Pensions

Published: 19 August 2013

Basically pensions are a form of saving for retirement, with certain tax advantages on contributions. When someone retires, or reaches a certain age, a pension scheme pays a regular income for life.

The sooner someone starts paying into a pension, the higher their income in retirement is likely to be. Experts say the general advice for people, even those approaching retirement, is that it is usually better to do something than nothing at all.

There are three main types of pension: state, personal and company.

State pension

If you're working, you usually build up the right to a basic State Pension and possibly an additional State Pension. The amount of basic State Pension you'll receive will depend on the amount of National Insurance contributions you've paid or are treated as having paid. The maximum you can get is £107.45 per week.

The Government also pays means-tested Pension Credit for those who have not accumulated enough in their pot.

There are plans to introduce a £140 a week universal state pension for new retirees in 2015. Entitlement will be based on a full 30-year National Insurance contribution record. Those who haven’t made 30 years of National Insurance contributions may get less – but this will be topped up with means-tested benefits such as pension credit. Currently, you can buy extra National Insurance years and it’s a good idea to contact the Future Pension Centre on 0845 3000 168 to confirm your position and what your options are.

However, most people would prefer their income to be more than £140 a week and many people invest in either a personal or company pension as well.

Personal pension

Personal pensions are available from banks, building societies and life insurance companies, who invest savings on your behalf. When someone retires, they can take a tax-free lump sum from their fund and use the rest to provide an income – usually in the form of a lifetime annuity (a payment made each year for the rest of your life).

Company pension

These are also called occupational pensions. They are set up by employers to provide pensions for their employees on retirement. If someone is able to join one, it’s worth considering as most people will be better off in retirement than if they had not joined.

Company pension schemes usually require a regular contribution straight from the employee’s pay packet based on a percentage of their salary. The payment is taken before they pay tax on their salary – hence they get tax relief on pension contributions.

Pensions and HIV

Generally health status does not present an issue when setting up a pension. However, both personal pensions and company schemes may offer a death-in-service benefit (a form of life insurance) within the scheme. Therefore the same underwriting issues apply as those encountered when applying for life insurance by itself. If necessary, ask if the employer can separate the death-in-service benefit from the pension itself.

Some people living with HIV might not see the point in having a pension if they think their life expectancy has been curtailed by HIV and that they won’t be able to access pension funds until age 50 at the earliest. But this is a misconception because improved treatment has led to increased longevity, and more and more people are able to benefit from pension planning and the tax relief this gives. Furthermore, even if their health were to deteriorate, then there are many circumstances when they may be able to access the benefits early.

Pensions or ISAs?

Some experts recommend ISAs as a more suitable savings vehicle than a pension for someone with HIV.

ISAs are savings accounts or investments where the interest or capital gains are paid tax-free. You can save up to £11,280 in an ISA each tax year, with a maximum of £5640 in a cash ISA (rising to £11,520 overall and £5760 for the cash element for the year 2013/14).

Depending on the terms of your ISA product, ISAs are more flexible than pensions when it comes to withdrawing money. An “easy access” cash ISA, for example, will allow unlimited withdrawals with no notice. This could be particularly helpful for someone with HIV who couldn’t work for a period of time and needed to access their savings.

If they had their money in a pension they wouldn’t be able to access it until the age of 55.

Even after age 55, you cannot get all the money out of your pension as a lump sum except in certain circumstances and subject to a tax charge. You can, however, take 25% of the fund out as tax-free cash when you reach that age.

If you’re approaching 55 and still in good health you might want to transfer some or all of the money in an ISA to a pension for the tax benefits. Put simply, for every £80 you pay into an individual pension the tax man will add basic rate tax relief of £20. If you pay above the basic rate of tax, you can also claim additional tax relief through your tax self-assessment form at the end of the tax year.

You can pay up to 100% of your income into a pension every year (capped at £50,000) so if you have saved money in an ISA it is possible to move substantial sums across in only a few years. For example, if you had £100,000 in an ISA, it would take you two years to transfer it to a pension.

Retiring early

If someone is ill and they have a personal pension, they can apply to take early retirement in some circumstances. In this situation, they would take out the fund as it stands (together with any tax-free cash they would be entitled to take). They will then be able to apply to an insurance company for an ‘impaired life annuity’. It essentially means that they should get a greatly enhanced pension income, at a younger age, as a result of their diagnosis.

If someone is entitled to an occupational scheme and have had to stop work due to ill health, they are entitled to apply to the trustees of the scheme for early retirement on grounds of ill health. In this situation the scheme will work out what they would have been entitled to, had they been able to work until retirement age, and pay out that amount straight away, annually.

Some local authority or government pension schemes will enhance an employee’s service if they retire early due to ill health and calculate their pension using additional years of service. This can make a significant difference to the amount of money received each year.

Equity release

Another option to retirees who own a property is equity release. Equity release plans allow homeowners to release tax-free cash from their homes to boost their finances in retirement. The two main types of equity release plans available are lifetime mortgages and home reversion plans. Both types of plan allow you to stay in your home.

Lifetime mortgages offer either an immediate lump sum or a series of payments, which are set against the borrower's home. When the borrower dies or goes into long-term care, the home is sold and the lender takes the value of the sum lent, plus the interest it has accrued.

Home reversion plans involve selling part, or all, of your home to an investment company (called a reversion company) which, in return, will give you a cash lump sum or an income for life and sometimes the option of both. When you die, if you have sold 100% of your home to the reversion company, the property will be sold and all of the proceeds will go to them. Otherwise, the value of any portion of your home that you have not sold will pass to your estate.

To qualify for equity release you need to be over 55 (both partners if a couple), own a home worth at least £70,000, and be living within the UK mainland or in Northern Ireland.

It’s essential to take independent professional advice before taking out equity release; it’s a big decision that affects both your home and the inheritance you leave to dependents.

Inherited wealth

Looking ahead, some people may be set to inherit their parents’ or partner’s property. Although it’s a difficult conversation to have, it’s important to talk to your family to find out how they intend to leave their estate when they die – and then factor this in when planning your own retirement. It may be that you have more options than you realise.

This content was checked for accuracy at the time it was written. It may have been superseded by more recent developments. NAM recommends checking whether this is the most current information when making decisions that may affect your health.
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This content was checked for accuracy at the time it was written. It may have been superseded by more recent developments. NAM recommends checking whether this is the most current information when making decisions that may affect your health.

NAM’s information is intended to support, rather than replace, consultation with a healthcare professional. Talk to your doctor or another member of your healthcare team for advice tailored to your situation.