Q&A: Expert answers on pensions

Malcolm McLean answers your pension queries

A number of viewers have contacted Working Lunch about the problems they have experienced with the insurance company Windsor Life. This was first featured on the programme on the 17th April and included an interview with the Windsor Life Chief Executive Jonathan Yates. Here is just one example.

Paul Heath writes: My mother has been affected by the Windsor Life fiasco. My father died in August and she was due part of his two Pensions. It took six months for my mother to receive any payments. I phoned the company numerous times. Nobody ever rang back. I eventually wrote a letter of complaint - received a quick response saying they would investigate my complaint. Nothing has happened since. They are the worst company I have ever had to deal with and if I had any choice would never deal with them again.

We have heard many similar complaints from customers of this troubled insurance company. Windsor Life took over the business of another insurance company (called Tomorrow) late last year and clearly underestimated the scope of the additional work they were taking on. The result has been a level of customer service which by almost any standards is totally unacceptable and needs to be sorted out as soon as possible.

We understand the FSA is aware of the problems and is monitoring the situation. It may be that at the end of the day they will decide to impose some sanctions on Windsor Life including perhaps a financial penalty in a form of a fine in consequence of their failings. In the meantime none of this will directly help frustrated customers who are being subjected to delay and inconveniences, and in some instances, financial hardship. We would urge them to lodge formal complaints in writing in all such instances and where actual financial loss has been incurred ask for full compensation for their loss.

On the Working Lunch programme on 17 April the Windsor Life chief executive pledged that everybody who has suffered a loss would be compensated. He should be held to that pledge.

If anyone is not clear on their rights in this respect they should feel free to ring our Pensions Helpline 0845 6012923.

Lewis Footring asks: I am retired and receiving both state pension and a private annuity. I still have a residual protected rights pension invested and yet to be used to purchase an annuity. Is it possible to transfer this protected rights pension to my wife?

The blunt answer is no. The only occasion when an individual's own pension rights can be transferred during their lifetime from a husband to a spouse or vice-versa is via a court order made as part of a divorce settlement. This presumably is not the case here.

Kieran Wright: I was reliably informed that we now only need 30 years of national insurance to get a full state pension. It used to be 44 years. Does it have to be 30 'full' years, or is there an allowance for sickness, unemployment etc? Please advise.

The reduction to 30 qualifying years needed to get a full state pension applies to anyone whose pension age is on or after 6 April 2010. A qualifying year is a tax year in which you have paid or been treated as having paid sufficient in national insurance (NI) contributions for it to count as a qualifying year. You do not necessarily have to make contributions every week or month in the year for it to count as a qualifying year - it depends on how much you contribute overall.

You can also be "treated as" paying contributions for weeks when you receive what are known as NI credits. These are usually given automatically when you are claiming certain social security benefits such as incapacity benefit and contributory job seekers allowance.

Mike Draycott: In a couple of years I will be 65, and start to receive a full state pension, and a similar amount from SERPS. I also receive some small private pensions. I understand that I will then be able to claim the over 65 tax allowance, but if my total income exceeds a maximum income figure, then the over 65 tax allowance will be reduced back to the normal single person's allowance. Could you please explain how this works, and what is counted as income in order to apply this reduction?

Everyone gets a 'personal tax allowance' that lets them have some tax-free income each year. The allowance increases once you get to 65, and then again at 75. The allowances for this year (2008/2009) are as follows:

Basic allowance - up to age 64 - �5,435
Age 65-74 - �9,030
Age 75 or over - �9,180

Your "taxable income" is added together and compared with your tax allowance. If the income falls below the figure no tax is payable. If your income is higher then tax is levied at the appropriate rate - 20% up to a specified level and 40% above that.

Some types of income are not treated as taxable (e.g. certain disablement benefits) but the items Mike has listed - the basic state pension, SERPS and private pensions - would be classified as taxable income.

In the tax year in which Mike reaches 65, he will qualify for the age 65-74 higher tax allowance. However, there is a sort of means test which kicks in for people on a higher level of income and this can have the effect of reducing the tax allowance.

This works as follows. If your income is over �21,800 your higher age-related allowance reduces by half of the amount you have over that limit (a reduction of �1 for every �2 of income over the limit). But you'll never get less than the basic allowance of �5,435.

So, for example, if you are 65 and your income is �22,300 (�500 over the income limit) your allowance of �9,030 falls by �250 to �8,780.

Anon: My partner was contracted out of SERPS in the 1980s. He has been advised to opt back in. He is 58 and in ill health so no funds are being put in. Could you tell us what the benefits would be to opt in? Also is it possible the government may pull out of SERPS in the near future?

The decision as to whether you should be contracted in or out of SERPS (now called the state second pension or S2P for short) and whether you need to review that decision is only really appropriate if you are in employment and are receiving wages or salary.

So there is probably no need to take any action at all in the circumstances which apply here.

Let me try to explain though for the benefit of others in fairly broad terms how contracting-out works.

If you are in paid employment and paying NI contributions you will normally be building up an entitlement in addition to the basic state pension to what is now called the state second pension, or S2P for short. This was formerly known as SERPS. Your S2P entitlement is based upon a complicated formula using your earnings between set minimum and maximum levels. These levels are set for each tax year. S2P is paid in addition to your basic state pension age when you reach your state pension age and claim your state pension.

There is, however, an option to opt out (or contract out as it is usually referred to) of S2P, effectively give up your entitlement to that and receive instead a rebate from the government into an individual private pension plan you have or can set up. Your pension plan provider will then invest the money as part of your plan on your behalf. A slightly different arrangement applies with occupational schemes although the principle is broadly the same.

