Your pension questions answered
Less than half of women save enough for retirement - just 47% compared to 59% of all men, compared to a recent Scottish Widows report.
The cost of retirement is a growing concern for many. In November 2009, Moneywise held a live webchat with Ian Naismith, head of pension market development at Scottish Widows, to find out how both men and women can ensure they save enough for their retirement.
Here are some of the best questions – and, of course, the answers.
Q: Should I just invest into ISAs that are tax-free rather than paying into a pension fund?
Ian Naismith (IN): ISAs are a very good way to save for your future, and you don’t have to pay any tax if your investments increase in value. The benefit of pensions is not just that you don’t pay tax on profits but that the government pays part of the initial investment for you – either 20% or 40% depending on what rate of tax you pay.
You have to pay tax on your pension after you retire, but that might be at a lower rate than when you’re working and in any case you can get a quarter as a tax-free lump sum.
Many people prefer to save in an ISA when they’re younger because their money isn’t tied up if they need it. However, if you do that you need to ensure that it really is earmarked for your retirement unless you have a financial emergency. You could then consider moving it into a pension as you get closer to retirement so that you get the full tax breaks.
If you save in a stakeholder pension there are no set-up fees and ongoing management charges have to be within limits set by the government. Other pensions often have similarly low charges, so investing in a basic pension needn’t be expensive.
Q: I have a final salary pension and have a much larger pension than my husband. Do retired couples have individual allowances or can they combine their income and allowances for tax purposes (this will help in deciding whether I should choose to take a larger lump sum and reduce my pension)?
IN: In most cases married couples have separate allowances for tax purposes. There is a married couple’s allowance where one partner was born before 6 April 1935, but that obviously applies to fewer couples as time goes on. It’s generally an allowance to the husband, but can be transferred to the wife if the husband doesn’t earn enough to benefit from it.
If you pay tax and your husband doesn’t, or if you pay a higher rate, you might want to consider having investments that are taxable in his name, or at least in your joint names. This could include, for example, savings accounts. It doesn’t make any difference for ISAs because they’re not taxable.
Q: I am 74 but because I stayed at home looking after my three children I am on a reduced pension and now it's difficult to manage. I moved to Spain five years ago with my husband because it was cheaper to live here. My pension is worth under 40 euros a week – is there any way to get more pension money?
IN: I think there’s limited scope for you to do anything with UK pensions because you probably won’t be entitled to anything on top of your basic UK pension. It’s worth checking that you’re getting everything you’re entitled too, though. There’s useful information at www.direct.gov.uk. Go to the section called “Britons living abroad”, and there’s a section there on pensions, which includes contact details for the International Pension Centre which should be able to answer your questions.
Q: Are there any pensions benefits (such as tax breaks) available to women that aren't available to men?
IN: The biggest benefit for women has been that they get their state pension from age 60, compared with 65 for men. However, that’s about to change and the age for women will increase in stages from 60 to 65 between 2010 and 2020. There’s no difference between the tax benefits of pension for women and men.
Q: I started a pension a while ago, but stopped paying when I went on maternity leave. I have never managed to start the payments up again since and my child is now two. I also work part-time, so find it hard as it is without losing any money to a pension. Is a pension worth contributing to?
IN: It's really good that you started a pension when you were younger because a lot of people leave it until it is too late. However, I think it is really important that you start paying in again when you can afford to. A lot of pensions have lost some of their value during the recession but over the long term, pension plans have, historically, given good returns. To have enough to live on comfortably when you retire you really need to save as much as you can, as early as you can.
Q: I have a 34-year pension with Royal Mail and it wrote to me to see if I was interested in taking a flexible pension – that is, taking it now and still working. This would mean I would lose 5% of my benefits for each year up to the age of 60 (i.e. 35%). I am currently 53 - is it worth the risk?
IN: This is a fairly normal position for final salary pensions when people choose to retire early. The reductions are designed to give you a pension that will cost about the same to the pension scheme as if you started it from age 60, based on how long people live on average.
From your point of view, you get pension for seven years longer, but have then given up a third of your pension for as long as you live. This means in broad terms that you’ll have gained if you die before about age 74, but lose out overall if you live beyond that.
