To see what is in front of one’s nose needs a constant struggle.
GEORGE ORWELL QUOTED ON NATIONALREVIEW.COM
The economic downturn is estimated to have cost the over-50s an average of £60,000 during the worst of the recession/credit crunch (call it what you will). This statement comes from a leading think-tank, the Institute for Fiscal Studies (IFS). The loss results from a combination of the drop in property values and investments. A separate report from the NFU Mutual (rural investment specialists) suggests that many older people expect ‘never to retire’, because they cannot afford to. According to the NFU, this problem has arisen because of a mismatch between expectation and reality. People need to make greater financial provision for their retirement to bridge this gap. The IFS report said millions of people aged between 50 and state pension age have little or no pension and found that 41 per cent will retire on less than two-thirds of their final salary.
The government, in an attempt to solve the pension crisis, introduced auto-enrolment in October 2012. But this won’t be enough on its own. Given the demographic reality (by 2025 there will be as many people aged 70+ as there were people aged 65+ in 2010) more and more people will have to find new ways of ensuring a decent standard of living. This is likely to unearth a new socio-economic group: a rising generation of WEARIES – Working, Entrepreneurial and Active Retirees – who may well be forced to continue working into their 70s and beyond due to hardships caused by the looming pension crisis (research carried out by the Future Foundation, article in Mature Times: www.maturetimes.co.uk).
Gloomy reading, but the pension crisis has been heading towards us for years. As so many of us are living longer, yet not saving enough for our old age, this comes as no surprise. People are inevitably going to get used to working beyond the traditional retirement age if they are to afford a good quality of life in retirement. Many women, for example, are staying on longer in employment because husbands and wives may wish to retire at the same time. State pension age (which is rising for both men and women) is becoming an anchor for decisions about when to retire.
In the recent past there has been much criticism of pension policy with frequent changes and a lack of certainty. But the Coalition government has brought a welcome period of stability. A number of sensible measures have been introduced, such as NEST, the auto-enrolment scheme, and the single-tier state pension. These have been welcomed by the pensions industry. Providing greater clarity at little or no initial extra cost overall will improve the lives of millions and save the government money in the long run.
With auto-enrolment in pensions, greater awareness of the need to save, an expectation and desire to work for longer, coupled with housing assets, a skills shortage and equity release (the medium- or high-value property which pensioner households will use to support their retirement) – all these promise to improve the circumstances of those expecting to retire within the next decade. Alongside employers wanting workers to remain in their posts for longer, and a desire among employees to continue working, it is likely that this group will be better prepared for retirement and ageing than might previously have been thought.
But the antidote to an impoverished old age is obvious: we all must save like mad, and should start doing so as early as possible.
Top tips to improve your retirement living standard from ‘This is Money’ website is to take things a step at a time, decade by decade (www.thisismoney.co.uk/pension-plan):
Those who qualify for a state pension currently start to receive payments in their 60s. The exact age is being equalized for men and women. It is rising to 66 for both sexes by 2020, then to 67 by 2028. People should look at a state pension calculator to find the age at which they will receive it.
The Chancellor decided in April 2013 that the flat-rate pension will be effective a year earlier (from 2016 rather than 2017). But for 2013–14 the basic state retirement pension has been increased by 2.5 per cent in line with the minimum increase provisions of the government’s ‘triple guarantee’. This results in the single rate rising by £2.70 per week (from £107.45 to £110.15 – or £5,728 a year). If you’re married and both you and your partner have built up state pension, you’ll get double this amount – so £220.10 a week in 2013/14. But if your partner has not built up their own entitlement, they will still be able to claim a state pension based on your record. The maximum is £66 a week.
It then gets more complicated because some people also receive the State Second Pension, or Serps, which is the government’s earnings-related additional pension.
If your income is below a certain level, you can boost it by claiming pension credit. This will take your income up to £145.40 a week for a single person and £222.05 a week for a couple (in 2013/14). See further on in this chapter.
Since October 2011 the default retirement age of 65 has been scrapped. Employers are no longer allowed to dismiss staff just because they are 65. But as the state pension comes under increasing pressure, it is important to make private pension savings and not rely on the basic state pension to finance your retirement.
Your state pension depends on how long you have worked and the number of National Insurance qualifying years you have. If you reached the state pension age on or after 6 April 2010, you need to have 30 qualifying years for a full basic state pension. If you reached the pension age before April 2010, then a woman normally needed 39 qualifying years, and a man needed 44 qualifying years during a regular working life to get the full state pension. If you are in a couple and only one person in a couple qualifies for the basic state pension, then you can still receive top-up state pension payments by using one partner’s National Insurance record.