The value of your contracted-out pension will depend on how well your pension provider manages the investment, how the stock market changes, the size of the charges made to run your plan, and the annuity rates at the time you decide to convert your fund into an income.

The S2P alternative is more certain although not necessarily better in that it is based on a defined formula and does not depend on investment returns. Many insurance companies have taken it upon themselves in consequence to suggest to older people closer to retirement who are contracted out to give serious consideration to contracting back in, a choice that can be made and/or changed on a year to year basis.

The government has also given notice that it intends to end contracting out as an option for so-called money purchase schemes (personal pensions, stakeholder pensions and some occupational schemes). This is currently scheduled to happen from 2012, at which point contracting-out will only apply in salary related occupational schemes.

There are two questions about buying annuities. Mike Williams makes a specific point on whether his health will be a factor, whilst David Robinson asks if he should get financial advice before buying an annuity.

Mike Williams, Leicester - I am nearly 65 with a pension pot of �80,000 approximately. I have Type II diabetes which is currently being treated with pills! I understand that I can get a better annuity because of my health. What further information can you give me about this and annuities generally?

Mike appears to be already aware that some insurance companies offer higher annuity rates for people with specific health problems, or medical conditions. This is for the very blunt reason that the insurance company expects people with health problems not to live as long as the average, healthy person. For similar reasons, better rates are sometimes offered for smokers. This type of annuity is often called an 'enhanced' or 'impaired life' annuity.

Not all insurance companies offer such annuities and therefore it is worth shopping around to find the best deal. Rates can be compared by visiting the Financial Services Authority's comparative tables at www.fsa.gov.uk/tables. But, like all major financial decisions, it can be beneficial to obtain specialist financial advice.

David Robinson - I will be 65 during March 2009 and have 2 pensions with 2 separate companies. Question:
1) Will each of these companies write to me nearer the time advising me the values and the options available?
2) Should I go to a specialist adviser to seek the best annuity or can this be done by myself?

A member of a personal or stakeholder pension scheme should automatically be provided with details of the options available to them upon retirement at least 4 months before their expected date of retirement. David should therefore make sure they have his up to date address details.

There is no requirement to use a specialist adviser, but David may find that some insurance companies will only sell annuities via an intermediary. There are also many different types of annuities and lots of companies in the market. It may therefore be quite onerous to do the shopping around by yourself.

David can compare rates at the FSA's comparative tables website. And he may also be interested to know that we are to soon launch an on-line annuity planner that will help people better understand their annuity options and help them decide on which annuity best suits them. The planner will be available at our website.

John Stillman: I retired and took my company pension and a tax free lump sum of �37,000 in July 2006. I have two very small personal pension plans with total benefits valued at �6,900 and �1,200 which I was hoping to take as a taxable lump sum when I am 60 in May of this year. I am told that I cannot do this as the total including my company pension benefit is more than the maximum allowed. Is this correct? If so what should I do with these small amounts?

John's pension providers are correct. The rules allowing pension plans to be given up entirely for cash only allow this if the individual is over 60 and all their pension plans, when aggregated (excluding the state scheme) are worth in value less than �16,500 (2008/09). The maximum cash therefore that John can take will be limited to 25% of the fund value of the plan.

All insurance companies have a set minimum fund value that they will accept in return for the offer of an annuity. John may therefore want to consider bringing both his plans together as this may increase the number of insurance companies willing to do business with him.

For further information about the rules applicable to "trivial pensions" ring our Pensions Helpline on 0845 6012923.

John: What should I consider before taking out a drawdown plan instead of an annuity?

Drawdown (also called income withdrawal or unsecured pension) allows you to take income from your pension plan (up to a maximum of 120% of a figure calculated according to tables produced by the Government Actuary's Department) without purchasing an annuity. If John is trying to decide upon whether to use a drawdown plan, instead of an annuity, he needs to weigh up the various advantages and disadvantages.

Perhaps the main factor to take account of is that if you use a drawdown plan your fund remains invested and therefore you are still required to make decisions on how to invest your fund. John will still be relying on investment growth and runs the risk that returns may not be as expected or that his fund value could fall. This of course could have a serious impact on the level of income he could receive in the future. In comparison, once bought, annuities will provide benefits in line with the features selected.

Using a drawdown plan does allow you to vary your income in line with your circumstances and perhaps also to benefit from improved annuity rates, as rates usually rise as you age. There is however the risk that annuity rates will not improve, they could actually go down. Further flexibility is available as drawdown plans can be transferred to another provider, although care should be taken of any charges made for doing so.

If applicable, John may also want to consider the options for his spouse / dependants, if he were to die.

The Financial Services Authority has produced a useful guide about drawdown called 'Just the facts about your retirement options - income withdrawal.' Copies can be obtained by ringing our Pensions Helpline: 0845 6012923.

Abdul: I have a pension wholly invested in a Fixed Interest fund and the value progressively goes down without switching any units or before management fees. Why is this?

The term 'fixed interest' can cover a number of different investment types, such as government securities and corporate bonds. Whilst these types of investments do pay out a regular and often fixed level of income, they are also bought and sold, like shares. Their value can therefore fall as well as rise, depending on their popularity in the stock market. Factors that can influence the value of units in a fixed interest fund include the rate of interest the security provides, inflation and interest rates.

The opinions expressed are Malcolm's, 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.

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