Your pension questions answered
The Moneywise.co.uk live web chat on 29 February saw users posing their pressing pension and retirement planning questions to the experts. During the hour-long chat, Steve Latto, from Alliance Trust, and Anna Sofat, an independent financial adviser at AJS Wealth Management, answered questions from the public on everything from annuities to SIPPs.
Thanks to everyone who contributed. Here is a selection of some of the best questions and their answers.
Do you have a pensions question? Why not post it in our forums and see what other users think.
Q: R.N.Morjaria: I am thinking of contributing about £100,000 lump sum to a stakeholder pension plan. As I am 63 years old I can’t take any risks and was thinking about a cash or index-linked fund. What company would offer the lowest charges and reasonable performance?
A: Steve Latto: The first thing you need to think about is if you have sufficient earnings. You can get tax relief on contributions up to 100% of your earnings. If you are thinking about cash or index-linked you need to look carefully at the interest rates on offer. For example, some of the SIPPs with higher charges do offer higher interest rates and those may be worthwhile for you.
Q: Works Pension: Can you take pension in a lump sum?
A: Anna Sofat: Yes you can if your total pension fund is less than £15,000. If it is more than £15,000 you can take 25% as tax-free cash and the balance has to buy you a pension.
Q: Max : I'm about to retire - should I take my tax-free cash and invest it or is it better to leave it in my pension?
Anna Sofat: It will depend on how much flexibility you are looking for. If you decide not to take it, that lump sum can only provide you with an income going forward. If you take the lump sum and invest it, you can use it to generate income but you will also have the flexibility of access to the capital if you need it.
Q: Geraldine: Aged 53, in a final salary pension scheme paying in approx £300 per month - would I be better coming out of the pension scheme and investing in something else i.e. property?
A: Anna Sofat: Bear in mind that your employer is also paying into your final salary pension and the employer is taking all the investment risk. Based on your service and your salary you will be guaranteed a pension on retirement and the pension is likely to be index-linked. That is a good benefit to have. Investing in a property does not give you a guaranteed return. I would not come out a final salary pension scheme if I were in your position.
Q: Mr F Fanstone: My son, who is still at university, will be 21 in June this year. We are considering opening a pension plan for him that he can take over at a later date. Would you recommend a stakeholder, a personal pension or an ISA? What is the maximum that can be paid in 2008/9?
A: Steve Latto: The choice between a pension or an ISA will depend on whether your son may need access to the cash before age 55 (the minimum age that he will be able to take benefits from a pension). If he may need the cash earlier, for example to pay for a deposit on a house, then an ISA may be the better option. Please remember that the pension or ISA will need to be opened in his name. Contributions of up to £3,600 gross into a pension will attract tax relief. The maximum subscription to an ISA in 2008/09 is £7,200.
Q: Jeremy Law: I have just started a job with a final salary (defined benefit) pension. I make a contribution to the scheme of 4%. How much extra can I pay into my SIPP since the new pension rules?
A: Steve Latto: You can get tax relief on contributions up to 100% of your earnings. So you have a lot of flexibility.
Q: Matthew: I have an old executive pension plan (£95,000) and have asked an IFA and my bank to advise. The bank (HSBC) advises a SIPP while the IFA advises a personal pension. Both seem to have a good argument. Any thoughts on what I should do/who to use?
A: Anna Sofat: Whether you opt for a SIPP or a personal pension will depend on how much investment flexibility you are looking for and the difference in charges between the two contracts. You can these days have very cost effective SIPPs but quite a few personal pensions can have higher charges for external funds. In arriving at a conclusion, I would look at charges for the funds you want to invest in.
Q: Jon from Birmingham: I use ISAs for my pension provision - is this taking undue risk and now I've started saving in that way is it inefficient to start a workplace pension instead?
A: Steve Latto: The big advantage ISAs have is that you're free to use the money when you want. But, you don't get tax relief on ISA subscriptions. It’s a case of weighing up whether the benefits of that flexibility are important for you.
Q: James : By how much does the lump sum I can take tax-free from my pension increase each year?
A: Steve Latto: Depending on the type of scheme, you can take a lump sum between the ages of 50 and 75, although the minimum age is increasing to 55 from April 2010. When you take a lump sum, the maximum is normally 25% of the value of pension fund at that time.
Q: Roger: Are traditional annuities still worth putting pensions savings into or are there better alternatives now?