According to government estimates, a woman of 53 will live on average until 84 and a man until 81 so it looks as though you’re more likely to lose than gain. However, it all depends on your individual circumstances, including whether you need the money now, and if you’re in doubt you should consult a financial adviser.
Q: I have a company final salary pension but pay into any additional pension - will this be enough when I retire? I'm 38 and took a year off four years ago to have a child.
IN: You're in a very good position compared with most people because you have a final salary pension scheme which guarantees you an income when you retire. It does sound as if you are doing the right thing by paying into an additional pension, but I can't say whether that will be enough without more information. If you have the money to spare, it probably would be a good idea to pay in something extra if you can to make up for the year that you missed.
Q: I am from New Zealand and may not retire in the UK - what sort of pension should I invest in so I can still benefit and take it with me if I return to my home county?
IN: Whatever kind of pension you have in the UK, you should be able to transfer it to a pension arrangement in another country if you need to.
You could probably also keep your UK pension and have that paid to you in the country you are living in - but in that case the payments would probably be in UK pounds, so the value to you could fluctuate with exchange rates.
If you are not comfortable saving into a pension you could always save into an ISA, which would give you a lump sum for your retirement. I suggest you speak to a financial adviser.
Q: Having already saved for my retirement, where would you suggest I invest my savings so that they are safe? I invested in a Scottish Widows Maxi ISA. I do take a small monthly income from this but between June 2007 and June 2009 it reduced in value by some 26%
IN: The only safe way to ensure your investment doesn't fall is to save in a bank account or a cash ISA. However, over the longer term, stockmarket investments have historically given better returns. A lot of investments did fall during the recession but the stockmarket has recovered quite a lot over the last few months.
Q: I work for Royal Mail and its final salary pension has ended and been replaced with another. I only have seven to 12 years until retirement (depending if I retire at 60 or 65) so how I can boost my pension? Is there is any other way I can have a good amount for retirement?
A: If you’ve worked for Royal Mail for a long time, hopefully you’ve already built up a good pension, but it’s always worth saving more for your retirement if you can. Pension is generally a good way to do this, because it has good tax breaks. You could ask your pension scheme about paying in additional voluntary contributions, or if you’d rather save separately you could consider a stakeholder pension, which you can get from companies like Scottish Widows.
Q: I am being trained to teach in a college. I want to teach part-time in the future due to having young children - what kind of pension scheme I might expect to be offered?
IN: A lot depends on where you end up working and whether you’re a permanent employee or doing short-term placements. However, if you end up working in state schools you’ll probably qualify for the teachers’ pension scheme, which is currently a very generous final salary type of scheme. You can find out more about it at www.teacherspensions.co.uk.
Q: I am a teacher, but I only started after my children started school. I started teaching in 2003 and have only been paying into the teachers pension scheme since then. I am divorced and bringing up the children on my own. I am 47 now and would like to have an idea of how much my pension will be if I retire at 65. I don't think that there is anything I can do to increase this amount as I can barely manage on my current salary of £33,000. I have own a house, which I bought last year, and have 17 more years to pay the mortgage.
IN: Most pension schemes send out a statement to members every year saying how much they might receive when they retire. If you don’t remember getting one, it may be worth asking the pension scheme for it. You should be able to get in touch through the website www.teacherspensions.co.uk or through your local authority.
I can really sympathise with people bringing up children on their own and trying to prepare for retirement while trying to make ends meet. The good news is that the teachers’ scheme is a very good one, so even though you started late you should get a worthwhile pension. You could also consider whether you could top it up when your family are less financially dependent on you.
If you’ve managed to pay your mortgage off by the time you retire, you may be able to use the value of your house to increase your income, either by selling it and moving into a smaller one or by getting a special kind of loan based on it – what is often called equity release. The best thing is if you have enough saved up to get by on, though.
Q: How do I calculate how much I should be putting into a pension plan/savings each month or year?
IN: We suggest that people over 30 should be putting aside around £1 of every £8 they earn for their retirement. That includes anything your employer might pay in. If you can’t afford that, just save what you can and try to increase it as you get older.
Q: What happens to women like myself (61 years old) who have paid the small stamp [national insurance contributions] and do not get any state pension? I have paid eight half years full stamp.
