312 lines
9.5 KiB
Plaintext
Executable File
312 lines
9.5 KiB
Plaintext
Executable File
finance
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personalfinance
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pensions
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8085653
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-----
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# State pension: Q&A
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## Plans to simplify the state pension to £140 raises some questions.
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2:29PM BST 25 Oct 2010
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[Comments][1]
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By Emma Simon
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News that the Coalition Government plans to simplify the state pension, paying
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one universal payment have been welcomed by many. This would replace the
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current hotchpotch of basic state pension, earnings-related "top-up" payments,
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plus additional means-tested benefits. This should make pension easier to
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understand, encourage private savings, and raise living standards for the
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thousands who don't claim the complex means-tested payments to which they are
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entitled.
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Details are scarce, but it has been suggested this payment could be £140 a
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week; significantly more than the £97 paid out as a basic pension at present.
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Many experts are now urging taxpayers to contract out of the state scheme. The
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following questions and answers provide more information about this issue:
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**What is S2P or Serps?**
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## Related Articles
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* [Are you ready for the new retirement?][2]
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25 Oct 2010
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* [Fixed 140 a week for all pensioners][3]
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25 Oct 2010
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* [Women to benefit most from pensions shake-up][4]
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26 Oct 2010
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The State Second Pension (S2P) replaced Serps (State earnings related pension
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scheme) in April 2002. These pensions are paid on top of the basic state
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pension. Those earning more than £5,720 a year qualify for this top-up
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pension, which is funded through their National Insurance contributions.
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However, those who are self-employed do not qualify at all, regardless of
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earnings.
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**What does "contracting-out" mean?**
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Since 1988 pension savers have been encouraged to quit the state system. Those
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who contract-out receive a NI rebate which is paid directly into a personal or
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occupational pension. When this was first introduced, the NI rebates were
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inflated to encourage more people to make private provision, rather than rely
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on the state. It was hoped that these rebates, combined with investment
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returns would produce a bigger pension pot than the payments guaranteed
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through Serps or S2P. Those who contract-out still receive their basic state
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pension.
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**But I'm sure I was advised to contract-back in?**
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The value of this rebate declined after the introduction of S2P so it was
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broadly "neutral" in actuarial terms. In other words, if investment returns
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were as predicted you would end up with the same pension regardless of whether
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you contracted in or out. But of course, actuarial predictions are rarely
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accurate. After a decade of poor investment returns, declining annuity rates
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and often high-charging pension plans the received wisdom was that these
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contracted-out private pension plans would pay less than the payments
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guaranteed by the state. In 2005, the Financial Services Authority recommended
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investors who had contracted out of the state scheme contract back in, and
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some pension providers automatically switched investors back into S2P.
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**Why has the picture changed again?**
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If the Government does launch a higher-paying universal pension, there seems
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little benefit in making NI contributions towards the S2P: you may receive the
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same regardless of whether you are contracted-in or out. Therefore it may be
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advantageous to contract out, collect you rebate for this year and next, and
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use this to boost your private pension which can then be paid on top. From
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2012 individuals will not be able to contract out of this top-up scheme,
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although final-salary schemes will be able to contract out.
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**Is there any risk in doing this?**
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We have yet to see the consultation paper, let alone the final rules. There is
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a chance that the Government could lower the value of this universal pension
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to those that have contracted out. This may seem "fairer" but would not be as
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simple to administer, which appears the driving force behind these reforms.
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**What is this rebate worth?**
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The size of this rebate depends on your age and earnings. For a 43-year old
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earning over £40,000 it is worth £2,300 this year. The value of this rebate is
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capped though, so once you earnings exceed £40,810 you do not get a larger
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rebate, nor for that matter a high S2P payment on retirement.
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**When will these changes happen?**
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This is still unclear. The Government has said these are "long term reforms"
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that will take time to introduce. If they are implemented gradually there is
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less chance that those who remain contracted in will be penalised, in
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comparison to those who have collected this NI rebate for most of their
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working life and may now collect a higher overall pension as a result.
