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Deferred pensions and transfers

As explained above, for most people who leave their pension schemes, the options are;

• 
  Your pension can be ‘deferred’ or ‘preserved’ in the scheme, and you can collect it when you retire. People often refer to this as a “frozen” pension but in fact it does receive some increases. The rules here are very complex, but broadly, it will keep up with inflation so long as that does not go above 5% (or without a ceiling, if it is a public sector scheme);
  
• 
  Alternatively, you can take a transfer to another employer’s scheme, or to a personal pension. You have the right to ask for a transfer out of a scheme at any time up to a year before retirement date. However, the new pension scheme may not accept transfers at all, or may allow them only within a certain time limit, especially in the public sector.
  

• 
  If you are 50 (or over when you leave, you may be offered an immediate pension, but it will probably be a reduced amount. (This age-limit changes to 55 from 2010 onwards)
  

“Pensions liberation”: a warning

For more information, see the FSA information sheet “Unlocking pensions: make sure you understand the risks” available from the FSA website.

….I GO ON MATERNITY OR ADOPTION LEAVE?

• 
  Ordinary maternity leave/adoption leave: pension rights continue, but contribution based on remuneration actually received
  
• 
  Additional maternity leave: pension rights may stop; schemes may offer special terms
  
• 
  HRP
  

During Ordinary Maternity Leave, employment rights, including pension rights, are maintained. In addition, occupational pension schemes must make any period of paid maternity leave pensionable as if you were receiving your usual rate of pay. However, pension contributions can only be deducted on the basis of the pay you are actually receiving.

Employers do not have to provide any pension benefits during unpaid maternity leave, but the scheme rules may allow periods of unpaid leave to be credited if the employee pays additional contributions on her return. In any event, the scheme should treat the service as continuous.

….I GET DIVORCED?

• 
  Swap house for pension
  
• 
  Earmarking
  
• 
  Pension splitting (sharing)
  
• 
  State pension: can’t go on paying “small stamp”
  
• 
  Can still rely on spouse’s NI record – unless you remarry before SPA
  

There are two ways in which an occupational pension can be divided between a husband and wife when they are getting divorced, or between civil partners on a dissolution:

• 
  Earmarking: this means that once the pension starts to be paid, it is divided between the member and the former spouse/ civil partner according to a judge’s order. It dies with the member however, and if the former spouse or civil partner remarries he or she loses it. Earmarking is complicated and does not work very well, so very few earmarking orders have been made.
  

• 
  Pension sharing: This means that the pension is divided at the time of divorce. The former spouse or civil partner is generally then able to transfer their share elsewhere.
  

The process is that:

• 
  As part of the information gathering for the financial settlement, the scheme member will be asked to obtain details of the transfer value from their pension scheme.
  

• 
  The court may make an order that part of this transfer value must be passed over to the other spouse/ civil partner.
  

• 
  Depending on what type of scheme it is, and the policy the trustees have adopted, the other spouse or civil partner may then have to leave his or her share with the member’s scheme for it to look after, transfer it to his or her own scheme or a personal pension, or have a choice of doing either. Information about which options are available with the scheme in question will be included with the details of the transfer value.
  

• 
  The amount passed across is treated as an addition to the other spouse’s or civil partner’s pension, to be counted against the lifetime allowance, and a reduction in the original member’s pension.
  

Where both members of a couple are young, or both have roughly equal pensions, the courts are unlikely to make a pension order. It is more likely to happen where one person has a much greater pension entitlement than the other, for example a senior manager whose wife has been working part-time while looking after young children. Even then, other assets such as the value of an owner-occupied house or a share portfolio are more likely to be divided taking the value of the pension into account in the calculation, as this is simpler and clearer than splitting the pension itself.

There are special rules to help divorced people qualify for a Basic State Pension as long as they have not remarried. The Pension Service checks both your National Insurance contributions record and that of your ex-spouse when you retire. If your former spouse’s record will give you a better State Pension than your own, they substitute it for yours. They can do this either from the date of the marriage to the date of divorce or from the beginning of your NI working life up to the date of divorce (or the year before State Pension age in both cases). This is simply a book-keeping exercise, and it makes no difference to the former spouse.

