Q. I have heard that only half of people will qualify for the full state pension when they switch to the single tier pension in 2016. How is this?
A. Currently people reaching state retirement age receive a pension made up of two elements. First there is the basic old age pension. Then there is the State Second Pension, which used to be called SERPS (State Earnings Related Pension Scheme). Many private schemes opted out of the second tier scheme, in return for lower NI contributions for both the employer and employee. Members of these schemes paid lower NI contributions, but got benefits from their pension scheme instead of SERPS or S2P. Under the Single Tier pension from April 2016, there will be one single level of state pension, with no contracting out.
In time, most people will qualify for the full higher “single tier” level of pension, expected to be around £155 per week compared with £113.10 per week for the current basic old age pension. When the single tier pension is first introduced, a deduction will be made from the full amount to account for years contracted out of the old second tier. For those with time left before retirement, it will be possible to build up further credits each year, back up to the full amount. However for those reaching retirement in the meantime, this will not be possible. However these people will not receive less than they would under the current system, and they will also have their private scheme which will usually offer more than the difference. It is important, however, that anyone taking advantage of the new pension flexibility to cash in their pension fund after April, is aware of the impact it will have on their income in later life, and is aware of the income they will have from all sources, and that it is sufficient for their needs. For individual advice, I recommend you consult a Chartered Financial Planner.
Q. I have built up a considerable amount of money in my pension plan and now wish to use it to invest in property. It seems unclear to me what I can buy and what I can’t buy, can you clarify please?
A. This column probably isn’t big enough to do the answer to this question justice, but in general terms any property you purchase must be commercial property and not residential property, even if you are going to use the residential property for commercial reasons, e.g. a buy to let property. Back in 2006 it was announced by the government that residential property would be allowed in pensions, but a fairly large “U Turn” occurred and the decision was rapidly reversed. It is possible to have some residential element in the purchase provided the majority of the purchase is for the commercial portion, for example a retail outlet on a high street with a flat above it. However in these cases, you, the pension owner, would not be allowed to live in the flat even if it was empty.
The rules are further complicated, so if you are considering this, I recommend you obtain advice from an Independent Financial Adviser specialising in pensions.
Q. I am 26 and a teacher. I still live at home and so I have surplus income to save. Am I best saving into a Building Society or something else?
A. It really depends what you are saving for and for how long. For example you may be saving for a deposit on a house which would be regarded as short term, so a Building Society cash New ISA (NISA) may be the best option, which provides capital security. If you are planning to save for longer then you could consider a Stocks & Shares NISA. The maximum that can now be saved into a NISA is £15,000 per annum and is fully interchangeable between Stocks & Shares and Cash. It may be a bit of both. These schemes are entirely flexible as contributions can be varied at any time so there is usually no long tem commitment to maintaining regular contributions. Your attitude to investment risk is important and would need to be taken into account before deciding which may be appropriate for you. If it is short term savings that is suitable then looking for a competitive rate on line (sticking to a well known provider) would probably be your best option, however if you wish to consider longer term investing and taking risk, I would suggest you talk to an Independent Financial Adviser who will be able to steer you in the right direction.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
