UK Pensions: how does it work?

State Pension Plan

Basic State Pension

Basic state pensions apply to anyone who has enough qualifying years from their National Insurance contributions.

Benefits are based on how much has been paid into the National Insurance contributions and several other factors.

Factors:
• How many qualifying years you have built up to date
• The number of years before you reach State Pension age
• Whether you may be affected by changes to the State Pension

In 2010-11, the maximum basic State Pension is 97.65 pounds a week for each person.

Claiming your benefits is fairly automatic as the Pension Service should automatically send a State Pension Information Booklet about four months before you reach State Pension age. If you haven't received the booklet within three months, call the State Pension claim line at 0800 731 7898 from 8:00 to 20:00 (Welsh information 0800 731 7936).

Documents needed to file claim:
• National Insurance number
• Current address and postcode, plus your last two addresses
• Tax reference number
• If you're married or in a civil partnership, bring the husband's/wife's/partner's details (this includes their National Insurance number and the date of your marriage or civil partnership)
• If you're divorced or widowed or your civil partnership has dissolved or you're a surviving civil partner, bring documentation of dates including details of any social security benefits or entitlements that you or your husband, wife or civil partner are getting or waiting to hear about
• Address of any employer you've worked for in the last two years, and the dates that you worked for them
• If you've ever lived or worked outside the UK, bring your social security number and relevant dates

Additional State Pension

You can build up additional funds if you are below State Pension age and you are:

• Employed and earning over 5,044 pounds (from any one job)
• Looking after children under 12 years old and claiming child benefit
• Caring for a sick or disabled person for more than 20 hours a week and claiming Carer's Credit
• A registered foster carer and claiming Carer's Credit
• Receiving certain other benefits due to illness or disability

Age of Eligibility

Currently, the State Pension age for men is 65 and 60 for women.

If you put off claiming State Pension, you can earn:

Extra State Pension (If you put off claiming your State Pension for at least five weeks you can earn an increase to your State Pension of 1 per cent for every five weeks you put off claiming.)
or a One-off taxable lump sum payment (If you put off claiming your State Pension continuously for at least 12 months, you can choose to receive a lump sum payment and your State Pension paid at the normal rate).
You can do this by working past the State Pension age, or by stop claiming benefits after having claimed it for a period.

Company Pension Plan

Company pension plans usually require you to make a regular contribution based on a percentage of your salary. You receive tax relief on the money paid into the pension.

For example:

• Anna puts 40 pounds a month into her company pension scheme
• Anna's pension contribution reduces her taxable pay so she pays less tax on her total pay
• Anna's employer puts in another 40 pounds every month
• Total = 80 pounds a month to Anna's pension

Claiming Your Pension

When and how you can claim your pension depends on the company and will be outlined in the scheme's rules. However, a forecast of how much you will receive when you retire, estimates of any survivor's benefits that may become payable, and how much you will get if you have to retire early due to ill health should be readily available.

Personal Pension Plan

Anyone can set up a personal pension plan. Private pensions are available from banks, building societies and life insurance companies. Once it is established, you can control how much money you pay into it.

A personal plan does not effect basic State Pension, but may reduce the amount of additional State Pension you can build. However, you will be able to receive tax relief on the amount you put in. Up to age 75, tax relief on contributions of up to 100 per cent of your earnings each year is offered.
For example, for every 80 pounds you pay into a personal pension, the Government adds an extra 20 pounds into the fund. This is subject to an upper "annual allowance" of 255,000 pounds for the 2010-11 tax year. Savings above the annual allowance will be subject to a tax charge. Also, for those making over 150,000 pounds annually, tax relief will be reduced.

Benefits

A yearly forecast informs investors of the status of the fund. It also lets you know the expected pay-out if contributions remain the same. The final value will be determined by how much has been paid in and how well the fund has performed. Charges of running the fund will also be deducted.

Upon retiring, you can take up to 25 percent of the value of your total personal pension savings as a tax-free lump sum. You then have two options:
1. Use the remaining fund to buy an annuity (a regular income payable for life) from a life insurance company
2. Take an income (taxed at your normal Income Tax rate) from the remainder of your fund while it continues to be invested – as an "unsecured pension" up to age 75 or an "alternatively secured pension" once you reach age 75.

Age of Eligibility

The earliest age at which you can take your personal pension is 55. Some funds allow you to take your pension out before this point, but this is uncommon.

Stakeholder Pension

A type of personal pension, stakeholder pensions are similar to other money purchase pensions. The difference is that these pensions must meet a number of minimum standards. The standards include:

• Limit on annual management charges (Managers can charge fees of up to one and a half per cent of the pension fund each year for the first 10 years you hold the product, and thereafter up to one per cent)
• Flexibility: (1. you can switch to a different pension provider without the provider you leave charging you, 2. you can start contributions at 20 pounds, 3. payment can be every week, month or at less regular intervals, you can stop, re-start or change your contributions without fees)
• Security: (Plans are run by trustees or by an authorized stakeholder manager)
• Contribution levels and tax relief: (You can contribute as much as you want. You get tax relief on contributions of up to 100 per cent of your earnings each year).

Expat

Expats can claim their State Pension if living outside the UK. However, you'll only receive the yearly index-linked increases if living within the European Economic Area or Switzerland or in a country with which the UK has a social security agreement regarding state pensions.

Making Contributions while Abroad

If you're working abroad, you may be able to pay into the State Pension scheme of the country where you're working. This is easily arranged within EEA countries (European Union + Norway, Iceland, Liechtenstein and Switzerland). Depending on how long you work abroad, you can have your contributions credited to your UK State Pension or you could receive two pensions - one from the UK and one from the country where you lived and worked. This will be decided when you reach State Pension age, taking into account where you live.

Claiming from Abroad

If you move abroad before becoming eligible for State Pension, you should have updated your contact information upon leaving the country and the registration will come to the address on file.

The age from when it is possible to claim benefits depends on the country in charge of settling the pension (the different periods must be validated by each state where it has been contributed).

Each institution where you contributed will calculate the amount to be paid according to:
• its legislation (national pension)
• by adding together all working periods in all the state members, and calculating proportionally with the time spent in the state (Proportional or communitarian pension)

Each state that will calculate a pension on your behalf will do the payment.
The initial request is made in the country where you are resident at the time of the demand. This institution will be in charge of coordinating with the other countries. The payment of each country depends usually on the rules existing in each state.

If receiving benefits from the UK pension plan, the International Pension Centre usually makes payments directly into a bank in the country in which you live or a bank or building society in the UK. Payment will be made in the local currency at no charge.
If you reside in an ineligible country, State Pension is paid directly into any UK bank account or with a sterling cheque to your home address.

Paying Tax on State Pension

You may need to pay tax on your state pension if you are classed as a "non-UK resident" for tax purposes. If you spend part of your time in the UK and part abroad you're likely to be classed as a UK resident. If you live abroad permanently, you're likely to be classed as a non-UK resident.

Non-resident your tax position depends on whether you live in a country with a double taxation agreement with the UK. This means you will not have to pay UK tax on your State Pension, but it will be taxable in the country where you live. If you live in a country without a double taxation agreement, you'll have to pay UK tax and may be taxed again abroad.

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