….I’M TOO ILL TO WORK?

• 
  Early retirement – what terms, what criteria ?
  
• 
  Terminal illness
  

• 
  Incapacity benefit
  

• 
  PHI/own insurance
  

If you are in a DB scheme, the scheme rules will almost certainly provide for early retirement terms at any age if you are too ill to work. The terms differ between schemes. In some schemes – and almost always in the public sector schemes – you will not be able to retire unless the medical advice is that you are permanently incapacitated for work. Many schemes will not pay a pension unless you are unfit for any work, whereas some will pay so long as the medical advice confirms that you are unable to do your own or a similar job.

…I DIE BEFORE I RETIRE?

• 
  Lump sum ?
  

• 
  Pension to spouse/partner ?
  

• 
  Pensions for children ?
  
• 
  State pension for widow/ers
  

Most occupational schemes will make a lump sum payment – typically between two and four times your annual pay. In the public sector schemes, this will be paid automatically to the person you have nominated. In private sector occupational schemes, the payment is made at the trustees’ discretion. They will take into account your wishes, if you have stated these (generally through an “Expression of wish” form), but they are not bound by these.

At the start of the weekend, we did an activity looking at how much income you thought you’d need (in terms of today’s money) to give you a comfortable retirement.

You might also have some non-pension savings that you regard as being available to finance your retirement. So in the empty spaces in the table, put down:

If it is either B or C, you’ll probably want to think hard about how you can change the situation. Improving your future position is probably going to mean putting more away for your retirement.

Couples

For a couple, this exercise is more complicated than for a single person. You might like to go through it twice, once together and once separately. When doing it separately, each partner needs to take account of:

• 
  pensions/savings held in his or her own right;
  

• 
  those they would inherit from the other (for example, a widow’s/widower’s/civil partner’s pension for a married couple); and
  

• 
  life insurance policies, provided they would still pay out in retirement. If the life insurance is part of a pension scheme, what is provided will change as soon as you retire, and will generally drop down to zero, or to a minimal ‘funeral benefit’ within five years
  

If you don’t have enough in retirement: Pension Credit

• 
  Guarantee Credit (GC, formerly Minimum Income Guarantee) from age 60,
  
• 
  Savings Credit from age 65; pensioners on income up to around £150 a week may be eligible
  
• 
  Provides “passport” to other benefits
  
• 
  Means tested, and extremely complex
  
• 
  Currently increases in line with earnings
  
• 
  Not taxable
  

Guarantee Credit

• 
  Aged 60 or over (or 1 of couple is)
  
• 
  currently £119.05 a week for single pensioners, couples £181.70
  
• 
  Higher rate if disabled/certain housing costs/child benefit
  
• 
  Reduced if savings/capital (not including home) of more than £6000 - £1 per week reduction for each £500 above £6000
  

Savings Credit

• 
  Intended to reward saving
  
• 
  Payable to pensioners 65 or over
  
• 
  Pays tax-free 60p per £1 of income between BSP and GC threshold, reducing by 40p per £1 of income above that threshold
  
• 
  Where BSP below full rate, SC only paid on income above full BSP level
  

• 
  Maximum payable to single pensioner £19.05 (weekly rates, 2007/08)
  
• 
  None payable where income is above £167
  
• 
  Maximum to pensioner couple £25.26
  
• 
  None payable when income reaches £245
  

When you reach retirement, you may find that you have not been able to save enough to live comfortably in retirement. You can get some means-tested benefits from the State to help out. The main one is Pension Credit.

This is a weekly social security entitlement for people aged 60 and over with low and modest incomes. You do not need to have paid National Insurance (NI) contributions to qualify for Pension Credit, but your income and any savings and capital over a certain level will be taken into account.
It comes in two parts – the guarantee credit and the savings credit. The guarantee credit tops up your income to a level set by the Government. The savings credit gives extra to people aged 65 and over who have income over a certain level, from sources such as pensions and savings. You may be entitled to the guarantee credit or the savings credit or both.
You will probably also qualify for Housing Benefit (HB) and/or Council Tax Benefit (CTB) to help with these bills. Even if your income is too high for you to receive Pension Credit, you may still be entitled to these benefits.
So long as you are over 60, you can work and receive Pension Credit, although most of your earnings will be taken into account. You may also be able to apply for other benefits such as lump-sum payments from the Social Fund. The guarantee credit will ‘passport’ you to help with health costs such as help towards glasses and free dental treatment.

