Malcolm tackles your pensions problems

My wife is 60 in October 2008 and will be entitled to a reduced-rate pension based on 10 qualifying years of national insurance (NI) payments. She can increase this to 11 qualifying years with a small payment of �6.75, or to 12 qualifying years with a payment of �151.95.

Is it worth making these payments? Or can she claim a basic state pension based on my NI contributions? I will qualify for a full basic state pension when I reach 65 in June 2011.

David Plowman.

Malcolm says: The value of David's wife's pension will depend on the number of years needed in her case to qualify for a full state pension (�90.70 per week from April 2008). This could be as many as 39 or as little as 20 depending on whether she has had years at home bringing up children or caring for sick or disabled people since 1978 and is covered by what is known as Home Responsibilities Protection (HRP). The maximum pension she could receive could not in these circumstances exceed 50% of the full rate and could well be a lot less. Paying voluntary NI contributions for the one or two years would increase the rate of her pension marginally but would not benefit her, at least not over the long term.

This is because in June 2011 Mrs Plowman will be able to claim a pension based on her husband's NI contributions when he reaches his state pension age. This would enable her to receive 60% of the pension he is entitled to, which would effectively supersede any pension she would be entitled to in her own right. (She cannot receive both).

The only question therefore is whether it would be worth her while paying the voluntary contributions to secure an increase in her pension for the period from October 2008 to June 2011. She needs to find out from the Pension Service how much extra pension that would get her and compare it with the cost of the contributions she has to make before deciding whether to go ahead.

Women's pensions tend to be more complicated than men's. For this reason and because there are some very significant changes coming in from 2010 which could be of particular benefit to women the Pensions Advisory Service has opened a special Women's Pensions Helpline on 0845 600 0806 to explain and answer questions on any aspect of women's pensions.

Why can a person not have a pension without a third party manager? In order for me to have a reasonable pension on retirement I would need to manage the fund myself without any boss telling me what to do.

Emmet McDonagh.

Malcolm says: The reason in two words is 'tax relief'. Because all pension schemes enjoy tax privileges, HM Revenue & Customs insist on the involvement of a professional third party to ensure full compliance with the tax rules.

However, as far as managing the investment of the money yourself, this is possible through what is known as a Self Invested Personal Pension, or SIPP for short. You can get more details in the Specialist Pension Arrangements section of our web-site: www.pensionsadvisoryservice.org.uk

We have put details in the specialist section of our website as we would always suggest you get some independent advice before taking out one of these pensions to make sure it is the right choice for you.

I am 57 and plan to stop earning at the end of March 2008. I have been in continuous employment since 1976. Am I obliged to continue NI payments on a voluntary basis in order to qualify for the maximum state pension? If so, for how long? If it is not obligatory, is it nevertheless worthwhile to continue contributions?

Dr Robert H Walter.

Malcolm says: Changes are being made to the number of NI qualifying years needed to get a full state pension from 6 April 2010 and Robert will need only 30 years (compared to the present 44) as he reaches state pension age after the changeover date.

This means that it is highly unlikely he will need to make any voluntary NI contributions to bring himself up to the 30 year figure. If he has paid full NI contributions all the way since 1976, then he will by the end of March already have 31 years.

In any event, a man of his age not in work should receive automatic NI credits for at least some of the years from the tax year he reaches 60 up to his state pension age at 65.

Although the Pension Service is not currently giving pension forecasts to people who reach state pension age after 5 April 2010, it might be worth Robert checking with the National Insurance Contributions Office to seek confirmation that his contribution record will be complete.

Would a person over 55 but under pension age, who is considering taking their pension from a personal pension plan, be wise to do so now or wait a few months more?

I do not trust IFAs. I have found from previous experience that, although they are independent, they do not always give the best advice but tend to push products which pay the best commission.

Pauline Priestley.

