Jan

25

retirement in the UK

Filed Under retirement 

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.

same beach, later

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?

state pension

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.

income drawdown

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:

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Comments

9 Responses to “retirement in the UK”

  1. CiaranFromChance on January 25th, 2008 2:11 pm

    Excellent information. I’ve often wondered about how the retirement system works in the UK (and Europe in general)and now I have a much better idea. I had to read it twice.

  2. Mrs. Micah on January 25th, 2008 4:25 pm

    I really don’t like the irrevocability of annuities. It’s a nice idea and I guess it means you have to do less work on figuring out when and how to withdraw the money, but I’d be worried about not getting a good deal or even losing my money.

  3. plonkee on January 25th, 2008 4:47 pm

    @Mrs. Micah:
    I don’t like them either, but they are almost compulsory here. That’s partly because we have a more generous welfare state, if you are without money, the government will fund you to a certain level - including nursing homes, housing benefits, and the minimum income guarantee.

    To stop people burning through all their money in retirement and relying on the state they strongly encourage buying annuities, and of course they are irrevocable, because that’s how annuities work.

  4. plonkee on January 25th, 2008 4:49 pm

    @Ciaran:
    I’m not sure on the specifics of other EU states, but I’d be surprised if they didn’t have similar state pension systems.

  5. RacerX on January 25th, 2008 5:39 pm

    Great set of articles!

    Interesting to see the different retirement systems in other countries.

  6. Rob Lewis on January 26th, 2008 2:26 pm

    Very informative article Plonkee. Pensions are something I sti struggle to get my head around, so this is a useful reference.

  7. plonkee on January 26th, 2008 2:35 pm

    @Rob:
    You won’t be surprised to know that I had to do quite a bit of research for this post. Even though I’m a long way from retirement, my parents aren’t so it’s helpful to have some ideas together.

  8. vh on January 27th, 2008 1:13 am

    In a lot of ways it seems more civilized than the sink-or-swim situation in the U.S.

    On the other hand, let’s say you’ve worked hard to accumulate wealth. If you convert your savings into annuities, you will have nothing to leave to your children. So if that were the case here, it would be hard, given the direction the U.S. economy is headed, to pass enough capital to the next generation to help keep them in the middle class.

    One of the neighbors here is a British citizen who married a doctor she met during WW II; she has retained her British citizenship even though she has lived here since shortly after the war. She’s pretty well to do, though she lives modestly. She has financed her grandchildren’s expensive private schools and presumably, if she lives long enough, will send them to college.

    She indicated that the British government would get pretty much everything she has when she dies, & so this is a way to pass wealth to her son, who also is a doctor. He can invest the funds he would have had to spend to put his kids in school (public schools are not what you’d call real viable around here), thereby effectively “inheriting” those amounts…in a roundabout way.

    Interesting.

  9. plonkee on January 27th, 2008 9:34 am

    @vh:
    It’s true that most annuity contracts don’t result in any money being left to be inherited once the beneficiary dies. This money doesn’t go to the government, it goes to the insurance company (and effectively funds other annuities).

    What you’re buying is insurance against the possibility that you outlive your cash - pooling the risk amongst all the people who have annuities with that insurance company. Which is a reasonable enough contract to enter into.

    The only difficulty that people have is that until recently annuities were compulsory for pension funds, so even if you don’t care about taking the risk, you were forced into buying an annuity.

    There are still lots of ways of leaving inheritance, even if you buy an annuity. In the UK, that will most commonly be property, but non-pension funds (including ISAs) are not subject to an annuity.

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