Points to note, since 6 April 2010:
Lived or worked outside Great Britain?
If you have lived in Northern Ireland or the Isle of Man, any contributions paid there will count towards your pension. The same should also apply in most cases if you have lived or worked in an EU country or any country whose social security is linked to Britain’s by a reciprocal arrangement. However, there have sometimes been problems with certain countries, so, if you have any doubts, you should enquire what your position is at your pension centre.
Home Responsibilities Protection (HRP)
Since 6 April 2010 Home Responsibilities Protection has been replaced with weekly credits for parents and carers. You can receive these credits for any weeks you are getting Child Benefit for a child under 12, you are an approved foster carer, or you are caring for one or more sick or disabled people for at least 20 hours a week. If you reach state pension age on or after 6 April 2010, any years of HRP you have been awarded before April 2010 will have been converted to qualifying years of credits up to a maximum of 22 years.
For more information about the changes introduced by the Pensions Act 2007, see website: www.gov.uk – Working, jobs and pensions.
Other situations
If you have been in any of the following situations you will have been credited with contributions (instead of having to pay them):
Married women and widows
Married women and widows who do not qualify for a basic pension in their own right may be entitled to a basic pension on their husband’s contributions at about 60 per cent of the level to which he is entitled.
Husband and wife are assessed separately for tax and a married woman is entitled to have her section of the joint pension offset against her own personal allowance, instead of being counted as part of her husband’s taxable income. For many pensioner couples, this should mean a reduction in their tax liability.
Reduced-rate contributions note: many women retiring today may have paid a reduced-rate contribution under a scheme that was abolished in 1978. Women who were already paying a reduced-rate contribution were, however, allowed to continue doing so. These reduced-rate contributions do not count towards your pension and you will not have had any contributions credited to you. If you are still some years away from retirement, it could be to your advantage to cancel the reduced-rate option, as by doing so you may be able to build up a wider range of benefits without paying anything extra. This applies if you are currently (2013/14) earning between £109 and £149 a week. If you are earning above the primary threshold (£149), to get the same extra benefits you would have to start paying extra contributions. For advice, contact your local tax office or see the website: www.hmrc.gov.uk.
How your state pension is worked out
Anyone trying to decide whether they can afford to retire should get their state pension forecast from the Pension Service (www.dwp.gov.uk). It is worth getting an early estimate of what your pension will be, as it may be possible to improve your NIC record by making additional Class 3 voluntary contributions. See website: www.gov.uk – Working, jobs and pensions.
Since April 2011, the basic pension is increased annually by the highest of price inflation, earnings or 2.5 per cent. But if you retire abroad, you only get these increases if you live in a European Economic Area (EEA) country, Switzerland or a country with which the UK has a reciprocal agreement that includes state pensions. Due to improvements in service arrangements, you only need to claim a state pension two months before your state pension birthday date. You can check your state pension age using the calculator on the Gov.uk website: www.gov.uk – State pension.
If you do not qualify for a full basic state pension you may be able to pay Class 3 NIC if you have gaps in your National Insurance record. Paying them would mean that years that would not normally be qualifying years would count towards your basic state pension. Your forecast letter will tell you whether or not you can do this. There are time limits for paying Class 3 NIC and you must normally pay them within six years of the end of the tax year for which you are paying.
If you need help deciding whether you need to pay extra contributions, you can obtain help from the National Insurance Contributions Office (www.hmrc.gov.uk/nic) or The Pensions Advisory Service (www.pensionsadvisoryservice.org.uk). To find out how much pension you are entitled to, you can apply for an online forecast (www.thepensionservice.gov.uk).
Additional state pension
If you are (or have been) in employment, you may have been building up an additional state pension, known as the State Second Pension. The amount you receive depends on your earnings and your NIC record. There are other means of entitlement to some S2P: for example, if you earn below a certain amount set by the government, if you cannot work through long-term illness or disability, or if you are a carer.
The S2P is not available to the self-employed, for whom the alternative pension choices are either a personal pension or a stakeholder pension. If you are an employee, you are automatically included in S2P unless you decide to contract out, or you are a member of an employer’s occupational pension scheme that is contracted out. If you decide to contract out, you stop building up your S2P entitlement and build up a replacement for it in your own pension. You will continue to be contracted out of S2P unless you decide to contract back in.
The end of S2P in 2016 will hit highest earners the hardest. Currently self-employed workers receive only the basic state pension, as they do not qualify for S2P. However, from 2016 they will be treated the same as employees for the purposes of state pension entitlement. Under the flat-rate pension, anyone with 35 qualifying years of NICs will be eligible for the full £144 a week, and means testing will be abolished.
