue.
3. Can I contribute to more than one pension scheme? I currently have both a company scheme and also a SIPP which I would like to contribute to in order to buy shares. Are there any restrictions?
You can contribute to as many pension schemes as you like although there are limits as to how much of your contributions and/or increased pension entitlement (if you are in a company defined benefit scheme) qualify for tax relief. Currently for tax relief purposes you are permitted to contribute either £3,600 a year or 100% of your earnings whichever is the higher into your pension schemes subject to a maximum of £255,000 a year (known as the annual allowance) and a lifetime limit of £1.8m (known as the lifetime allowance).
Because of concerns about the cost of tax relief for high earners the government is currently considering reducing the annual allowance to perhaps as low as £40,000. It is expected that any changes if implemented will take effect from the next tax year (2011/12).
4. Regarding SERPS, if I pop my clogs before my wife does she get the whole of this pension? I have a recollection the there was some quirk in the wording of SERPS which would give my wife the whole pension.
It depends on the date you reach your state pension age as the percentage of SERPS that can be inherited is being reduced over time. If you reached state pension age before 6 April 2002 your wife should normally inherit 100% of your SERPS less any SERPS she was entitled to in her own right. From 6 October 2002 or later the maximum amount of SERPS that can be paid will be 50%. For dates between these the percentage reduces gradually from 90% to 60%.
5. My company wants to introduce a cap on pensionable salary increases, based on RPI with a maximum of 2.5% per year. Should I opt out of this if given the choice?
It is always your right to opt out of your company pension scheme but it may not be in your financial interest to do so. Setting up your own pension arrangement will normally mean that it is you alone who is contributing to the scheme and you will be missing out on the contributions that your employer would be making into a company arrangement.
That said, the impact of a cap on your pensionable salary could make a substantial difference to your pension entitlement over time, particularly if you achieve promotion and a higher salary which may not be taken into account in the arrangement that you are now entering into. Although it might be precipitous to leave your company scheme at this stage it might be worth considering in due course setting up a supplementary long term savings plan if you can afford it in the form for example of an ISA or a personal pension.
6. I receive my state pension, but not the full one. I have asked about paying extra years to supplement what I receive but am not allowed. This is because the shortfall happened when I first had my children and I am not allowed Home Responsibilities Protection for the years 1971 to 1978 (I stopped working at the end of December 1970). Is there anything I can do about this?
I suspect not, but there is an outside possibility that you may be able to make good some of the missing shortfall as explained below.
It is sometimes possible to make good any gaps in your record of National Insurance (NI) contributions and thus improve your rate of pension by opting to pay voluntary NI contributions. There are time limits however when these can be made and for most people the missing year(s) must be one or more of those in the last six tax years. It is possible to pay for a further six years in certain specified situations - if you reached or are reaching your State Pension Age between 6 April 2008 and 5 April 2015, have at least 20 NI qualifying years already under your belt and were not registered to pay only the lower "married woman's" rate of NI contributions. One other restriction that may be pertinent in your situation is that you can only go back as far as the tax year beginning on 6 April 1975.
I can only suggest that, if you think you may meet the criteria for paying voluntary contributions in respect of the period between April 1975 and April 1978, you should contact the NI Contributions Office in Newcastle - their phone number is 0845 302 1479.
7. I understand that I can defer my state pension and receive an increment of 1% for each five weeks that I defer it (or 10.4% for each year). Is this interest simple or compound and is the final pension received based purely on the level at the date at which I deferred it, or do I benefit from any intervening annual increments?
If you choose to put off claiming your state pension, you can receive extra state pension. You must put off your claim for at least five weeks.
For every five weeks you put off claiming you can earn an increase to your state pension of one per cent. These increases are not compound.
The increase is applied to the amount of the basic state pension at the time you decide to claim it, not to the amount when you reached state pension age. Thus you would benefit from intervening annual increments.
Also, you may be aware that if you put off claiming your state pension for at least 12 consecutive months, you can choose to receive a one-off lump sum payment instead of a higher state pension. The payment would be treated as taxable income in the year it was received.
There is a comprehensive booklet on deferring your state pension available
8. I have a stakeholder pension for about £10K. Will the new rules allow me to take a lump sum and an income drawdown from next April? I do not need an annuity as I have an occupational pension. I intended to take a pension this year at age 70. Is it a good idea to wait until April?
It is already possible at your age to take a lump sum from your pension pot and use the remainder to take an income from it, either in the form of an annuity (i.e. a pension for life) or an income drawdown (i.e. leaving the remainder of the pot invested and taking an income from it). However, income drawdown arrangements would not normally be appropriate with such a small fund. Income drawdown is also complex and not suitable for everyone.
Changes to the annuity rules are currently under consideration and, although not yet finalised, are unlikely to affect someone in your situation.
9. Please could you clarify the position re my gaining access to my full pension pots under "trivial" amount rules? I would prefer the total amount in cash rather than a monthly income which would be very small. I have heard that this is possible if the total pot amount is under £18,000. My pot is approx £10,000. The policies are with The Prudential and The Royal London. I am 58 years old.
The normal rule is that, for small pensions (often referred to as 'trivial pensions'), it is sometimes possible to draw the whole fund in cash. This applies to both personal pensions and occupational pensions, providing the total value of all your non-state pensions does not exceed £18,000. You also have to be aged between 60 and 75, and make all the encashments within a single period of 12 months.
The requirement to aggregate all your pension arrangements does not apply where you have an occupational pension valued at no more than £2,000, when you can take the full amount in cash. There is currently no equivalent rule for personal pension arrangements, probably because such a rule could be open to abuse more easily with a set of personal pension arrangements than with an occupational scheme.
10. I'm a 72 year old pensioner. I receive the bulk of my monthly income from my late husband's company pension. I am concerned about your frequent references to having to purchase an annuity when I am 75. Does this apply to me? If so can I be guaranteed the same level of income as I get now? At present the pension money forms more than half of my income.
As you are already receiving a pension from your late husband's company pension scheme the question of having to buy an annuity (which is simply another form of pension) does not arise.
11. I have the option to retire in a few years time and with endowments not paying out any significant returns, my financial adviser has suggested "a draw down system" instead. Can you let us know what your option is of this type of scheme, and what are the advantages and the disadvantages of it over an endowment?
I assume you meant to refer to an annuity rather than an endowment.
When you take an annuity this means that you have handed over your fund (i.e. the money built up in your pension pot) to an insurance company and, in return, you receive a pension in the form of an annuity from them for life. Income drawdown is where you retain ownership of your pension pot, do not take an annuity, but arrange to draw instead an income from the fund, which remains invested.
There is a useful leaflet published by the Financial Services Authority (FSA) in their Money Made Clear series, which explains income drawdown and some of the pitfalls.
Income drawdown is complex and not suitable for everyone, for example if you have a small pension fund and no other assets or income to fall back on.
Even if you have a large pension fund, and other assets or income, income withdrawal may still not be suitable. If investment returns are lower than expected, your fund may fall in value, depleting the fund and lowering your future income.
Until recently, there was an effective obligation to take an annuity at age 75 (now extended to 77), but the government intends to introduce legislation to withdraw this requirement altogether. Full details are still awaited.
If your financial adviser is recommending you take out an income drawdown plan you should question him/her very closely about the perceived advantages and why he/she thinks it is appropriate for you.
The views expressed are those of Malcolm McLean not the BBC.