Do not be shy about retiring

February 23, 1996

It takes a working lifetime to secure a financially comfortable retirement. Sue Ward gives a guide to pensions

Postgraduates lead insecure lives, and many do not find permanent jobs until they are well into their thirties. Meanwhile, they worry about their long-term prospects, and especially about how they will survive in retirement.

If you are living solely on a grant or savings, there is little you can do about this. With some exceptions in the state scheme, the social security and tax rules link pension contributions to earnings. There are also opportunities to set up a pension using part-time earnings.

The basic building brick is the state retirement pension. This comes in two parts, basic and earnings-related. You build up towards a full basic state pension each year that you are either paying National Insurance contributions or getting credits because you were unemployed or sick. School-leavers and trainees between 16 and 18 can be given some credits to make an initial part-year's payments count as a full year, but older students receive nothing.

There is a threshold, the "Lower Earnings Limit", below which you pay nothing and build up no entitlement. In 1995/96 the threshold is Pounds 58 a week, but from April it will be Pounds 61. If you earn less than this in a week, you pay no NI. As soon as you earn more, you pay at the full rate, which can mean that you lose more than you gain from a pay increase. For that reason, many part-timers keep down their wages below the threshold. In the long-run, though, that may be a mistake, because it will create a gap in your entitlement.

Self-employed people pay contributions which are partly flat-rate and partly earnings-related; there is a "small earnings exception" for those earning below a certain level, currently Pounds 3,260 a year (Pounds 3,430 from April).

For a full state basic pension, you must have paid or been credited with contributions for about nine-tenths of the years of your "working life", starting at age 16. If you have paid or been credited for fewer years, you can get a reduced pension. If you have paid or been credited for less than a quarter of your working life, you do not get a pension at all.

Postgraduates with family commitments may be able to benefit from the rules about home responsibilities protection. This is given to men and women for complete tax years without a job, if they are receiving child benefit for a child under the age of 16. Those years will then not count towards your "working life" when it is calculated how much basic pension you are entitled to. Normally the person receiving the child benefit will be the mother, but it can be transferred to the father instead. It can be worth doing this "role swap" to protect a non-earning father's pension rights.

The "nine-tenths" rule means you have about five years' leeway during which you need not worry about a gap in your entitlement. If there is a longer gap than this, voluntary contributions are Pounds 5.65 a week, and you can pay up to six years in arrears. Ask the Benefits Agency for details.

However, the basic pension is low, and falling in real terms. By the time a 25-year-old comes to retire, it is estimated that it will be worth only about 9 per cent of average earnings. So to have a comfortable retirement, you need something else.

Anyone with earnings above the LEL, and not any other pension scheme, is automatically in SERPS, the State Earnings Related Pension Scheme. The rules of SERPS are complicated. It was cut back by the Government in 1988 and is to be cut again in 1997. As a rough guide, someone who was in SERPS throughout their working life will receive a fifth of their earnings, between the LEL and an upper limit (the UEL) which is currently Pounds 430 a week.

However, less than 20 per cent of the population is now in SERPS. Most people are "contracted-out" of SERPS, either in an employer's pension scheme or via their own personal pension.

The Universities Superannuation Scheme is one of these employers' schemes. If you are planning on an academic career, the sooner you join the scheme the bigger the benefits will be.

Not every academic job is treated as pensionable, but if you are doing regular part-time teaching in your university, you should certainly ask about membership, and take it further if you are told you are ineligible. You pay 6.35 per cent of salary to the scheme, and the employer pays another 18.55 per cent. In return for that, you become entitled to a full range of benefits - not just a retirement pension and ill-health pension. Moving between universities makes no difference, as the scheme is run jointly by all the United Kingdom universities and some other academic bodies.

If you have non-academic earnings from your university find out about the scheme for non-teaching staff. Each university either has an agreement with the local government pension scheme, or runs its own scheme for them.

All these schemes are what are called "final earnings" schemes, meaning that the pension you get when you retire is based on your earnings at that date - likely to be very different from what you are earning now.

Many private employers, especially the larger ones, also have schemes of this sort. Others run "money-purchase" schemes, which are more like investment accounts with special rules. You and the employer put money in, it is invested and builds up until you retire, and then you can draw part of it as a lump sum and take the rest as an "annuity". There is always the risk to the investment - it might be doing badly at the time you come to retire, meaning that you get a poor pension. Equally, it could be doing well and you will thrive.

If you leave a scheme of this sort, you can have a "deferred" pension, which is partly inflation-proofed or continues building up investment returns. You may be able to transfer this to another employer or a personal pension (see below).

People who have earnings from employment without a pension scheme, or money coming in from self-employment, can take out instead a personal pension policy from an insurance company or other financial organisation. This will always be money-purchase. If you use your personal pension to "contract out" of SERPS, the Department of Social Security then arranges to pay over the SERPS element of your National Insurance contribution, and the employer's (called the NI "rebate") to your policy. For a younger person, this is likely to give you a higher benefit than remaining in SERPS. But as you get older, the rebate becomes less adequate to cover the cost, and you may do better by contracting back in to SERPS. But since SERPS is low, putting in only what you would have paid into that will not give you much of a pension anyway. You will need to pay extra to build up a better pension.

The Government is altering the rules next year, and some younger people will need to contract in as a result.

The firms selling personal pensions charge you for their costs in setting up and running the administration of your benefits, and these charges are either flat-rate or heavily weighted against lower contributions. A rule of thumb is that if you earn below Pounds 10,000, contracting out is too expensive to be worthwhile. You may still want a personal pension, but put it on top of SERPS rather than in its place. You may also get better value by saving up the contributions and making one payment a year, rather than making monthly payments from which there will be a deduction each time.

If you have a year with no earnings, you are not allowed to contribute to a personal pension. Check, before taking out a policy, whether you will be penalised for a gap, or whether payments can be suspended for a time with no extra cost. Alternatively, you can pay "single premiums" each year when you have the money, without committing yourself to a regular contract with the same provider.

Finally, here are some points to look out for;

* Keep an eye on your National Insurance record. You can get a Retirement Benefits Forecast, covering both basic state pension and SERPS, by filling in form BR19, available from your local DSS office

* If there is an employer's pension scheme available, it is usually worth joining, unless you are only working casually or on a very short-term contract

* If you need to take out a personal pension, shop around for what suits you. Go to an independent financial adviser, or more than one, and check out what the charges and conditions are before signing anything

* As a rule of thumb, over a working lifetime 15-20 per cent of earnings needs to go into a pension to give you a comfortable retirement. So if you start late, you need to put more in. With an employer's scheme, you can pay additional voluntary contributions. With a personal pension, you should be able to increase the contributions - but check the charges for doing so, if it is a regular premium contract.

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