New State Pensioner Problems!

Dunwunderin

Hi,
In a few weeks time I hope to draw my State pension at the age of 65.

Unfortunately, the Pension service states that I will be 2 qualifying years short to get maximum State Pension but I can top this up with NI contributions at a cost of £660. This must be paid by April 2009 to qualify!

My options appear to be:

1. Do nothing and receive a slighty reduced pension and collect full pension when target is reduced in 2010.

2. Wait to 2009 and pay at last minute to receive full pension. Is pension back dated to my retirement date?

Is a top up cost effective? I am in reasonably good health and a basic rate tax-payer.

On a slightly morbid note, wife and I have stand alone state pensions. What happens when one dies? Does the surviving spouse inherit the others pension rights as per many occupational pension schemes?

EdInvestor

Dunwunderin wrote:

My options appear to be:

1. Do nothing and receive a slighty reduced pension and collect full pension when target is reduced in 2010.

Nope.The reduced amount only applies to people who become eligible to retire after 2010.

2. Wait to 2009 and pay at last minute to receive full pension. Is pension back dated to my retirement date?

Why not ask?Why not pay now and get the pension immediately?

Wife and I have stand alone state pensions. What happens when one dies? Does the surviving spouse inherit the others pension rights as per many occupational pension schemes?

If your wife's pension is below 60% of yours, hers will be made up to that level when you retire.If it's higher there is no effect.Otherwise not. Widows can inherit 50% of husband's SERPS/S2p pensions.

It all changes from 2010 when the gender discrimination is dropped.

jamesd

How much is the difference in pension payment?

It seems very likely that your best course is to pay the extra contributions, unless you have some reason to believe that you will die younger than usual.

Dunwunderin

The nett payment difference after basic rate tax deduction is approx £3/week
So I need to survive to 69 to recover my additional outlay.Perhaps a bit less as the state pension will rise each year by RPI.

jamesd

That makes paying a clear best option for you.

I'mcomingbackasaman

I've just been threading through this thread and think it's disgusting that workers are taxed twice on their salaries! Can someone explain to me why this is.

I pay into a company pension at the pricely sum of £70 per month out of my earnings, so when I hopefully reach retirement age the money grabbing government tax my pension??

I wouldn't bother paying the extra if I was you by the time they've taxed it, it won't be worth paying that money for.

jem16

I'mcomingbackasaman wrote:

I've just been threading through this thread and think it's disgusting that workers are taxed twice on their salaries! Can someone explain to me why this is.

I pay into a company pension at the pricely sum of £70 per month out of my earnings, so when I hopefully reach retirement age the money grabbing government tax my pension??

I wouldn't bother paying the extra if I was you by the time they've taxed it, it won't be worth paying that money for.

You're not taxed twice.

Pension payments get 22% tax relief. So for the £70 you pay in to your pension, the pension company applies for tax relief making it up to £89.74. It is taxed when you draw your pension unless of course you are still under the personal tax free allowance.

I'mcomingbackasaman

jem16 wrote:

You're not taxed twice.

Pension payments get 22% tax relief. So for the £70 you pay in to your pension, the pension company applies for tax relief making it up to £89.74. It is taxed when you draw your pension unless of course you are still under the personal tax free allowance.

Under the personal tax free allowance - I wish :rotfl:

I was under the impression your taxed on your gross earnings, then your pension contribution is taken out, etc. that's where I've got the idea that your taxed twice.

EdInvestor

LOL:D Most people get it wrong the other way round - they know about the upfront tax relief, but don't know they get taxed when they draw the pension.

Tax on pensions is, in the main, just deferred.

exil

I'mcomingbackasaman wrote:

Under the personal tax free allowance - I wish :rotfl:

I was under the impression your taxed on your gross earnings, then your pension contribution is taken out, etc. that's where I've got the idea that your taxed twice.

Well - now you know. And do you REALLY wish your income was so low you wouldn't pay tax??????

jamesd

We do quite often suggest that people arrange things so that their taxable income is so low that they won't pay tax on it.

That means using ISAs or other methods instead of only pensions, as well as evening out the pension between the two members of a couple. Two people, 7550 each a year in 2007/8 and you get zero income tax on 15100 a year in income. Not bad at all. Add in the 10% band and that's another 4300 where total tax is a relatively low 430, leaving you with 18970 after tax. Then age allowance reduction starts at 20900 so you have to be careful to dodge that or pay 33% effective tax instead of 22%.

Get it wrong and have all the income for one person and you pay much more tax, essentially voluntarily unless you're single. It's one area where personal pensions are much better than job pensions, where the job decides the person who gets the income.

On the topic of this thread, taking the pension as early as possible reduces the pension and taxable income and the money can be put in an ISA if it isn't needed, changing it to a source of tax free income.