News - Pension queries
In Consuming Issues, Malcolm McLean of the Pensions Advisory Service answered your questions on pensions.
A large number of viewers have got in touch over Gordon Brown’s Budget. In particular his 200 pound council tax rebate . How is this going to work? And what if you are currently 64? When is the cut off date for becoming 65 to receive it this year. Michaela Moody, Doreen Kennedy and June Campbell, to name but three, are all single pensioners aged between 60 and 65 who receive a pension and pay council tax - are they excluded from this? Bob Shulver is wondering how it will affect those already receiving council tax credit or pension credits.
The 200 rebate will be paid to all council tax paying households where at least one of the household is aged 65 or above. Unfortunately, it is not payable where in the case for example of a single person household where the householder is between 60 and 65.
The 200 will not be payable to those people who currently receive a full rebate of their council tax. If you are over 70 and do not qualify for the 200 rebate you will get the 50 promised in the pre-Budget report. If you receive a partial council tax rebate and your council tax bill is less than 200 you will still get the 200 rebate.
Those who qualify for the 200 will receive it along with this year’s Winter Fuel payment. There should be no need to make a separate claim. The payment will include those people who attain the age of 65 in or before the period 19 - 25 September 2005.
Bob from Staffordshire says my wife retired early, aged 51, on a modest occupational pension, but will be six years short of the required 39 years for her full state pension. We are buying in these six years by making voluntary contributions for the missing years - we have bought in one already and plan to have bought the remaining by the time my wife reaches 60. With the talk of a “Citizen’s Pension”, which is claimed to give women a full pension, are we likely to be wasting our money making these voluntary contributions?
It must be emphasised that no decisions have yet been taken about the introduction of a Citizen’s Pension and/or what the exact qualifying conditions would be if it were to go ahead. The basic idea behind it however would be to provide a pension based on a residency test rather than as now your National Insurance contribution record.
Talk of this type of new pension does create uncertainty as to whether it would be worthwhile, as Bob has pointed out, to pay money to make good missing National Insurance contributions.
We would hope that a decision on this is taken without too much delay. The Department for Work & Pensions are currently reviewing women’s pensions and have indicated they aim to produce a report by the end of the year. Whether this addresses the problem direct and reaches conclusions on the ‘Citizen Pension’ remains to be seen.
One thing that Bob and his wife might like to bear in mind is that you can go back six tax years in making good missing contributions. Therefore it might be possible for them to defer taking a decision on this for a few years by which time the position on whether or not a Citizen’s Pension is to proceed will hopefully be resolved one way or the other.
Mary in Hertfordshire was 60 in December 2003 and has received a state pension forecast of 30 a week. She understands that as a married woman she won’t receive this until she’s 65? She asks can I still buy the missing stamps to increase my pension and if so, how much would this cost?
A woman who qualifies for a pension in her own right is at present entitled to start drawing it from age 60. To qualify for a “married woman’s” pension based on her husband’s national insurance contribution record, however, she has to wait until he has reached 65 and starts to draw his pension. The maximum pension that she can get on this latter basis is approximately 60% of her husband’s basic pension.
Mary therefore may have misunderstood her position and needs to get this clarified with the Pension Service as soon as possible. If she does have an entitlement to a pension in her own right it might be possible to improve this by paying voluntary contributions even though she is past 60. The cost of doing so varies slightly from year to year depending on which year you have a gap. For example the weekly rate for 2001/02 is 6.75.
The other alternative she might want to consider is the possibility of putting off taking her pension for a while in return for which she could qualify for a higher rate or, if she defers for at least a year after April 2005, a cash sum.
For further information about voluntary National Insurance contributions Mary should contact the National Insurance contributions office on 0845 915 5996.
Mary from Lincolnshire has two personal pension plans - one with Lloyds TSB the other with Scottish Widows. She reckons that in total they are worth between 15,000 and 18,000. She wants to know whether she can amalgamate the two? Does she need to shop around for an annuity herself or should she go to an investment adviser? She knows that the monthly payments will be very small and she would like to get the best return possible.
Mary should be able bring both policies together if she wishes to do so. She should first check though whether there is any penalty for transferring either of the policies.
One of the advantages of bringing the policies together might be a saving on ongoing charges and also assist in purchasing a single annuity.