How Pension Credit works: an example from the Pension Policy Institute Dolly is entitled to a BSP of £77.30 a week; she also receives an occupational pension of £30 a week, giving a total of £107.30. She will be entitled to a guaranteed element of £11.75 from age 60, to increase her income to £119.05; from 65 she will also receive a savings credit of £12 a week, i.e. 60% of the excess above £87.30. If she was entitled to a full BSP, she would receive £18 a week of savings credit.

More information; look at Pension Credit; Pick it Up; It’s Yours, leaflet PC1L, available from The Pension Service. Phone number for leaflets is 08457 31 32 33, or website is www.thepensionservice.gov.uk

Note: if you’ve come from abroad

There are some restrictions on people who have come from abroad claiming means-tested benefits, depending on their immigration status. You need to have a right to reside and to be habitually resident in the UK before you can claim

Council Tax Benefit

Housing Benefit

Pension Credit

or a number of other benefits.

Look on the DWP website for more information on this.
Take further advice if you are unclear about the position
BUYING EXTRA PENSION

• 
  Added years or Added Pension (mainly in the public sector schemes)
  
• 
  Additional Voluntary Contributions (AVCs)
  
• 
  Stakeholder or Personal Pension
  
• 
  Other forms of saving
  
• 
  Salary sacrifice arrangements
  
• 
  Tax limits on pension saving
  

The tax rules now allow you to put up to 100% of your salary in any one year into a pension arrangement. You couldn’t do that every year, of course, because it would not leave you with anything to live on. However, it would be possible if you had an inheritance or a windfall.
The main options to increase your pension are;

• 
  If you work in the public sector, for instance in the NHS, you can pay extra contributions over a period, or all at once as a lump sum, to buy added years. This is quite expensive, because it is valuable. You buy extra years or parts of years of service, which means an increased pension linked to your final salary, for yourself and your spouse, with full inflation-proofing. Some of the public sector schemes, such as the teachers’ scheme, no longer allow the purchase of added years but instead allow members to buy an additional amount of annual pension
  

• 
  In most private sector companies, you can’t do this. Instead, if you are a member of the occupational pension scheme, you can pay Additional Voluntary Contributions (AVCs) to increase your pension (public sector workers have this as an extra option as well). Most employers who have an occupational pension scheme will have arrangements for this. It will be a money purchase pension, probably run by an insurance company or building society. There used to be a restriction on what you could take as a lump sum, but these have been swept away and you may now be able to take up to 25% of the total fund in this way, provided the scheme rules have been adjusted to match.
  

• 
  Starting or adding to a personal/ stakeholder pension; There used to be restrictions on having a personal/ stakeholder pension at the same time as belonging to an occupational scheme, but these were swept away in April 2006.
  

Which of these possibilities is available to you, and how much you would be able to put into them, depends on your own employment situation and the rules of the scheme.

For instance, many occupational schemes still have a rule that you can only put up to 15% of your earnings in total, into the main pension scheme and AVCs, even though this is not a legal requirement any more. So if you could afford to put more than that into a pension, you might want to look as well at putting money into a personal or stakeholder pension.

More information; look at FSA Guide to Pensions 2; Reviewing your pensions

SALARY SACRIFICE
Some employers are using “salary sacrifice” arrangements to make contributions to pension schemes; the individual agrees to a pay cut, and in return the employer pays the money directly into the pension scheme. The idea is to reduce the tax and national insurance payments going to the Government. What happens is shown by the example below:

Wilfrid earns £297 a week. On each £1 he earns, above the tax and NI thresholds, he pays 11p National Insurance and 22p tax, a total of 33p. The employer pays 12.8p. He pays £18 into his pension scheme. If instead he takes a pay cut of £18 and the employer pays £18 directly into the pension scheme, his take home pay may go up a little (because he is paying less tax and NI) and the employer will save (£18 x 12.8% =) £2.30. So more money could go into his pension without it costing him or the employer more.

