Cash Q&A: Act now to maximise benefits from your UK retirement pot

Q - I AM a female UK national aged 58 and have just been transferred to the UK by my employer, having worked overseas for 25 years. Our company policy is to retire at age 65, so I expect to be working for a further seven years. I understand that I will qualify for a minimal UK state pension at around the age of 63 (on which I will be liable to tax at 40 per cent). Is there anything I can do to improve my position?

SH, Dundee.

A - At present, the basic state pension is £102.15 but this requires you to have 30 qualifying years of National Insurance contributions (NICs). If you have just five qualifying years (ie: from now until age 63) then the pension you receive will be just £17.02 per week.

You should, therefore, look to maximise the number of qualifying years you have – for example you may have had UK employment prior to going abroad and you should ensure that this period is shown on your NICs record. Equally, you could look to make voluntary class 3 NICs for the tax years from the year ended 5 April, 2006 to now, which would give you additional qualifying years.

You can contribute by payment of a lump sum now for up to the past six years (in certain circumstances scope for more contributions may be available) and, provided you are in reasonable health, can represent an extremely good use of any spare funds you may have.

For example, a year’s contributions of £655.20 would secure you an additional indexed-linked annual pension of £177 and therefore you would benefit, provided you lived for at least four years after taking the state pension. By contrast, a lady of your age could only expect to be able to purchase an annuity of around £25 from an insurance company for the same capital sum. You can obtain a state pension forecast online or by completing form BR19 available at www.directgov.uk.

As you note, you will qualify for a state pension at around the age of 63 and as you will still be working your effective tax rate will be 40 per cent, slashing your net receipts. By deferring the pension until after you stop work, it may be that the effective tax rate would fall to 20 per cent.

The government currently encourages individuals to delay taking the state pension by providing an attractive incentive. For every year you defer taking the state pension, your pension is increased by 10.4 per cent, with an alternative of taking the original pension you were entitled to plus a taxable lump sum equal to the pension you would have received if you had claimed it at age 60, plus interest at 2 per cent above base rate.

From an investment perspective, maximising your state pension through increasing your qualifying years and deferring taking the pension could make good financial sense. The proviso is that you should be in reasonable health (particularly for additional contributions) with an expectation of living long enough to benefit overall.

• Glen Gilson is a partner and head of private client and financial services at HBJ Gateley.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article.