Malcolm says: I assume that Pauline is concerned about the way the stock market has been rising and falling quite erratically at times over recent months. I wouldn't claim to be able to predict whether the stock market will continue to be so volatile, but I will say that it is generally a good idea to reduce your exposure to the stock market as you approach the age you want to draw your pension.

Many new personal and stakeholder pension plans these days are designed to move your investments automatically from stocks and shares into more stable investments such as cash and bonds, in the years leading up to your retirement date.

Despite Pauline's reservations, it is often desirable to seek independent financial advice in these situations. There are many good financial advisers who will take the time and trouble to investigate your problem and offer solutions to it. You can easily find an IFA who will give you advice on a fee-paying basis only - there will be no commission involved. If you know of someone who has used an IFA and has been very satisfied with the service, it might be worth making contact with them. Otherwise, you can get details of three IFAs in your area through www.unbiased.co.uk.

My wife receives 50% of the state pension. She has now claimed an additional pension based on my contributions (I will be 65 in March 2008). This we believe will raise her pension to 60%. Could she claim further additional pension based on Home Responsibilities Protection from 1978? Our youngest son was 16 in 1993.

D Williams.

Malcolm says: Home Responsibilities Protection (HRP) should have been taken into account when your wife first claimed her state pension. If you have any reason to think she has been "short-changed" in that respect, you should take it up with the National Insurance Contributions Office.

I worked for Northern Rock and contributed to their pension scheme. I left the company in 1993 at the age of 44 fully understanding that my pension would be frozen and not be available until I am 60 (2 years time) unless I take a reduction of 6% a year. In view of the current situation should I take the money and run or hang on for two years?

Pauline Lewis.

Malcolm says: I assume Pauline is referring to the decision to nationalise Northern Rock.

We cannot advise Pauline on whether or when she should consider drawing her pension from the scheme although as she says to do so in advance of her normal pension age would mean a percentage reduction in the amount of the pension payable. I have to say, however, that I don't think that she should be unduly worried about the security of her pension. For a start, the assets of the Northern Rock pension scheme are kept separate from the company; the scheme is run under a trust by trustees, acting on behalf of the members.

The decision to nationalise Northern Rock was aimed at keeping the bank going, so this will allow it to continue to support its pension scheme.

Some experts are in fact now claiming that the nationalisation of Northern Rock is 'excellent news' for its pension scheme as the government's move has removed all concerns over security.

I have been told that a non-working wife under pensionable age can claim a pension if her husband is over 65. I'd be grateful of an explanation of this somewhat arcane benefit, and whether a claim, if substantiated, can be made in arrears?

Michael Reed.

Malcolm says: Michael has unearthed something called an Adult Dependency Increase. This can sometimes be paid to a man or woman in receipt of a state pension for a 'dependent' spouse or civil partner who is under state pension age. The current weekly rate for a couple who are living together is �59.15. For a couple living apart the rate is �52.30.

But, there are some conditions attached. Amongst other things, the wife must not be earning above a minimum amount and/or receiving certain state benefits.

A successful claim can only be backdated up to three months from the date of claim.

Be aware that this benefit is being phased out from April 2010. If you claim the increase before 6 April 2010, you can keep this up to 2020, or until your wife can claim a state pension in her own right, whichever is earlier.

People who claim state pension on or after 6 April 2010 will not be able to claim extra money for their spouse or civil partner in this way.

For further information about women's pensions generally, contact the Pensions Advisory Service's Women's Pensions Helpline on 0845 600 0806.

So many misunderstand their expectation from pensions. Seemingly company 'Final Salary Pension' does not mean one receives final salary as pension. The ambiguous word 'Defined' is mentioned. Will you please unravel?

Peter Madsen.

Malcolm says: One of the problems most people have with pensions is understanding the jargon. Unfortunately, the industry has a language all of its own. I always thought that a 'pup' was a fluffy little bundle of fun but I found in pensions jargon it means 'a paid up pension'. Even then I still had to ask what 'a paid up pension' was. This is one of my hobbyhorses - I'm always reminding people in this industry (they're probably sick of listening to me) that pensions are for people and so should be their communications.

