The answers to your top pension questions

Q: When is it good to SIPP?

What are the tax pros 
and cons of taking out a self-invested personal pension (SIPP) as 
opposed to a stocks and shares ISA?

A: Francis Klonowski, principal of Klonowski & Co in Leeds, says:

The question often arises whether a SIPP or an ISA is the best vehicle for retirement saving. I’ve seen several 
calculations that try to show one is better than the other, but there isn’t any hard and fast rule on whether SIPPs or ISAs are better.

It will often depend on the individual’s needs – for example, if you want extra income or simply capital for ad hoc needs. My usual answer, though, is that ideally you should have both: one for income, the other for capital purposes. 

To compare the two at a glance: a pension contribution attracts tax relief at your highest rate, with the added advantage of being able to make the contribution net of basic-rate tax. [This could be subject to change as the coalition government reviews pension legislation.] If you invest £1,000, the actual amount invested in the SIPP is £1,250. If you are a higher-rate taxpayer you can also claim a further £200 in your tax return. With ISAs, you get no tax relief on the contribution. 

Both types benefit from having no tax on income and growth within the fund, except that the managers cannot claim the tax credit on UK dividends – the first of former prime minister Gordon Brown’s now notorious ‘stealth taxes’.

Pensions are taxed as normal income, while income from an ISA is free of income tax and won’t affect your tax banding. If you’re a higher-rate taxpayer pre-retirement and drop to basic-rate post-retirement, then a 
pension is clearly in your favour – 40% tax relief on your contributions and only 20% on your income. [Again this is subject to change in the future.]

A SIPP is paid outside the estate, with no inheritance tax liability. 
However, there’s a 35% tax charge if the fund is paid out as a lump sum, whether to the spouse or other 
beneficiaries. ISAs, on the other hand, form part of your estate and may 
therefore be subject to inheritance tax.   

Q: Can I fund a pension after gaps at work?

I’m 54 years old but have no pension provision as I’ve spent most of my life 
bringing up my children and was either not working or working part time. I’m now in full-time work, earning £18,000 a year, and plan to retire when I’m 65.

Is it worth starting a pension with my current employer – it will match my contributions and add yearly bonuses, although the bonus is not guaranteed – or would I be better off investing my money elsewhere for the next 10 years? 

A: Philip Pearson, a partner at P&P Invest in Southampton, says:

The main consideration at your age is to ensure you have adequate funding for a full state pension. I would advise you to get a state pension forecast from the Department of Work and Pensions. This will highlight any shortfall in the national insurance contributions you’ll need to qualify for a full state pension.

During the period when you were bringing up your children while they were in education – up until the age 
of 18 – you will have been provided with a NI credit. This reduces the number of years you would have to have paid contributions in order to qualify for the full state pension.

However, if you still have a shortfall, you can make it up by making additional voluntary class 3 NI contributions. These offer excellent value compared with purchasing benefits from a comparable company or personal pension. 

Once you are sure you are entitled to a full state pension, you should 
consider joining your employer’s 
occupational pension scheme. Your 
employer will make a contribution to your pension, which will give your funding a valuable boost.

It would be sensible to get some advice on how best to invest these
contributions, to ensure the level of risk you take suits your circumstances and expectations of growth. I’d also advise a regular review to highlight 
any shortfall between your future pension benefits and what you’ll need to fund your retirement. This will help you establish if you’ll need additional funding in the run-up to retirement in order to meet any potential shortfall.

Q: Can we claim joint tax relief on a joint pension?

My wife and I receive a joint pension, which we bought with our business earnings. The pension is paid into a joint account. However, because it is only in my name, I pay all the tax on it.
I still work part-time and want 
to pass the pension earnings to my wife. But HM Revenue & Customs will not allow my wife to claim joint tax relief. Is there a way round this?

A: Francis Klonowski, principal of Klonowski & Co in Leeds, says:

A joint pension (or a joint life
annuity) doesn’t exactly mean what its name implies. Rather, on the 
annuitant’s death, the annuity will continue to be paid to a nominated person – usually the spouse – for the rest of that person’s life.

Payments can be anywhere up to 100% of the original annuity income. The annuity company calculates that income according to its assessment of factors such as how long it’s likely to have to keep paying out.

This also means the starting income will be much lower than a single life annuity. Of course, there’s a risk to the annuitant as well, because if the 
second person dies first, they will have to accept the lower income for the rest of their life.