For more information about contracting out, or if you have any queries regarding the S2P scheme, you can obtain help from this website: www.gov.uk – Working, jobs and pensions.
Deferring your pension
When you reach the state pension age, you decide whether or not to start drawing the state pension. Many people prefer to stop working gradually by reducing hours or shifting to part-time work, so you might not need your entire pension straight away. By deferring your state pension, you can have a bigger pension when it does start, or alternatively a lump sum. Your state pension is increased by 1 per cent for each five weeks you defer it, ie an increase of 10.4 per cent a year for each year you defer. But this is only worth considering if you can live without the pension for now. You can continue deferring your pension for as long as you like. The extra money will be paid to you when you eventually decide to claim your pension. The lump sum is worked out as if your deferred pension had been invested and earned a return of 2 per cent more than the Bank of England base rate. If you plan to defer your pension, you should also defer any graduated pension to which you may be entitled – or you risk losing the increases you would otherwise obtain. More information can be found on the Pension Service website: www.gov.uk – Working, jobs and pensions.
Adult Dependency Increase
This is an increase in the state pension for a husband, wife or someone who is looking after your children, as long as certain conditions are met. Since 6 April 2010, you are no longer entitled to claim an Adult Dependency Increase. If you were already entitled to this increase on 5 April 2010 you will be able to keep it until you no longer meet the conditions for the increase, or 5 April 2020, whichever is the first.
Income Support
If you have an inadequate income, you may qualify for Income Support. There are special premiums (ie additions) for lone parents, disabled people, carers and pensioners. A condition of entitlement is that you should not have capital, including savings, of more than £16,000. A big advantage is that people entitled to Income Support receive full help with their rent and should also not have any Council Tax to pay. See ‘Housing Benefit’ and ‘Council Tax Benefit’ in Chapter 8.
Pension Credit
Pension Credit is an income-related benefit for those who have reached the minimum qualifying age and live in Great Britain. You do not need to have paid NIC to get it. There are two parts to Pension Credit.
Guarantee Credit may be paid to you if you have reached the minimum qualifying age. It tops up your income to a guaranteed minimum level (for the year 2013/14 it is £145.40 if you are single, or £222.05 if you have a partner).
Savings Credit is for those who have saved money towards their retirement. You may be able to get it if you are aged 65 or over. You may be able to get Savings Credit as well as Guarantee Credit. You may still get Pension Credit if you live with your grown-up family or own your own home.
If you wish to apply for Pension Credit, you can do so up to four months before the date from which you want to start getting Pension Credit. The longest Pension Credit claims can be backdated is three months. You do not have to pay tax on Pension Credit. If entitled to it, you may get Savings Credit (for the year 2013/14) of £18.06 a week if you are single or £22.89 a week if you have a partner.
The age from which you may get Pension Credit – the qualifying age – is gradually going up to 66 in line with the increase in the state pension age for women to 65 and the further increase to 66 for men and women. To find out when you reach the qualifying age for Pension Credit, visit www.gov.uk – State pension.
If you apply for Pension Credit, you may also apply for Council Tax Benefit and Housing Benefit at the same time. The age at which people can get Housing Benefit and Council Benefit for pensioners is also increasing from 60 to 65 between April 2010 and 2020. Housing Benefit is to help people on a low income pay some or all of their rent. Council Tax Benefit is to help people on a low income pay some or all of their council tax. You do not have to pay tax on either of them.
Visit the Gov.uk website to find out more information: www.gov.uk – Heating and housing benefits.
Other sources of help
Don’t be ashamed to claim.
An estimated 1.5 million people could claim benefits but the means test puts some people off claiming the top-ups they are entitled to. Every year as much as £5.5 billion of benefits that older people are entitled to go unclaimed, despite many of them struggling to make ends meet. According to leading charities – AgeUK and Elisabeth Finn – much needs to be done in terms of raising awareness of welfare benefits available and reducing some of the negative perceptions against claiming when times are tough.
For help relating to benefits, Turn2Us (website: www.turn2us.org.uk) is a charity set up specifically to identify potential sources of funding for those facing financial difficulty. Individuals can log on to this website for free and in confidence. Also look at AgeUK’s website, Britain’s leading charity for older people: www.ageuk.co.uk.
Community Care Grants, Budgeting Loans and Crisis Loans can all help with exceptional expenses if you are facing financial difficulties. These are all dealt with through the Gov.uk website. See www.gov.uk – Jobseeker’s Allowance and low income benefits for the widest range of online government information for the public, covering benefits, financial support, rights, employment, independent living and much more. For information for disabled people, see www.gov.uk – Disability benefits.