These arrangements are quite legal and can be good for everyone (except the Government). You need to read the small print, though, because

• 
  the reduced pay could affect other things, like means tested benefits and redundancy pay; and
  
• 
  some employers try to keep part of the savings for themselves, rather put it all into the pension
  

Tax and your pension

You get tax relief on your pension contributions (that is, you pay less tax because you are making the contributions). Both occupational and personal/ stakeholder pensions get tax relief, but it works in different ways:

• 
  if you are contributing to an occupational scheme, the money is deducted from your gross pay before your PAYE income tax is worked out.
  

?

For example, Mary is earning £300 a week, and paying 5% contribution to her pension scheme. How much will be deducted from her pay, and how will her PAYE be worked out? How much tax will she save? Mary is earning £300 a week, and paying 5% contribution to her pension scheme. How much will be deducted from her pay? 5% of £300 is £15 Her PAYE will be worked out as if she is only earning £285 Her tax rate is 22%, so she’ll be saving 22% of £15 = £3.30

• 
  if you are paying into a personal or stakeholder pension, the money comes out of your net (take-home) pay. The pension provider then reclaims tax at 22% from HM Revenue and Customs (even for people who are not taxpayers at all, or who are only paying tax at the 10% rate).
  

?

If Matthew wanted to pay £15 a week into a personal pension, how much would he need to pay out of his take-home pay? What would the insurance company reclaim? Matthew wants to pay £15 a week into a personal pension He’s also on the 22% tax rate, so he needs to pay 78% of that (100 minus 22) out of his take-home pay. 78% of £15 is £11.70 The insurance company would reclaim the other 22%, £3.30

People paying tax at the higher rate (40%) get tax relief at that rate. With an occupational pension it is automatic, but with a personal pension they have to claim it on their tax return.

TAX RULES SINCE APRIL 2006

• 
  Tax relief on contributions up to 100% of your UK taxable earnings
  
• 
  If no earnings, tax relief on contributions up to £3,600 each year
  
• 
  Tax penalties on pension growth by more than £225,000 in year (“Annual Allowance”)
  
• 
  Tax penalties if total pension savings worth more than £1.6m (“Lifetime Allowance”)
  

You are entitled to tax relief on pension contributions of up to £3,600 a year or 100 per cent of earnings, whichever is higher.

There is a lifetime allowance (LTA) for the amount of pension saving that gets tax relief, alongside an annual allowance for the amount the pension can grow each year. You can pay into whatever sort of pensions you like, and as many pensions at the same time as you like, so long as you’re willing to pay the tax penalties if you go above the allowances. The LTA is currently £1.6m per person (2007-2008), going up to £1.8m in stages by 2010-11. The annual allowance is £225,000 a year in 2007-2008, going up to £255,000 by 2010-11.

When can the pension be paid?

The pension can only be paid on or after the ‘normal minimum pension age’ (NMPA). This is 50 before 6 April 2010, but 55 after that date. This age limit does not apply in the case of ill-health retirement. There are some exceptions to the new age limit of 55 for employees who had a contractual right to a pension from age 50. You may be allowed to draw part of your pension while still working for the same employer, provided the scheme’s own rules allow this.

Lump-sum payments

Generally, the maximum tax-free lump sum available at retirement is 25% of the total value of the pension. In any case, it cannot be more than 25% of the individual’s available Lifetime Allowance. Depending on the scheme rules, you may be able to take this lump sum from your main pension scheme, or your Additional Voluntary Contribution arrangement, or any other pension you have, so long as you do not go above the overall limit.

Activity: Recommendations from the Course

Aim
To sum up

the lessons of the course;

any further activities that you are going to undertake, or think others should undertake, as a result of it
Activity

Working individually, make a list of actions you think you or someone else should take as a result of this course. We’ll then ask each person to share the main points with the rest of the group.

Action point	Who should do it

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