Money
Pensions
Pension and NI changes you need to know
In April 2010, three major changes could affect you. Act now – or you will lose the chance for ever, says Paul Lewis
DEPENDENT ADULTS
Men aged 65 or more with a dependent wife under 60 have just three months to claim an extra £57.05 a week. This Adult Dependency Increase (ADI) is paid with state retirement pension but it cannot be claimed after April 5, 2010. Alternatively, it can also be paid for a dependent adult who looks after the children of the person getting the pension. To claim the money the man must be getting his state retirement pension and put in a separate claim for the increase.
The increase cannot be claimed by a man over 65 who is deferring his state pension and all claims for ADI must be in writing and arrive at the Department for Work and Pensions by April 5, 2010.
If you claim an ADI before April 6, 2010 it can be backdated by up to three months. So you could get an initial payment of more than £700. It counts as his income and is taxable.
The increase for a wife will normally end when she reaches 60. At that time she can claim her own state pension or a category B pension based on her husband’s National Insurance contributions. Adult Dependency Increases are being phased out on April 5, 2020.
The increase is paid for an adult who is 'dependent' on the pensioner. So it is not paid for someone who has an income of their own above certain limits. The increase will not be paid if a dependent wife or adult works and earns more than £64.30 a week.
A personal or occupational pension counts as earnings. If they get any other state benefit up to £57.05 a week, that will be deducted from the amount paid. If the other benefit is more than that, nothing will be paid. If income falls, ADI will re-start.
ADI is not normally paid to a female pensioner with a dependent husband – but it can be if she claimed incapacity benefit immediately before pension age and that benefit included an addition for a dependent husband.
The Adult Dependency Increase is not paid to civil partners.
UNDER-55 PENSIONS
If you are aged between 50 and 54 and you want to draw your personal or occupational pension soon, then you have just three months to do it. On April 6, 2010, the age at which you can draw such pensions rises from 50 to 55.
Most people cannot think of retiring under 55. But drawing your pension and retiring are different things. And it can sometimes be advantageous to take your pension.
You can, for instance, take out a quarter of the fund tax-free. That does mean, of course, that a quarter of your pension fund will no longer be there to grow until you retire. But if you need the money now to pay off debts or a mortgage or for some other useful purpose it can be a good idea. You do not have to convert the rest of your fund into a pension. It can be left to grow while you take what is called an “unsecured pension” from it. That can be zero, leaving the rest of your fund invested for the future.
Another option is to take the tax-free lump sum and reinvest it in another pension. You can do that without penalties if it is no more than £17,500. The advantage is that if you earn at least as much as the lump sum in the tax year you take the money, your new pension will get a 25% boost from the Chancellor – more if you are a higher rate taxpayer (so £10,000 would become £12,500 in your new pension).
These choices may not be sensible for you. Be very wary of adverts that invite you to “release your pension” in your fifties; they are seldom good value. But if you want to use your lump sum early and you are between 50 and 54, then act before April 6, 2010 or you will have to wait until you turn 55.
CUT-RATE NI CONTRIBUTIONS
Men born between April 6, 1933 and October 23, 1939 and women born between April 6, 1938 and October 23, 1944 can buy extra National Insurance contributions for the six years 1996/97 to 2001/02 at a lower rate as long as they do so by April 6, 2010. Each of those six years can be bought for a special low price of between £309 and £351 per year.
From April 6, the cost of each year's back-payment will roughly double to well over £625 a year. So if you have a gap in your record for any of those years it is as well to find out about filling it now.
The people concerned are already over pension age and will know if they have a gap in their record because their basic state pension will be less than the full amount. Each year they make up will boost their state pension by either 2% or 3% – which is £98 or £148 a year. So the money paid out will be recouped within a very few years. However, it can be difficult to find out which years you can pay back. You cannot pay any year when you were over pension age. Nor can you pay any year when you were working and paid National Insurance contributions. Women who paid the married woman’s contribution at work are barred from paying extra contributions for a further two whole tax years after they stopped working.
FULL-RATE NI CONTRIBUTIONS
People who reach pension age on April 6, 2010 or later (that's men born April 6, 1945 or later and women born April 6, 1950 or later) will need to make only 30 years' contributions to get a full pension.
The Department for Work and Pensions estimates that reducing the years needed to get a full pension (from 44 for a man and 39 for a woman) will mean 40,000 extra women (and a much smaller number of men) who reach pension age in 2010/11 will get a full 100% pension.
However, another 20,000 – the DWP estimates – could get a full pension next year if they pay extra contributions. And if they pay before they reach pension age then the full pension will start earlier. Find out if you need to pay extra contributions by getting a retirement pension forecast.
Everyone can fill any gaps in their National Insurance record in the past six years (back to 2003/04 if paid before April). And those who reach pension age from April 6, 2008 to April 5, 2015 can also pay up to another six years right back to 1975/76. Contributions will normally cost £626 for each year bought before April 6, 2010 (though the most recent two years will be slightly cheaper). The price will almost certainly go up if they are bought after April 6, 2010.
Written by Paul Lewis, this article first appeared in the January 2010 edition of Saga Magazine. Paul's opinions are his own and for general information only. Always seek independent financial advice.