Early retirement and your state pension
Because some people retire early, they can mistakenly assume it is possible to get an early pension. While the information is correct as regards many employers’ occupational pension schemes, as well as for stakeholder and personal pensions, it does not apply to the basic state pension. If you take early retirement before the age of 60, it may be necessary for you to pay voluntary Class 3 NIC to protect your contributions record for state pension purposes. Your local tax office can advise you about NICs.
Other situations
Pensions can be paid to an overseas address, if you are going abroad for six months or more. See website: www.gov.uk – Working, jobs and pensions (see section ‘State pension if you retire abroad’).
If you are in hospital, your pension can still be paid to you and you will receive your pension in full for the duration of your stay, regardless of how long you have to remain in hospital. For advice, contact either the Pension Service or the Citizens Advice Bureau.
Christmas bonus
This is paid shortly before Christmas to pensioners who are entitled to a qualifying benefit. For many years the sum has been £10. The bonus is combined with your normal pension payment for the first week in December.
The Pension Service provides information to current and future pensioners so that making informed decisions about pension arrangements is straightforward. If you need help with your retirement plans it can assist you. It will explain what the state will provide when you retire and let you know what pension-related benefits you may be entitled to.
If you have any queries or think you may not be obtaining your full pension entitlement, you should contact the Pension Service as soon as possible. If you think a mistake has been made, you have the right to appeal and can insist on your claim being heard by an independent tribunal. Before doing so, you would be strongly advised to consult a solicitor at the Citizens Advice Bureau or the Welfare Advice Unit of your social security office. For further information about pensions, there is a booklet full of advice entitled Pensioners’ Guide obtainable from the Pension Service, part of the Department for Work and Pensions: www.directgov.uk/en/PensionsandRetirementPlanning.
Other useful sources of information include:
The Pensions Advisory Service: www.pensionsadvisoryservice.org.uk.
The Service Personnel and Veterans Agency: www.veterans-uk.info.
Citizens Advice: www.citizensadvice.org.uk.
You can save as much as you like towards your pension but there is a limit on the amount of tax relief you can get. The lifetime allowance is the maximum amount of pension savings you can build up over your life that benefits from tax relief. If you build up pension savings worth more than the lifetime allowance you’ll pay a tax charge on the excess. The annual allowance now stands at £50,000 a year for everyone until April 2014 when it reduces to £40,000 a year. This reduction of 20 per cent was introduced by the Chancellor in his April 2013 budget, at the same time he reduced the lifetime allowance from currently £1.5 million to £1.25 million with effect from April 2014. This yearly contribution should still be more than adequate for most people. For those who have taken a break from contributions, there will be the useful option to potentially carry forward up to three years’ annual allowance. Those who are in final salary schemes or those with employer, employee and individual pension contributions over two consecutive tax years which combine to over £50,000 will need to be particularly aware of the limits. It would be wise to check with your pension provider when your current ‘pension input period’ (the accounting period for your pension scheme) ends.
Wealthier investors can build up their defined contribution pension funds to £1.5 million until April 2014, at which point the changes come into effect. After that time there will be an ‘individual protection’ regime provided to honour those funds. While these changes do set a cap on the amount of pensions tax relief individuals can obtain, they still permit significant tax-free savings into a pension and are far simpler than the restrictive regime they replaced. It is important to bear in mind that tax rules and tax reliefs can and do change and their exact value depends on each individual’s circumstances.
Despite a certain amount of apprehension, pension savings are still one of the most tax-effective investments available because you receive income tax relief on contributions at your highest tax rate and the growth in your pension fund is totally exempt from income tax and capital gains tax. Another advantage is that part of the pension can be taken as a tax-free cash lump sum when you retire. For further information, see www.hmrc/pensionschemes.
NB: Many part-timers who were previously excluded can now join their employer’s occupational pension scheme as of right.
Company pension schemes
Types of company pension schemes
The pension that your employer offers may be ‘contributory’ (you and your employer pay into it) or ‘non-contributory’ which means that only your employer does. If the scheme offered is a group stakeholder pension scheme, your employer doesn’t have to contribute, so you alone may be putting money in. There are four main types of company pension:
Final salary
These are known as a type of defined benefit scheme. You build up a pension at a certain rate – 1/60th is quite common – so for each year you’ve been a scheme member, you receive 1/60th of your final salary.
Final salary schemes are costly for employers to run and have all but disappeared. In the private sector only 1.3 million workers are in a final salary scheme and few schemes are open to new employees. More public sector workers (such as teachers, police, NHS and local government workers) pay into a final salary scheme, but this is still only 5.3 million out of 29 million employed people in the UK. If you work for one of the few remaining employers with a final salary scheme, you should join it.