A: Steve Latto: You have two main options with your pension fund. You can buy an annuity or you can withdraw an income directly from your fund. You need to think carefully if you want to do this as the risks here are high. If you are buying an annuity there are various options available to you. For example, there are investment-based annuities available in the market.
Q: Arthur Brugger: I have a pension pot of approximately £170,000 and the last thing I want to do is buy an annuity. I much prefer income drawdown – how can I achieve the maximum yield on the investment?
A: Anna Sofat: The investment yield is different from the income you're allowed to take. If you want to maximise the income into your drawdown contract then you need to look at investment generating income. These will include property funds, distribution funds and high dividend-generating companies. But don’t forget that capital growth can be used for income purposes as well.
Q: Lisa Fairfax: I am 27 and have no company scheme. I am considering taking out a pension plan. Once I've decided on the company to use how should I split my contributions into the various funds offered. I intend to retire at 60.
A: Steve Latto: The first thing for you to think about is what sort of investment flexibility you are looking for and whether you want to manage the investments yourself. What is important is for you to consider is the risks associated with each investment option available. For someone who has a lengthy period of time until retirement you may be prepared to take higher risk.
Q: Fred Gibson: A question about state pension - there is always general talk that women do not qualify for full pension but do they not get credit for years when looking after children? For example, my wife who will be 60 in August 2010 had her first child in 1972 and our third child in 1984 - so how many years national insurance credits accrue from this?
A: Anna Sofat: I would suggest that your wife gets a pension forecast from DWP. There's a form called BR19 that she can complete. Given her age she can probably get a forecast online as well. The BR19 forecast will tell her, not only what she's entitled to but also the missing years and whether she's now allowed to make up for some of those missing years. In general, I think it's five years credit that the government is looking to give to women - but I would check this out.
Q: OH Bridgend: I read it’s now possible to put stocks into a SIPP without selling them and having to buy again. Is that true? Also, is it simple as telling pension firm which stocks to move in and they tell the taxman, or more complicated than that? Would I get tax relief as I think - hope - this counts like a contribution?
A: Steve Latto: Yes, it is possible to transfer an investment that you own into a SIPP. There are two ways of doing this. Firstly, your pension fund can purchase the investment from you and send you a cheque for the value of an investment or, secondly, it can be treated as a contribution and receive tax relief in the normal way. It’s worth pointing out that the process that SIPP providers need to follow for contributions of this kind is not straight forward. As a result, very few SIPP providers allow contributions to be made in this way. Those SIPP providers that allow this type of contribution are likely to charge a significant fee. You should speak to your SIPP provider to see what options are available to you and what charges will be levied.
Q: Dale: I have changed jobs a few times in my career and have deferred pensions with all of them. Should I seek to consolidate them?
A: Anna Sofat: I think much will depend on the benefits you have accrued. For example, if the schemes are final salary schemes from a secure employer, and the benefits are increasing at least in-line with inflation, then you might not want to move the benefits. However, if they are money purchase schemes where you are taking the investment risks, then it might make sense to consolidate them.
Steve Latto: If you do choose to consolidate, you need to consider what type of scheme you move to. Again, what investment options are available and what are the charges?
Q: Wjs: Does it ever make financial sense to put off taking the state pension?
A: Anna Sofat: It can make sense to delay taking your state pension if, for example, you continue to work and do not need further income. Financially the government has made it more attractive if you do want to delay taking a pension. If you put off claiming your state pension for at least five weeks you can earn an extra 1% pension - this is equivalent to about 10.4% extra for every year you put off claiming. If you did not want the extra pension, you could take the delayed benefit as a lump sum.
Q: Arthur hiscox: How many years of national health contributions do I have to pay to qualify for a full old age pension?
A: Anna Sofat: If you are talking about the basic state pension currently, you have to work for 44 years as a man, but from 2010 this will be brought down to 30 years. If you are talking about the NHS pension scheme, then it is 40 years of service.
Q: Benjamin Ojideagu: What is the personal tax allowance for a 65 year-old pensioner now? What will it be after 6 April 2008?
A: Steve Latto: The current allowance is £7,550 and is due to increase to £9,030. This is a significant change but please remember the 10% starting rate of tax is being abolished.