When buying an annuity she is not tied to her current provider, as she should be given an ‘open market option.’ This will provide her with a capital sum, which she can then use to buy an annuity with another insurance company. She can shop around herself and comparative tables are available from the Financial Services Authority (FSA)’s website, www.fsa.gov.uk/consumer which may help her research.
To get advice on the purchase of an annuity Mary may want to consider speaking to an independent financial adviser and may find that some insurance companies will only sell her an annuity if she has first used an adviser when making her decision
One other issue that may be of interest to Mary is that the Inland Revenue’s rules will change from 6 April 2006 and will allow individuals to exchange for cash their total pension rights from all their different pots, if they amount to less than 15,000. Although it would appear that Mary’s funds total more than 15,000, this limit will increase at each 6 April subsequently. This choice will only be available from age 60 and any encashments must be made within a single 12 month period. Anybody who has any questions on the new rules can ring our Pensions Helpline on 0845 601 2923.
Martin Richards has read in the press about changes to the inflation proofing arrangements for final salary occupational pension schemes. One article that he has read says that inflation proofing will be reduced from 5% to 2.5% a year. When does this come into effect and does it affect current pensioners?
Legislation effective from April 1997 introduced a minimum compulsory level for annual increases, which meant that pensions relating to service after that date had to increase in payment by either the Retail Price Index or 5% per annum, whichever was the lower.
Changes brought in by the Pensions Act 2004 will mean that the 5% figure will reduce to 2.5% from April 2005. This only applies to service after the date of the change and so will not apply to pensions already in payment.
There was and is no bar on pension schemes allowing increases higher than the statutory minimum if they so wish.
John in Cheshire says I am 63 years old and I am having to give up my self employed business on health grounds.
I have received details of a paid up pension entitlement from Royal Sun Alliance. My options are firstly a paid up pension at normal retirement date of 3,948 per annum. Secondly, an immediate transfer value of 71,240. Is there a simple way of deciding which is best value?
In view of his circumstances I assume that John is looking to start drawing a pension rather than simply transferring his money into another pension plan.
Probably the best thing for him to do is to shop around to see whether he can achieve a higher pension elsewhere to that on offer from his current provider.
He could do this on his own but it might be preferable for him to use a financial adviser who will be able to obtain quotes from other providers and give him a specific recommendation.
As John is unfortunately suffering from ill health, he might find that some providers would offer an immediate annuity on better terms.
Allan Hayes has a personal pension plan with NPI. He has received an urgent action communication to review his decision on whether to remain contracted out or not of the State Second Pension Scheme (formerly SERPS). What should he do? He is 51 years of age and not working due to ill health?
If Allan is not working and therefore not paying National Insurance contributions then the question as to whether to contract out or not is largely irrelevant and he need take no action. This is because the option is only applicable if you have earnings from employment.
Contracting-out means that instead of you building up an entitlement to the State Second Pension, a refund (or rebate as it is more usually described) of a part of the National Insurance contributions you have paid is made by the government direct into your private pension plan at the end of each tax year. This is then invested on your behalf by your pension provider. The size of the annuity that is eventually bought will be dependent on the investment returns achieved by the pension provider and annuity rates in force at the time.
The calculation of State Second Pension although complex has a fixed formula which is unaffected by investment performance or annuity rates.
Unlike Allan therefore the question for many people in this situation who are in work is therefore which is the better deal. Although the rebates are age related (i.e. are higher for older people than younger ones) many commentators now believe that for most people the rebate is insufficient for them to confidently predict that someone would be better off opting out.
It is a great pity that many financial advisers seem to be taking the view that the choice is ‘to difficult to call’ and are not prepared to offer any advice on this important issue. This means individuals have a difficult decision to make without the benefit of professional advice.
Although the Pensions Advisory Service is not authorised to give financial advice, we are willing and able to provide information on request about the factors that might influence an individual’s decision and the issues that could be important for them to consider.
Our Pensions Helpline number is 0845 6012923.
Depak Mistry’s wife works for Asda and she has just started a company pension with them. She also has a stakeholder pension with Standard Life. Is this allowed or does she need to reconcile them?
Since April 2001it has been possible to be a member of a company and a personal pension plan, including stakeholder, at the same time subject to certain conditions.