Career average
These are another type of defined-benefit scheme, because the benefit (your pension) is worked out using your salary and the length of time you have been a member of the pension scheme. The pension you receive will be based on an average of your earnings in the time that you’re a member of the scheme (often averaged over the last three years before retirement). What you receive will depend on the proportion of those earnings that you get as pension for each year of membership. The most common are 1/60th or 1/80th of your earnings for each year of membership.
The benefits of such schemes are that the pension is based on your length of membership and salary, so you have a fair idea of how much your pension will be before retirement. Also, your employer should ensure there is enough money at the time you retire to pay you a pension, and you get tax relief on your contributions. Scheme investments grow generally free of income tax and capital gains tax. Your pension benefits are linked to your salary while you are working, so they automatically increase as your pay rises. Your pension income from the scheme will normally increase each year in line with CPI instead of RPI.
Is there a risk? If a salary-related occupational scheme or the sponsoring employer gets into financial trouble, the Pension Protection Fund can provide some protection. You can normally get a pension of up to 90 per cent of your expected pension, subject to a cap. (See the Pension Protection Fund website for more information: www.pensionprotectionfund.gov.uk.)
Money purchase
These are also known as defined-contribution schemes. The money paid in by you and your employer is invested and builds up a fund that buys you an income when you retire. Most schemes offer a choice of investment funds. The amount paid in varies, but the average employer contribution in 2010 to money-purchase schemes was 8 per cent of salary.
It helps to think of money-purchase pensions as having two stages:
Stage 1. The fund is invested, usually in stocks and shares and other investments, with the aim of growing it over the years before you retire. You can usually choose from a range of funds to invest in. The Pensions Advisory Service (TPAS) has an online investment choices planner to help you decide how to invest your contributions (see www.pensionsadvisoryservice.org.uk/online-planners).
Stage 2. When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity. The amount of pension you’ll get at retirement will depend on: how much you pay into the fund; how much your employer pays in (if anything); how well your invested contributions perform; the charges taken out of your fund by your pension provider; how much you take out as a tax-free lump sum; annuity rates at the time you retire – and, the type of annuity you choose.
The benefits of money-purchase schemes are that you get tax relief on your contributions; your fund grows generally free of income tax and capital gains tax; you may be able to choose the funds to invest in; and your employer may contribute, if it’s a work-based pension.
Group personal/stakeholder
If you’ve decided on a private pension, you can shop around for either of the above. These are also money-purchase schemes, ie the pension you get is not linked to your salary. Your employer offers access to either a personal or stakeholder plan, which you own, and can take with you if you get a new job. Your employer will choose the scheme provider, deduct the contributions you make from your salary and pay these to the provider, along with employer contributions. There are some differences between them.
Stakeholder pensions must have certain features. Some of these include limited charges; low minimum contributions; flexible contributions; penalty-free transfers; and a default investment fund – ie a fund your money will be invested in if you don’t want to choose one yourself. If your employer offers a group stakeholder pension, it doesn’t have to pay into it.
Personal pensions: these are similar to stakeholder pensions, but they usually offer a wider range of investment choices. If your employer offers a group personal pension scheme, it must contribute at least 3 per cent on your behalf. Personal pension charges may be similar to stakeholder pension charges but some are higher. You can compare stakeholder and personal pensions from different providers on the website www.moneyadviceservice.org.uk.
The government has recently developed its own system to encourage low- to middle-wage earners to contribute to a personal pension plan. This is the National Employment Savings Trust, the not-for-profit, low-cost workplace pension scheme into which employees can be entered.
From October 2012 about 8 million employees up to state pension age began saving into this company pension scheme for the first time. This auto-enrolment scheme was introduced for all companies who employ more than 50,000 people and has been extended to all companies since 2013. This scheme promises to provide some income for several million people who previously would have had nothing beyond the state pension. As encouragement, employers are given tax breaks if they do not opt out.
Automatic enrolment, the government hopes, will start a savings revolution, but first people will need to understand the value of saving for their future. If too many exercise their right to opt out, the government will be forced to consider compulsory membership – and there will be no need for tax breaks to encourage saving into a pension. The government will review the position in 2017. The aim of pension tax relief is to encourage people to contribute into a private pension arrangement. If it became compulsory there would be no need to provide that incentive and therefore it could be withdrawn. In which case the amount of money being saved into pension plans might go down not up (see www.nestpensions.org.uk).
