Ask the expert: pensions guidance

As a follow up to his previous Q&A, Carl Lamb, Managing Director at Almary Green continues to talk pensions, and the new guidance guarantee.

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Will I get the new ‘single-tier’ pension?

I am aged 55 and I think I will have to wait until I’m 66 before I get my state pension.  I’ve worked for over 20 years, but was contracted out for about ten years.  Can you tell me please if I will automatically get the new single-tier pension when I retire?

Carl says…

You’re correct.  Your state pension age will be 66, but your entitlement to the full single-tier state pension is a more complicated matter.

Firstly, in order to qualify for a full state pension (as you will reach your state retirement age after April 2016 when the new regime comes in), you’ll need to have accumulated 35 qualifying years in your National Insurance record.  This doesn’t necessarily mean you must have worked for 35 years, as years spent claiming some benefits – child benefit, for example – will be counted too.  If you have less than the required number of years, your pension will be reduced proportionately.

When single tier starts, your pension entitlement will be assessed under both the new and the old rules.  In both cases a deduction will be made in respect of the years when you were contracted out.   The higher of these amounts will become your “Single-Tier Foundation Amount”.  It could be higher, lower or the same as the full single-tier pension.

If your foundation amount is higher than or the same as the single-tier, this is the pension you will get.  Any excess over the full single-tier amount will become a “protected payment” which you will receive but which will remain separately identifiable from the rest of your pension.

If your foundation amount is lower, this is the pension you will get.  However, you may have the opportunity to increase your entitlement if you continue to make NI contributions after 2016 (even if you already have 35 years of contributions).

I hardly need add that calculating the state pension entitlement for anyone whose working life straddles both regimes is always going to be complex, particularly if, as in your case, there have been periods where you have been contracted out.  The exact contracting out deduction is yet to be announced, so it’s not possible to give indicative figures yet.  The Government’s website www.gov.uk/calculate-state-pension is a good starting point.  If you need a more exact idea of your entitlement, a financial adviser can work through your NI record and give you a more detailed picture.

Can I use my pension funds to start a business?

I’m aged 42 and have been employed for about 20 years, making regular contributions into a pension scheme and have built up nearly £200,000 in my fund.  I’m now in the process of setting up my own business and have heard I might be able to use some of my fund to buy business premises.  Can you explain how I do that, please?

Carl says…

Using your pension savings to buy your business premises is something that is possible if you transfer some or all of your pension into a “self-invested” arrangement.  A Self Invested Personal Pension (SIPP) is still subject to pension rules – i.e. you cannot access it personally until you reach the minimum retirement age – but it does allow you to make your own choices about how the fund is invested.  One of the allowable investments is commercial property, so once funds have been transferred to the new scheme, they can be used to buy your premises.  It’s also possible for the SIPP to take out a mortgage to cover any shortfall on the property price, although this is limited to 50% of the value of the pension fund (for example, if you put £100,000 into a SIPP, you can borrow a further £50,000).  You, as a business, would then pay a fair market rent to the pension fund, which can then be invested in other selected investment vehicles.  It’s worth noting that residential property isn’t allowed in a SIPP.

Self-invested pension schemes are designed for those who want to be pro-active about their pension savings and who have some understanding of the investment market and its associated risks.  The charges involved make it generally only suitable for those with larger pension funds.  It’s certainly not something we would recommend doing without getting advice, and we would rarely advise a client to put all of his or her pension savings into any one single investment.   The downside of a property investment is that it isn’t “liquid” – i.e. can’t easily be turned into cash when needed, so you need to think carefully about including investments that can be turned into retirement income or capital when you do want to retire.

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About the author

Carl Lamb Founder and Managing Director of Almary Green Investments Ltd, Carl is passionate about delivering a quality service to clients.

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