Q: Tony Keeling: I have about £10,000 tied up in an Equitable Life with-profits pension scheme. I have taken early retirement. I am drawing income from two defined benefit schemes. Benefit from a third defined benefit scheme will become payable within the next 12 months. The benefit from the annuity that Equitable fund will purchase is miniscule. On the other hand, £10,000 could come in useful as a lump sum. Can I free up the whole of this fund and get a lump sum? If I can, how much of it will I lose in tax payments and other fees?
A: Anna Sofat: You can take 25% of the amount as tax-free lump sum. The rest of the fund must be taken as income or used to buy an annuity. You can take up to 120% of the annuity rate for a single person applicable for your age – so you could take more income than might be possible through an annuity. My advice would be to opt for this route. You will in effect go into drawdown and will probably need to move the pension to make this possible. The charges on drawdown can be more than a normal pension and given the sums involved you might struggle to find a provider who will allow drawdown for this amount.
Schemes have been set up whereby you can access the whole fund but this is not allowed under Inland Revenue rules and you would face an unauthorised payment tax of 55% plus the provider which allowed the payment will also face charges.
Q: AllTooMuch: How can my unmarried daughter, already struggling to keep up with her mortgage payments and working 10 hours a day in jobs with no pension provisions, also manage to save anything for later in life?
A: Anna Sofat: I would suggest that she looks to make a minimal payment if at all possible, because the government would top it up by another 20% from April. Also bear in mind that from 2012 she will be forced to join a pension scheme and she will have to pay 4% of her earnings into it.
Q: Lindsay Evans: What are the pros and cons of opting in or out of the state second pension?
A: Anna Sofat: One of the key things to consider when making the decision is investment risk. The advantage of contracting out is that the benefit going to a personal pension which you control, you decide how it should be invested and you can take the benefits any time after the age of 50 (55 from 2010) and you can take 25% of the sum you accumulate as tax-free cash. If you decide to opt in, you will get a known pension at a known age and it will be index linked. It therefore boils down to what you feel comfortable with and how much interest and involvement you are going to take in your pension provision.
Q: Derek: Is a personal pension as flexible as a SIPP? If not does this justify the higher charges?
A: Steve Latto: Many personal pensions offer a lot of flexibility but not necessarily as much investment choice as a SIPP. There are various SIPPs on the market and charges tend to reflect the investment flexibility they offer. There are SIPPs that have a decent range of investment options but lower charges. It depends on how much flexibility you are looking for.
Q: Steve Banks: I am 55 and now live in France having just taken early retirement. Some years ago I opted out of the state pension scheme and still have SERPS. Can you please advise me what steps I should now take with the SERPS?
A: Anna Sofat: The good news is that you can now take your benefits from the age of 55 – you can 25% as tax-free lump sum and use the balance to buy an annuity or take an income from the fund. However, you do not have to take a pension – you can leave it invested until you are 75.
Q: Kate Jones: In March I start my first job on a salary of £36,000. I am keen to start contributing toward my pension but I can't join a company scheme for two years. What do you advise?
A: Anna Sofat: I would suggest if you are keen on saving into a pension you should set up your own personal pension plan. You can continue paying into this even once you have joined your company scheme. Pensions are very flexible nowadays – there won’t be any penalties for stopping payments into it, or restarting it at a later age.
Q: Lou: I have a recently taken out a SIPP and consolidated all my pensions. I am 53 and won't be formally retiring for some time to come. However, would it be possible to take out 25% of my pension fund now, even though I will not have formally retired?
A: Steve Latto: You can take a lump sum of 25% from age 50, even though you have retired. With the balance you must either buy an annuity or withdraw an income from your pension. But, the minimum income that you can take is zero.
Q: Dennis: I am 58 and a teacher and am hoping to retire shortly - do I have any options as to how I can use my accrued sum in purchasing an annuity.
A: Anna Sofat: If you are a member of the teachers' pension scheme, the best course will probably be to take the pension from the scheme. However, technically you are allowed to take a transfer into another arrangement and you could buy your annuity on the open market. Do remember the teachers’ pension is usually index-linked, and if you were to buy an index-linked annuity that is going to cost you a considerable amount – roughly the cost is about 50% of a normal annuity. For example, £100,000 lump sum may give you a level pension of about £6,000 a year, but an index-linked pension of about £3,000 to £3,500 per year.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Personal pension plan
A money purchase (defined contribution) pension that the holder can make contributions to if the company they work for does not provide an occupational or final salary scheme they can join or they are self-employed. PPP contributions qualify for tax relief.
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.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
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 financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.