Self-Invested Personal Pensions (SIPPs)
If you want to use a pension to save for your retirement, you don’t have to give your money to a fund manager. You can manage your own retirement fund with a self-invested personal pension (SIPP). Most stockbrokers offer Sipp accounts and the good news is that the government is so eager for you to save via a SIPP it will even give you tax back. You can either pay a lump sum to a pension provider or drip feed in monthly amounts. The latter can be made via a scheme into which both you and your employer pay. But instead of your employer directing where your money goes, you get free rein over where it’s invested. You can buy a range of asset classes, from stocks to bonds to gold bullion (though you can’t buy fine wines). Monthly contributions can be as low as £50. You can pay in amounts equal to 100 per cent of your annual salary up to a current ceiling of £50,000 per year. You can access your SIPP from age 55 and you can normally take up to 25 per cent as a tax-free cash sum with the balance being used to buy an annuity. SIPPs are not suitable for everyone; broadly they are for people with larger pension pots. As SIPPs are fee-based arrangements, the smaller the fund the more expensive they are. If you are someone who finds the idea of investing your own money daunting, a SIPP may not be for you.
Until now residential property has not been permitted in SIPPS, but the government is currently exploring whether SIPP investors may be able to convert unused commercial property to residential use by amending Investment Regulated Pensions Schemes rules. This should reduce unnecessary red tape which plagues such projects at the moment. This could be good for the property and pension sector, though professional advice beforehand would be essential. For advice talk to your financial adviser or look at the website www.moneymadeclear.gov.uk.
Flexible drawdown
The introduction of ‘flexible drawdown’, effective since 6 April 2011, allows pension investors to take money from their pension as and when they want it. By taking money out of your pension you would, however, be removing it from a tax-free environment, so you would probably leave funds in the pension until you needed them, at which point you could draw out however much you needed. Leaving funds in the pension makes tax-efficient sense because the fund growth is free from UK income and capital gains tax (tax deducted from dividends at source cannot be reclaimed). You will still normally be able to draw up to 25 per cent of your pension tax free when you take retirement benefits.
Some of the requirements you will have to meet to be eligible for flexible drawdown include being over 55 to start drawing a pension; also receiving a secure pension of at least £20,000 per annum. This can include the state pension, final salary pensions and pension annuities. The reason for this requirement is so that even if you draw your entire pension out and spend it, you are unlikely to fall back on means-tested state benefits.
Other requirements are if either you or your employer makes contributions to a pension scheme; this could mean that you are prohibited from using flexible drawdown until the start of the tax year after those contributions are made. After you have moved into flexible drawdown, you will be effectively prevented from accruing any more pension benefits, so it is only worth it once you have finished building up pension benefits.
Family pensions
Another change to pension rules is that you now have greater scope to pass your pension on to your heirs. You can now pass your pension on to beneficiaries of your choice as a lump sum, even if you are older than 75 when you die. This will be subject to a 55 per cent tax charge. The tax charge is designed to claw back the tax relief already provided. The government is keeping the current provision which generally allows you to pass your pension on to a beneficiary as a tax-free lump sum if you die before 75, provided you have not started drawing retirement benefits.
If you have a small pension pot
If the value of your pension rights is below a certain level, it may be possible to give up those rights in exchange for a cash sum. From 6 April 2012 the link to the Lifetime Allowance has been removed. The threshold is announced each year by the government: for the year 2013/14 the limit is £18,000. An important point, if you have more than one pension plan, is that the ‘exempt’ amount of £18,000 does not apply to each of them but is the total aggregate value of all your plans.
Minimum retirement age
The minimum age at which you are allowed to take early retirement and draw your pension has been 55 since 6 April 2010. It may be possible to draw retirement benefits earlier if you are in poor health and unable to work.
If, as opposed to switching jobs, you leave paid employment to start your own enterprise, you are allowed to transfer your accumulated pension rights into a new fund. There are two main choices. The most obvious solution is to invest your money with an insurance company, or to take either a personal or a stakeholder pension. An alternative course of action, which might be more attractive if you are fairly close to normal retirement age, is to leave your pension in your former employer’s scheme. Before making a decision, take professional advice from your Independent Financial Adviser.
Questions on your pension scheme
If you have a query or if you are concerned in some way about your pension, you should approach whoever is responsible for the scheme in your organization. The sort of questions you might ask will vary according to circumstance, such as before you join the scheme, if you are thinking of changing jobs, if you are hoping to retire early and so on. The questions listed here are simply an indication of some of the key information you may require to plan sensibly ahead.
If you want to leave the organization to change jobs
If you leave for other reasons
If you stay until normal retirement age
If you just want information
Should I transfer my long-lost fund?
