This post was written as part of the M-Network’s Money Matters for All Ages project. See the bottom of this article for the full list of participants and links to their articles.
If you’re anything like me, no matter how much you love your job, you don’t want to keep working there until you drop dead. Retirement, then, is the destination of choice for a lot of us. But, what might we expect to happen financially at retirement?
If you’ve been paying National Insurance contributions for most of your working life, you will have built up entitlement to a state pension. There are two sets of rules, one set for those claiming state pensions before 6th April 2010, and one for those claiming on or after that date – this handy calculator can tell you your state retirement age. For more information, visit The Pension Service website and for detailed free advice, contact the Citizens Advice Bureau.
retiring before 2010
You need to have worked and paid NI for between 39 and 44 years – depending on your age, and gender – to receive a full state pension, which is currently £87.30 a week. To receive any you need to have paid NI for 10 or 11 years. You may also be entitled to additional state pension (which used to be known as SERPS) and graduated retirement benefit. You can get a state pension forecast to find out what you are likely to receive.
retiring after 2010
You need to have worked and paid NI for 30 years to receive a full state pension. If you have worked for at least 1 year, you will receive something. Similarly to those retiring earlier, you may also be entitled to additional state pension.
NI credits and using a partner’s record
Each autumn, HMRC notifies people who have a shortfall in their NI contributions, there are a few different ways of making these up.
If you haven’t paid NI for enough years, you may be able to claim home responsibilities protection or credits for years when you were caring for a child or disabled person, claiming certain benefits, on an approved training course, or doing jury service.
In addition if it’s within the last 6 years that you didn’t pay NI you can make voluntary contributions at a rate of £7.80 (in 2007-08) for each week you want to make up – so for a whole year that’s £405.60 to buy an additional years credit.
Finally, if you still don’t have enough contributions, you may be able to make a claim using your partner’s contribution record. If successful you would currently get a pension of £52.30 if married, or £87. 30 if you were the surviving partner.
minimum income guarantee
If you have a low income and you are over the age of 60, this can be supplemented by the pension credit, which you can claim if:
- you’re single and your weekly income is below £119.05
- you have a partner or civil partner and your joint weekly income is below £181.70
This will top up your income to those levels. It also means that if you are currently projected to have an income in retirement below these levels, it may not be worthwhile contributing to pension schemes (ISAs may be a different matter). If this is your situation you can get advice from the Citizens Advice Bureau.
final salary pensions
Final salary pensions are employer based schemes which give you an income in retirement based on your salary when you retire, and the number of years you have worked for the company.
The exact rules vary from company to company, and you should contact your pension trustees for the details of your scheme – at least one third of the trustees must be members of the scheme. If asked the trustees must send you an annual benefits statement telling you how much you are likely to receive, the transfer value of the fund to see what you could transfer elsewhere, and the annual report and triennial actuarial valuation. Trustees have 2-3 months to provide this information.
In a typical scheme, for each year you work for the company, you will gain a retirement income of 1/60th of your average final salary. There are usually limits on when you may retire, and some provision for early retirement with reduced payments. For more information, contact the Pensions Advisory Service.
private pensions and money purchase pensions
Private pensions and money purchase pensions are treated exactly the same way on retirement (The pre-1988 Retirement Annuity Contracts are also treated the same way). For each scheme that you are in you may take up to 25% of the value tax-free and either buy an annuity with the remainder, or put it into income drawdown.
buying an annuity
An annuity is a contract with an insurance fund, whereby you give them a lump sum and they provide you with an income for life.
For each pension fund that you have, the process of buying an annuity - called benefits crystallisation – is an irrevocable decision, and so should not be taken lightly.
You do not have to buy an annuity from your pension provider, you can use your Open Market Option instead. For this reason, it may well be worth using the services of an Independent Financial Advisor to search the best annuity rates. Some plans have guaranteed annuity rates and these are often much higher than the market rates – the House of Lords ruling against Equitable Life mean that these rates must be maintained.
Annuity rates will depend upon the market, your age and health, and whether or not you want any survivor income. It is possible to buy either a level annuity or one with an annual increase. You should consider the effects of inflation on a level annuity, what you can buy with £30k at the age of 60 would need £60k at the age of 84, assuming a low 3% inflation rate.
This means that you take an income from your fund and leave the remainder invested. The maximum annual income you may take is 120% of the pension that could have been purchased with an annuity, calculated using the Government Actuary rates. You can only use this option whilst you are between 50 and 75. Once you reach 75 you have to either buy an annuity (which you may do at any time) or use an Alternatively Secured Pension – which is similar to income drawdown but with stricter income limits.
This option is only open to pension funds in a Self Invested Personal Pension (SIPPs), an Executive Pension Plan or a Small Self Administered Pension Scheme. Fortunately, most SIPPs allow you to transfer funds from other sorts of pension. The standard rule of thumb is that this is only worth doing if you have a pension fund of £100k or more – note that £100k would give you an income of something like £4k a year.
For more money matters for all ages, read the rest of the series:
- Introduction: Financial Strategies for Infants and Young Children @ My Dollar Plan
- Preschoolers: Teaching Preschoolers About Money @ I’ve Paid for This Twice Already
- Children and Pre-Teens: Personal Finance for Children and Pre-Teens @ Being Frugal
- College Age: College Money Matters @ Mrs. Micah
- The Twenties:
- The Thirties:
- The Forties: The Forty Year Old’s Wakeup Call @ Credit Withdrawal
- The Fifties:
- The Sixties: Easing into the Golden Years- the 60’s and Beyond @ Chance Favors the Prepared Mind
- Retirement: The 4% Retirement Rule @ Quest for Four Pillars and retirement in the UK @ plonkee money
- baby boomer with no pension: find out your current position
- expat finances – National Insurance and State Pensions
- working after retirement