The payments are taxable only on the person receiving them – either the original annuitant or the surviving named person. Unfortunately, payments cannot be treated as a joint income for tax purposes.

Q: How can I beat high pension charges?

I am 48 years old, self-employed, and have had a personal pension plan with Allied Dunbar, which later became Zurich, for nearly 22 years. Recently, I discovered that Zurich is one of the highest charging companies in terms of its administration fees.

I’ve never missed a payment but I’m concerned that I’m paying over the odds and may discover that my pension turns out to be a lot smaller than I was anticipating. What are my choices?

Should I switch to another company, stay where I am or stop the pension altogether and put the money somewhere else?

Q: Francis Klonowski, principal of Klonowski & Co in Leeds, says: 

When you took out this plan, the charges were certainly higher than those available now.  But it was also normal for companies to levy high initial charges, mainly to pay up-front commission to advisers.

Those initial charges would be reflected in early surrender or transfer values, which would invariably be lower than the actual fund value. If you keep premiums going at the agreed level, those charges are gradually recouped over the term of your plan.

In Allied Dunbar’s case, the charges would be imposed by means of ‘initial’ or ‘capital’ units. Your initial premium, and any subsequent increase, would buy these capital units for a fixed initial period (three or four years). These would be priced much lower than the accumulation units that you would buy from then onwards.

The annual management charges on capital units, for the lifetime of the contract, would be much higher than that of 
accumulation units. The penalty for transferring is simply the capitalised value of the future capital unit charges.

A transfer should only go ahead after proper analysis of the policy to establish if there would be any material disadvantage. Charges are just one of the issues to be considered. If the transfer value simply reflects the future charges that would be deducted anyway, then this is a ‘neutral’ factor. Transferring to a new, perhaps stakeholder, contract with lower costs could be to your advantage – even if fund performance is the same.

The other factors to be considered include death benefits, tax-free cash entitlement (sometimes higher with older plans), investment choice and past performance. In some older policies, the death benefits are less than the transfer value; in more recent plans, the death benefits are usually the full fund value, which is often higher than the transfer value.

Another solution you should consider is to carry on paying the current level of contributions to Allied Dunbar, but not increase them or make any single contributions. If you wish to contribute more, any increase should then be paid into a lower-cost stakeholder or personal pension.

Q: Where can I find a retirement safety net?

I am in my fifties and am very concerned about my retirement. As I have not worked since the early 1970s I have no personal pension plans – my partner has three. What’s the best way to secure an income safety net for my retirement?

A: Caroline Hawkesley, a certified financial planner and director of Evolve Financial Planning, says:

The best way to start planning 
for your retirement is to obtain a free state pension forecast from the DirectGov website.

You may find that you can claim pension credit. This is an entitlement for people aged 60 and over who live in the UK – it could mean a bit of much-needed extra money each week. You can obtain a pension credit estimate via DirectGov.

You should also think about how to make the best use of any assets you and your partner have, in the time between now and your retirement. Sit down together and review your monthly income and expenditures. See if there are any ways in which you can cut back on your spending in order to boost your income when you retire.

Q: Can I use pension to pay debts?

I am in debt and have been for a very long time. I have a pension with Royal London, which is 
probably worth £4,000. Is there any way I can cash this in so I can pay off my debts? It would be a great relief.

A: Philip Pearson, a partner at P&P Invest in Southampton, says: 

It all depends on how old you are. If you’re currently age 55 or over, then it’s possible to draw pension benefits without actually retiring. 

Normally up to 25% of the fund is available as a tax-free lump sum, with the balance being used to provide income. However, there are rules which restrict the amount of benefit this can provide to the individual.

The total benefit of all pension arrangements must be no greater than 1% of the lifetime allowance. Under current limits, this restricts total benefits paid as a lump sum to a 
maximum of £17,500.

Should you qualify, then 25% of this fund is paid tax-free, with the balance paid after the deduction of basic rate tax at 20%.

Q: What is the best private pension for my wife?

My wife is 27 years old and does not have a 
pension. She doesn’t want to join her company scheme as she has heard negative things about it, and will also be moving jobs soon. She has always indicated that she would like a 
private pension. Can you tell me what’s the best, easily understood, no-nonsense private pension available at the moment?

A: Philip Pearson, a partner at P&P Invest in Southampton, says:

If an employer offers the option of joining the company pension scheme then for most people this is an opportunity not to be missed. Company pensions have the advantage over personal pensions in that the employer also makes a contribution to your pot.