Previous schemes
In addition to understanding your current pension scheme, you may also need to chase up any previous schemes of which you were a member. According to the ‘This is Money’ financial website, an amazing £1.4 billion is estimated to be forgotten and hidden away in accounts worth less than £5,000. At the moment around 70,000 people get in touch with the DWP for help in finding a lost pension. Hundreds more queries are fielded by the Pensions Advisory Service.
For free help tracking down a pension, contact the Pension Tracing Service, which assists individuals who need help in tracing their pension rights: www.gov.uk – Working, jobs and pensions. Choose the link to ‘Workplace and personal pensions’. If you have any queries or problems to do with your pension, there are three main sources of help available to you. These are the trustees of your pension scheme, the Pensions Advisory Service and the Pensions Ombudsman.
Trustees or managers
These are the first people to contact if you do not properly understand your benefit entitlements or if you are unhappy about some point to do with your pension. Pensions managers (or other people responsible for pensions) should give you their names and tell you how they can be reached.
The Pensions Advisory Service
The Pensions Advisory Service provides members of the public with general information and guidance on pension matters and assists individuals with disputes with personal, company and stakeholder pensions. See the Pensions Advisory Service website: www.pensionsadvisoryservice.org.uk.
Pensions Ombudsman
You would normally approach the Ombudsman only if neither the pension scheme manager (or trustees) nor the Pensions Advisory Service is able to solve your problem. The Ombudsman can investigate: 1) complaints of maladministration by the trustees, managers or administrators of a pension scheme or by an employer; 2) disputes of fact or law with the trustees, managers or an employer. The Ombudsman does not, however, investigate complaints about mis-selling of pension schemes, a complaint that is already subject to court proceedings, or those that are about a state social security benefit, or disputes that are more appropriate for investigation by another regulatory body. There is also a time limit for lodging complaints, which is normally within three years of the act, or failure to act, about which you are complaining.
There is no charge for the Ombudsman’s service. The Pensions Ombudsman has now also taken on the role of Pension Protection Fund Ombudsman and will be dealing with complaints about, and appeals from, the Pension Protection Fund. He will also be dealing with appeals from the Financial Assistance Scheme (see below) and the Pensions Ombudsman website: www.pensions-ombudsman.org.uk.
If you have a personal pension, the Financial Ombudsman Service (FOS) could help you. Since last year, the maximum award that the Financial Ombudsman can make has increased from £100,000 to £150,000. See website: www.financial-ombudsman.org.uk. It is possible you may be referred to the Pensions Ombudsman, but if so you will be informed very quickly.
Protection for pension scheme members
New rules have been introduced to protect pension scheme members in the event of a company takeover or proposed bulk transfer arrangement. There is now also a Pension Protection Fund (PPF) to help final salary pension scheme members who are at risk of losing their pension benefits owing to their employer’s insolvency. Members below the scheme’s normal retirement age will receive 90 per cent of the Pension Protection Fund level of compensation plus annual increases, subject to a cap and the standard fund rules. See website: www.pensionprotectionfund.org.uk.
There is more help too for members who lost pension savings in a company scheme before the introduction of the Pension Protection Fund. The Financial Assistance Scheme (FAS) offers help to some people who have lost out on their pension. It makes payments to top up scheme benefits to eligible members of schemes that are winding up or have wound up. Assistance is also payable to the survivor of a pension scheme member. It is payable from normal retirement age (subject to a lower age limit of 60 and an upper age limit of 65). See website: www.pensionprotectionfund.org.uk.
Pension rights if you continue to work after retirement age
When you reach normal retirement age you will usually stop making contributions into your company pension scheme even if you decide to carry on working. If your employer wants you to leave, they will have to give you at least six months’ notice in writing. If you are facing such a decision, here are some points to bear in mind:
Equal pension age
Employers are required to treat men and women equally with regard to retirement and pension issues. They must have a common pension age, and pension schemes must offer the same benefits to their male and female members.
Divorce, separation and bereavement
Divorce
Pension sharing became legally available in respect of divorce or annulment proceedings commenced on or after 1 December 2000. Although women usually benefit most from pension sharing, recent legislative changes equally allow an ex-husband to have a share in his former wife’s pension rights. The question of pension sharing is a subject to raise with your solicitor if you are in the process of divorce proceedings. But however much in favour your legal adviser may be, in the final analysis it is up to the court to decide on what it sees as the fairest arrangement – and pension sharing is only one of several options available.