Peter is correct that a 'Final Salary Pension' does not mean that you receive a pension equal to your final salary. It doesn't even mean that your final salary will always be used in the calculation of your pension. The term covers a myriad of situations and is one of the reasons why many commentators prefer the term 'Defined Benefit Scheme'.

A 'Defined Benefit Scheme' is one where the pension you get is calculated according to a formula laid down in the rules which govern the operation of the scheme. It means that the different benefits paid from the scheme, and the circumstances in which they are paid, are all defined in the scheme rules.

For example, a scheme's formula may allow you to build up your pension at the rate of one sixtieth for each year that you are a member of the scheme. After 30 years you will then be entitled to 30/60ths or a half of your salary as your pension. The salary to be used could perhaps be your best annual earnings out of the last 3 years. If that were say �30,000 then your pension would be �15,000

I worked 25 years for a company that went bust in February 2005 and the pension scheme was entered into the Pension Protection Fund (PPF) assessment period on 25 November 2005. I am 54 years old and I am considering taking early retirement from the scheme although I intend to work full time until I am 60.

I would like to know what penalties I will suffer from taking my pension six years early. Also, if I decide to take my pension will I be subject to the higher rate of tax because I still work?

William Roper.

Malcolm says: Once a scheme has entered the assessment period, benefits payable by the trustees have to be in accordance with the rules of the PPF. One of their rules is that the member gives at least six months notice of his intention to take early retirement. This can be waived in situations of financial hardship.

For anyone retiring early the calculation starts by working out their deferred pension due to be paid at the scheme's normal retirement age (NRA). This is then reduced by 10%. The resulting amount is then subject to a maximum. That maximum differs according to the scheme's NRA and equates to �26,935.70 at age 65.

Finally there is a further reduction because you are taking your pension early. The amount of the reduction depends on the age at which you take your pension and the scheme's NRA. For example, in a scheme with an NRA of 65, a person retiring at age 56 will have their pension reduced by a further 20%.

A full set of the reduction factors can be seen on the PPF's web site: www.pensionprotectionfund.org.uk

The pension when it is put into payment will be added to your other income and taxed accordingly. If this takes you into the higher tax bracket, some or all of your pension income will be subject to a 40% tax charge.

I am self-employed and a couple of years from retirement age. Although I plan to continue working beyond 65, I will probably take my state pension and gradually work shorter hours. I have a small private pension and money in shares and savings. Would it be tax efficient to put a few thousand pounds of my savings into my private pension now, or will it make little difference as the pension income will be taxed when I take it in a few years time?

Jo, East Sussex.

Malcolm says: The tax advantage you get from putting money into a pension plan is that your payment gets tax relief. For every �100 a basic rate payer puts in, an extra �28.20 is added by the taxman. This means that you have �128.20 in your pension plan at a cost to you of �100.

However, if you are a higher rate tax payer, you get an additional �23.07 back from the taxman in extra tax relief. You still have �128.20 in your pension plan but this time it only cost you �76.93. So you can see how much more beneficial it is for a high-rate tax payer.

The maximum amount you can get tax relief on cannot exceed 100% of your annual earnings or �225,000, whichever is the lower.

Also the investment return that your pension fund earns is virtually tax-free. It used to be completely tax-free until the former Chancellor of the Exchequer changed the tax laws some years ago.

You are right about the pension you eventually draw being taxed. But not all of your pension savings has to be turned into a pension; 25% can be taken as a lump sum which is tax-free.

One further factor you need to consider is how much you will have in your pension plan when you decide to take it. If you take the 25% lump sum, you need to make sure that the remaining amount is at least �10,000 to be able to get the best terms around at that time for turning your savings into a pension. If you have less than �10,000 left, you will find that many insurance companies are not interested in small pension funds and you might not get the best rates going.

The opinions expressed are Malcolm's and not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.