EACH week The Scotsman gives you a top ten guide to pertinent financial issues. This week's Budget contained a raft of announcements affecting retirement income. Turcan Connell's director of financial planning and Ian McGowan, director of tax services, share their tips on boosting your pension.
1 RACK YOUR BRAINS Make sure that you claim all the pensions to which you are entitled. Many people have old pensions that they might have forgotten about or they might have simply lost touch with the company or provider because they have changed address or because the company or provider has changed its identity. An independent financial adviser (IFA) will be able to help you find out where your pension is now, or you can use the government's Pension Tracing Service (0845 600 2537 or online at www.thepensionservice.gov.uk)
2 CONSIDER ALL THE OPTIONS Retirement income planning is extremely complex and if you buy an annuity this is usually a final decision that cannot be reversed. But you can now draw an income from your pension in several different ways. An IFA can talk you through all of the options and help you decide which is the most appropriate for your fund. You might even be able to draw the whole pot out at once if your fund is less than 17,500.
3 CONSOLIDATE AND SHOP AROUND Whether you are buying an annuity or thinking of another way of providing retirement income, you will have a lot more buying power if you consolidate all of your arrangements. You are entitled to transfer your fund and shop around for your annuity, using the "open market option". Although most life companies will not accept an open market option for funds below 5,000, shopping around for a good deal is an easy way of getting more income.
4 READ THE SMALL PRINT Some personal pension arrangements will have guaranteed annuities written into the contract, guaranteeing a minimum amount or rate at retirement age, and you may have an entitlement of which you are unaware. These guarantees can be lost if you do not take the option on a specific date with some life companies, so do make sure that you are aware of your entitlements. An IFA will be able to interpret the documentation for you if you are unsure.
5 MAKE THE BEST OF A RAW DEAL If you are being made redundant and intend to retire, redundancy payments above 30,000 are subject to income tax in the same way as earnings. However, as part of the redundancy process it is usually possible for employees to give up part or all of the taxable redundancy in return for the employer making an equal contribution to the employee's pension scheme, providing a very tax efficient boost to the pension pot.
6 CONSIDER YOUR CONTRIBUTIONS Those not in paid employment but aged under 75 can make annual pension contributions under the stakeholder rules. Contributions of up to 3,600 with the benefit of tax relief at the basic rate of 20 per cent can be made each tax year, so a contribution of 2,880 will "gross up" to 3,600 in the pension fund.
You can contribute up to 100 per cent of your earnings into a pension and get tax relief on the full amount. This is particularly useful if you are paying higher rate tax on a slice of your earnings and you want to top up your pensions from other areas. However, as announced in the Budget, this will be curbed from April 2011 for those whose annual income is more than 150,000.
7 BOOST YOUR STATE PENSION You can enhance your basic state pension by buying up to six years worth of additional National Insurance Contributions (NICs). This can be done by paying the Voluntary Class 3 contributions for up to six years back to 1975. Although the cost of the Class 3 contribution has increased from 8.10 a week to 12.05, buying back years of contributions could add significantly to your final entitlement.
As of next year, anyone reaching retirement age after 5 April, 2010, will only need 30 years of NICs to qualify for the basic state pension, whereas a man or a woman reaching retirement age before then will need respectively 44 or 39 years of contributions.
8 DON'T PAY TOO MUCH TAX When retired make sure you reduce your income tax liability on your retirement income in every possible way. For example, if you are 65 or over with taxable income below 22,900, you may be entitled to claim increased personal tax allowances to reduce the amount of income tax payable. Married couples may be able to improve their overall position by "equalising" ownership of income bearing assets to bring each of them within the income limit for increased tax allowances.
9 MAKE YOUR SAVINGS WORK Make sure that your bank does not deduct tax at source from any savings interest that you earn by completing the simple R85 form, available from your bank. Also take full advantage of individual savings accounts (Isas) to enjoy tax-free income on funds held in the account.
As announced in the Budget, from April 2010 you will be able to invest up to 10,200 in an equity based Isa or up to 5,100 in a cash-only Isa, although those aged 50 or over can take advantage of the change immediately.
10 CLAIM ALL YOUR BENEFITS If, for example, you need assistance with personal care, find out if you're entitled to Disability Living Allowance if you are under 65 or Attendance Allowance if you are 65 or over. You can check entitlements with the Department for Work and Pensions on its website at www.dwp.gov.uk or by contacting your local Jobcentre Plus. Also check with your local council if you are entitled to housing benefit or a reduction in your council tax bill.