Broadly speaking, these are that you cannot contribute more than 2,808 per annum into the personal pension plan and your earnings do not exceed 30,000 in a year. However, from April 2006 these restrictions are all being swept away and you will be able to contribute to as many schemes as you like up to 100% of your annual earnings subject to a cap of 215,000.
Jessica Chivers has a question about. Is there a website anywhere that brings together details about the best SIPPs on offer at the moment? I have a pension fund with my previous employer and now I work for myself and I want to find out about low-cost SIPPs. I’ve been told that charges can be much lower than a stakeholder pension.
A SIPP is a Self-Invested Personal Pension. This is a form of personal pension where the Inland Revenue allows the policyholder more control over the investment of the fund. At the moment there are restrictions on permitted investments but these will be relaxed from April 2006 to allow for a much wider range of investment options.
SIPPs are normally best suited for the more sophisticated type of investor who has both the time and the knowledge to get involved in share selection. For most people a SIPP should not be taken out without the advice of a financial adviser.
Charges on SIPPs can be quite high and would normally exceed that of a stakeholder, which is limited to 1% at present (shortly to be increased for new policyholders to no more than 1.5%).
For more information on SIPPS there is a website called www.sipp-provider-group.org.uk run by the SIPP Provider Group.
Peter Harris from Birmingham says I understand new pension rules are coming into effect in April 2006 with regards to property. I have read various accounts but with no definite answer - could you give more details?
What Peter is referring to are the wide ranging changes that are taking place from April 2006 including permitted pension investment options. For the first time, pension schemes will be allowed to invest in residential property. This will permit individuals to put property into their pension arrangements via a SIPP - including their own home and holiday property.
The relaxation in the rules will be attractive to many people in view of the investment and tax advantages. For example if the property is let the rent will paid to the pension fund where it will roll up free of income tax. Any profits when the property is sold will also be free from Capital Gains Tax. But there are some downsides for example if you use the property you will need to pay a commercial rent to your pension fund or pay a benefit-in-kind tax charge. You will also not be able to take any pension or cash from the sale of a property until the age of 50, or 55 from 2010.
We have not yet had the final regulations on this innovation so there may yet be changes for potential investors to take into account. If Peter is interested in investing in residential property as part of his pension portfolio he should keep a careful eye on developments between now and April 2006.
Tim Price wants to know whether the government are planning any changes to the rules that require someone with a personal pension to buy an annuity by age 75?
At the moment Inland Revenue rules require that someone with a personal pension must use that part of their pension fund not taken as a tax-free lump sum to buy an annuity by their 75th birthday. From April 2006 however, a new option will be available for people reaching 75 called an Alternatively Secured Pension (ASP).
ASPs will allow individuals to keep their fund invested and draw an income from it rather than use the fund to purchase an annuity. You will only be able to draw income up to the equivalent of 70% of that you could have received from an annuity. But there are advantages, the main one being that you retain control of the investment of your pension savings without passing your money over to an insurance company and tying yourself into a fixed annuity.
On death, any funds remaining in the ASP must be used to provide a dependant’s pension. If there are no dependants, the funds revert to the scheme where they can be re-allocated to provide pension benefits for other members or can possibly be paid to a registered charity.
It must be stressed that ASPs will not be suitable for everyone. Fund values could fall, leading to a reduction in your income. You should almost invariably therefore consult with a financial adviser before taking up this option.
Peter Smith from Derbyshire says today I have had information from my company offering me “Tax efficient Pension Contributions” through their Flexible Benefits Scheme. I find this very confusing, would you be kind enough to clarify whether this is a good option or not?
I assume that Peter works for a company, which offers a range of employee benefits and gives the individual employee a right to ‘pick and mix’ from them.
Clearly some benefits are more valuable to some individuals than others, for example, some people might prefer private medical cover in lieu of extra holidays.
Peter needs to decide what is important for him. All I would say is that membership of a company pension scheme is a valuable benefit given that generous tax relief is given on your payments into the scheme and your employer will also be making a contribution. Not taking full advantage of what is on offer in this respect is the equivalent of turning away pay.
The opinions expressed are Malcolm’s, 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.
Read http://news.bbc.co.uk/1/hi/programmes/working_lunch/4359053.stm
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