IN: The default position is that you’ll start to receive a ‘Category B’ pension when your husband reaches 65, if he hasn’t already. This is about 60% of the normal basic state pensions (assuming your husband has paid enough national insurance to be entitled to the full basic state pension).
Depending on when you paid the full stamp, there may be an option for you to pay additional (Class 3) national insurance contributions to take you up to 10 years - which would then entitle you to some state pension in your own right. However, you need to be sure it will benefit you before you do that – you may well be better off with the Category B pension.
If you’re widowed or divorced, you should still be able to receive a state pension based on your husband’s national insurance record. I suggest you may want to phone the government helpline on 0845 60 60 285 to find out more about what your options are.
Q: I understand spousal pensions can be split on divorce - does this go both ways or is it just the larger pot that's split?
IN: Our research found that very often pensions aren't considered in divorce settlements so it's good that you are thinking about this. With spousal pensions, both partners' pensions should be taken into account in the settlement. If yours is smaller, it may make sense for you to keep it all and receive a smaller percentage of your ex-spouse's pension than you otherwise would. Remember also that if it suits you better it's possible to trade off pensions against other assets from the marriage. I would suggest that you get the pension schemes to provide the values of the pensions and then work out what is best for both of you.
Q: I have several years pension entitlement from Sweden before I came over here to work. Can I fold this into a UK pension or will I just get two pension cheques when I retire?
IN: It will probably be possible to transfer your pension from Sweden to the UK but you will need to ask the pension scheme whether this is possible. If not, it may well be as you say and that you get two sets of pension payments.
Q: I've just left my job but am too young to retire. I was contributing to a company stakeholder pension. When I move jobs, can I take this pot with me and fold it into the next company scheme?
IN: Yes, it will probably be possible to transfer your stakeholder pension into your new scheme. One of the advantages of a stakeholder pension is that there are no penalties if you transfer it - however, you could also leave it where it is because stakeholder pensions have low charges. If you are not sure what to do, speak to a financial adviser.
Q: I understand the government will be introducing personal account where we all essentially become responsible for ourselves. Does this mean I will have to pick pension investments myself in the future, or will this still be something your company (and others) can help with?
IN: The government plans to introduce personal accounts from 2012, and by 2015, everyone who has an employer will automatically be placed in a pension unless they choose to opt out. However, there will be a default investment fund so you don't have to make a choice unless you want to. Private providers like Scottish Widows also offer pension schemes that your employer could choose instead of personal accounts.
It will be possible to opt out completely, but if you do you will lose the benefit of the contribution your employer would have made, and also the tax relief you would have got from the government.
Q: I am 51 and my husband is just retiring and has opted to take a lower annuity, which pays me out a percentage in the future. I have no pension myself – will this be enough?
IN: It's good that your husband has built in a pension for you because many people forget about this. However, you should check how much pension you would actually get if he died before you and make sure that this would be enough to live on. Anything you can save now will help you to enjoy a more comfortable retirement.
Q: We are in a civil partnership and both have small pensions of our own (we are in our 20s). I understand that the law treats us the same as married people now, but what does this actually mean for our pensions/retirement?
IN: You are right that legally civil partners are treated in exactly the same way as married people. This means that when you retire - though that may in a very long time from now - it will be possible for you to provide a pension for your civil partner if you should die first. And vice versa. If you, unfortunately, split up at some stage you will both have the same rights as divorcing spouses.
Q: I have a company pension and my company has given me a choice of different funds that I can go into. How can I decide which fund to choose?
IN: The fund you choose will depend on how much of a risk you're willing to take with your pensions and also how old you are. Most pension arrangements have default funds that are suitable for many people. But if you are not sure what to do I suggest you speak to a financial adviser.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
Additional voluntary contributions
If you’re a member of an occupational pension scheme but want to increase your contributions to help boost your income in retirement, this is where AVCs come in. An AVC is a top-up pension that sits alongside your company pension and is administered by your employer. You get tax relief on your contributions and, if you move jobs, you can apply to transfer your AVC plan to your new employer or your AVC your contributions have to stop with your old employer and you will need to start a new AVC plan with your new employer. An AVC linked to a company scheme is subject to the rules of the main pension. (See Free-standing additional voluntary contribution).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.