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**How many people are contracted out of S2P?**
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Around 7m people who are members of final salary schemes which are
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automatically contracted out. The rebate is used to boost the occupation
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pension, people do not have their own individual funds. In addition an
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estimated 2.5m are contracted out into private pension schemes.
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**I contracted back into the state scheme. What can I do now?**
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This isn't a once in a lifetime decision; each tax year people have the option
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of contracting back in, or contracting out. If you are currently in the state
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scheme and want to move out, then you can apply now, and get your NI rebate
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for this tax year (April 2010/11). Contact your pension provider to initiate
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this change. Tom McPhail of Hargreaves Lansdown says: "Depending upon the
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terms of this review this could be a last bonanza for contracting out. For the
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next two years investors can still receive rebates into their Sipps or
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personal pensions. If they are ultimately going to receive a universal state
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pension then these rebates could effectively be 'free money'."
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**Who should stay in the state scheme?**
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If you are close to retirement it may not make sense to contract out. This new
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simplified pension may not come into effect before they retire. Over a shorter
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time frame there is also a far greater risk that pension investments will
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underperform.
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**[Get retirement planning and pensions advice][5] from [Telegraph Retirement
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Service ][6]**[![][7]][5]
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[X][8] Share & bookmark
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[What are these?][9]
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* Share: [Share][8] [ ][10] [ ][11]
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[Tweet][12]
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http://www.telegraph.co.uk/finance/personalfinance/pensions/8085653/State-
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pension-QandA.html
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Telegraph
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## [Pensions][13]
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* ### [News »][14]
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* ### [UK News »][15]
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* ### [Finance »][16]
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* ### [Personal Finance »][17]
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[![pensions-calculator][18]][19]
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### [Pensions Calculator][19]
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[![find an independent financial advisor][20]][21]
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### [Find an Independent financial adviser][21]
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Related Partners
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* [Telegraph Retirement Services][22]
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In finance
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[![Cartoon of couple planning pension][23] ][24]
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### [Clock ticks down on pension dreams][24]
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[![New state pension to be unveiled][25] ][26]
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### [State pension: Q&A][26]
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[![Composite of gas ring, shower, electricity meter and woman on phone - Five
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money-saving tips for pensioners][27] ][28]
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### [Five money-saving tips for pensioners][28]
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[![equity-release-guide][29]][30]
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### [The Daily Telegraph Guide to Equity Release][30]
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[X][8] Share & bookmark
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Delicious Facebook Google Messenger Reddit Twitter
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Digg Fark LinkedIn Google Buzz StumbleUpon Y! Buzz
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[What are these?][9]
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Share:
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* [ ][8]
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* [ ][10]
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* [ ][11]
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* [Tweet][12]
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* Advertisement
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![][31]
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telegraphuk
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Please enable JavaScript to view the [comments powered by Disqus.][32] [blog
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comments powered by Disqus][33]
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[![Retirement services][34]][35]
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Advertisement
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[TELEGRAPH RETIREMENT SERVICES »][36]
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### [Thinking about retirement?][13]
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**[1. Pensions Calculator][37]**
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> <b><a target="_blank" href="http:/telegraph.aegondirect.co.uk/retirement-
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income/retirement-calculators/pension-
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calculator?utm_source=tmg&utm_medium=box2&utm_campaign=retirement">2[.
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Retirement options explained][38]**
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> <b><a target="_blank" href="http:/telegraph.aegondirect.co.uk/retirement-
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options?utm_source=tmg&utm_medium=box4&utm_campaign=retirement">3[. How much
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income do you need?][39]**
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> <b><a target="_blank" href="http:/telegraph.aegondirect.co.uk/retirement-
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income?utm_source=tmg&utm_medium=box5&utm_campaign=retirement">4[. What is an
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annuity?][40]**
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