Divorced wives
If you have a full basic pension in your own right, this will not be affected by divorce. However, if, as applies to many women, despite having worked for a good number of years you have made insufficient contributions to qualify for a full pension, you should contact your pension centre, quoting your pension number and NI number. It is possible that you may be able to obtain the full single person’s pension, based on your ex-husband’s contributions. Your right to use your ex-husband’s contributions to improve or provide you with a pension depends on your age and/or whether you remarry before the age of 60. If you are over 60 when you divorce, then whether you remarry or not you can rely on your ex-husband’s contributions. If you remarry before the age of 60, then you cease absolutely being dependent on your former husband and instead your pension will be based on your new husband’s contribution record. The same rules apply in reverse.
Pension sharing
Provisions to enable the court to share occupational or personal pension rights at the time of divorce or annulment came into law on 1 December 2000. The legislation now equally applies to the additional state pension. Sharing, however, is only one option for dealing with pension rights and would not necessarily apply in all cases.
Separated wives
Even if you have not lived together for several years, from an NI point of view you are still considered to be married. The normal pension rules apply including, of course, the fact that, if you have to depend on your husband’s contributions, you will not be able to get a pension until he is both 65 and in receipt of his own pension. If you are not entitled to a state pension in your own right, you will receive the dependant’s rate of benefit, which is about 60 per cent of the full rate (or less if your husband is not entitled to a full pension). In such a case, you can apply for Income Support to top up your income. Once you are 60, you can personally draw the wife’s pension without reference to your husband.
If your husband dies, you may be entitled to bereavement benefits in the same way as other widows. If there is a possibility that he may have died but that you have not been informed, you can check by contacting the General Register Office website: www.gro.gov.uk. The indexes to all birth, marriage and death entries in England and Wales are available from the National Archives website: www.nationalarchives.gov.uk.
Widows
There are three important benefits to which widows may be entitled: Bereavement Payment, Bereavement Allowance and Widowed Parent’s Allowance. These are all now equally applicable to widowed men or those who have entered a civil partnership. Widows who were already in receipt of the Widow’s Pension before it was replaced are not affected by the change and will continue to receive their pension as normal.
Bereavement Payment
This is a tax-free, lump-sum payment of £2,000 to help you when your husband, wife or civil partner has died. To get Bereavement Payment you must usually be under state pension age (currently 65 for men and 60 for women). Even if you are over state pension age, you may be able to get one, if your husband, wife or civil partner was not getting a state pension. The time limit for claiming a Bereavement Payment is 12 months after the person’s death. You can fill in a claim form, obtainable from the Pension Service: www.gov.uk.
Bereavement Allowance
Bereavement Allowance is paid to widows and widowers between the ages of 55 and 59 inclusive. The standard weekly amount (2013/14) is £105.95. It is normally paid automatically once you have sent off your completed form BB1. In the event of your being ineligible, owing to insufficient NIC having been paid, you may still be entitled to receive Income Support, housing benefit or a grant or loan from the social fund. As applies to Widow’s Pension, widows who remarry or live with a man as his wife cease to receive Bereavement Allowance. See website: www.direct.gov.uk/benefits.
This is a taxable benefit for widows or widowers who are under state pension age and who have at least one child for whom they are entitled, or treated as entitled, to Child Benefit. The current value (2013/14) is £105.95 a week plus a share of any additional state pension you have built up. The share of additional pension payable will be between 50 and 100 per cent depending on your date of birth. The allowance is usually paid automatically. If for some reason, although eligible, you do not receive the money, you should inform your social security or Jobcentre Plus office. See website: www.direct.gov.uk.
Retirement pension
Once a widow reaches 60, she will normally receive a state pension based on her own and/or her late husband’s contributions. If at the time of death the couple were already receiving the state retirement pension, the widow will continue to receive her share. An important point to remember is that a widow may be able to use her late husband’s NIC to boost the amount she receives. Separate from the basic pension, a widow may also receive money from her late husband’s occupational pension, whether contracted in or out of the state scheme. She may also get half of any of his graduated pension.
War widows and widowers
War Widow’s or Widower’s Pension is a tax-free pension for surviving widows, widowers or civil partners of veterans who died as a result of serving in HM armed forces before 6 April 2005. You may also be able to get extra money or help with funeral costs. The Service Personnel and Veterans Agency will pay War Widow’s or Widower’s Pension if any of the following applied before 6 April 2005:
If you are a widow, widower or surviving civil partner whose husband, wife or partner left service before 31 March 1973, you can keep your pension if you remarry, form a civil partnership or live with a new partner after 6 April 2005. Otherwise this pension may stop.
If you think you may be entitled to claim a War Widow’s or Widower’s Pension, visit the Service Personnel and Veterans Agency website: www.veterans-uk.info.