However, there are circumstances when it does not make sense to join such a scheme and these include the situation, like your wife’s, where you are unlikely to be with the company for very long.

An alternative choice is a stakeholder pension. This is a personal pension designed to provide a low-cost route to saving towards retirement. Stakeholder pensions are different from alternative personal pensions in that the government sets a standard that they must meet with regard to charges and contribution levels.

In brief, there’s no initial charge to invest, and individual funds have a maximum annual management charge capped at 1.5% per annum for the first 10 years of the plan. A minimum contribution of £20 a month can be made. There’s no exit charge should you wish to transfer the plan to an alternative provider.

An employer can also make contributions into stakeholder pensions; if your company does not operate a pension scheme, it’s worth asking if they will make a contribution into such a plan as a means for you to boost your savings towards retirement.

Q: Can I claim my pension and continue working?

I have just turned 50 and am now eligible for my final salary pension of £430 a month. But is it wise to claim this now, while I am in full-time employment in another job and paying into a contributory pension scheme?

A: Francis Klonowski, principal of Klonowski & Co in Leeds, says:

There are two ways to look at this. You could argue that as you are in full-time employment you don’t need the money, and that you will only be taxed on it (perhaps even at 40%, 
depending on your current tax bracket) if you start receiving it. 

On the other hand, by taking the money now you have the opportunity to invest any surplus money from the tax-free cash (assuming you take what’s available) plus the net income.

Providing you can get a higher return on this money than the annual increases that would be applied if you delayed, then it could be worth doing.

There is another consideration, however, that has become more relevant in recent years as an increasing number of pension schemes are having to resort to the Pension Protection Fund. If your previous employer went bust and was unable to meet its liabilities to the pension scheme, existing pensioners come first, ahead of the existing members and those in

So if you take your pension now, you would be first in line to receive payments should the company go out of business.

This may sound like a selfish way of approaching the question, but when it comes to pensions, you have to take care of yourself.

Your Comments

re the last Q & A.. it states in response to the question:

There is another consideration, 
however, that has become more 
relevant in recent years as an increasing number of pension schemes are having to resort to the Pension Protection Fund. If your previous employer went bust and was unable to meet its 
liabilities to the pension scheme, 
existing pensioners come first, ahead of the existing members and those in 

My comment the remarks regarding existing pensioners I don't believe is correct - with the 2004 pension changes all pensions (differed and active) are at risk as I now know!! this was a badly thought out change by the government in being retrospective - I had retired specifically to protect my pension only to have the government change the rules and of course I had no option to return to my old job. And the PPF ? well My scheme is in assessment with PPF rules already reducing my pension by 38% and with the fragile nature of PPF funding this is lightly to reduce even further as I get older. My pension advice? invest in property at the right time - no overheads to the Pensions 'industry' and you can at least see your investment.

Can you explain why if an ISA is just a 'tax-free' wrapper why the banks eg Nationwide offer fixed rate bonds with higher rates of interest if NOT in an ISA. For example Nationwide (other banks are just as bad) offer a 3 year fixed rate bond at 4% in an ISA but at 4.40% in a fixed rate bond for the same term...or 5 years 4.5 % in an ISA or 5% without the ISA wrapper. I consider this grossly unfair as eg I have accumulated over 50K and the differerence compounded over several years adds up to a significant amount. Visits to the branch in Woking or calls to Nationwide H.O. have proved useless as clearly the front-line staff do not understand and make comemts like 'an ISA is a different product'....but it isn't it's just a wrapper around term money?. It has proved impossible to speak to anyone in their treasury dept. only customer service staff.
Any ideas? seems that which the government gives with one hand the greedy banks take with the other. Andrew Sadler

I am in the process of taking 25% tax free from my personal pension and have been asked by the provider to provide details of my salary when I took out the pension so they can calculate my tax free amount. As this was 30 years ago I cannot remember exactly what my salary was, does anyone know why I need to provide what my salary was back then? Will what I was earning have any affect on my tax free entitlement.?

I have a teacher'spension and I have also set up (but currently paused) an AVC with the prudential.
My husband has just left his job of 13 years which had a pension and has moved to a job with no pension.
Would it be possible for my husband to pay into my AVC's and ensure my teachers pension was complete rather than set up a new pension?
The teachers pension is good in itself and AVC's will add even more.

I'm well informed on health matters and live a healthy lifestyle. Rather than pay for medical insurance is it possible to draw from my pension fund to pay for large ( or small ) medical bills, before I've actually retired?