Fergus Muirhead answers your money questions
I'm Fergus Muirhead and I'm trying to answer any money or consumer problems you may be facing at the moment.
You can contact me by e-mail at firstname.lastname@example.org
I will deal with a selection of your e-mails every second Wednesday on lunchtime Reporting Scotland, Scotland Live and on the BBC Scotland news website.
I also have a blog at www.moneysucks.net
Q. I have a chance to retire from my present job at 60 or any time after that. I have a pension with Scottish Power, payable at 2013, that has been lying for 20 years. I want to know how the two pensions will be assessed for tax if I take the lump sum in the same financial year. I am looking at the amount that tax is payable on, which I believe is £30,000. If the two lump sums fall below £30,000, and are taken in different financial years, do I have to pay tax on any of the payments? It seems pointless to retire and collect two lump sums if one can be deferred. Jim Mallon
A. Pensions normally have two elements - a lump sum and an income. Under current legislation the lump sum is usually tax-free and the income is taxable. The way the lump sum is calculated depends on whether you have an occupational pension or a personal pension. If it is occupational and final salary-related then it will usually be a multiple of the pension to which you are entitled. If it is a personal pension it will usually be up to 25% of the value of your fund. The £30,000 to which you refer is not, as far as I am aware, related to a tax-free payment for pensions but is the amount of redundancy and some other severance payments that are not taxed. So it should not make any difference whether you take both pensions in the same tax year since the lump sum payments on both should be tax-free.
Q. I have been in employment all my life and am now retired. During that time I have been in various private and occupational pension schemes - Strathclyde Regional Council, North Lanarkshire Council, then a personal pension scheme. I wanted to make sure that when I retired I would have a decent amount coming in to live a little better. I have paid the tax each week through PAYE whilst earning. Now that I have retired I am being penalised by being taxed each month on my pension income. To make things worse, now that I receive the state pension, the amount of additional pension has been reduced because, as they put it, I would lose some additional OAP because I had been in an employer's pension scheme. At no time in my working life was I told that if I had a private pension it would reduce my state pension. Where is the incentive to prepare for your own retirement if it reduces your state pension and you are taxed again on your works pension? Bob Wellcoat
A. There are a couple of issues worth addressing here, Bob. The first is that pension income is taxed in the same way as any other income, although you would have been able to take some of your pension as a tax-free lump sum. So you are not being penalised by having your pension income taxed, unless you think that it should be tax-free. When you refer to your additional pension being reduced it is probably because at some point in your working life the occupational pension you were a member of was 'contracted out'. This means, effectively, that your employer promised to pay you a sum equivalent to what you would have received from the Additional State Pension in return for lower national insurance contributions. So the private pension you had has not had an impact on your Basic State Pension, only the additional amount you would have received had you not been contracted out. It's also worth noting that although you are taxed on your pension income you would not have paid tax on the money you paid into your pension throughout your working life.
Q. Why were pensioners excluded from the £1,000 rise before paying tax? Douglas Kidd
A That's a very good question, Douglas, but one you would have to ask the chancellor rather then me, I'm afraid. At the recent Budget the chancellor announced that the amount of income that could be earned before you start to pay tax would be increased from £6,475 to £7,475 from April 2011, but only for those under 65. Before the election the Liberal Democratic Party was keen to see the personal allowance increased to £10,000. It is possible that this may still happen, but in stages over the next few years rather than all at once.
Q I have a very small pension fund of about £27,000. Should I use this to buy an annuity when the time comes or can I take a percentage of this total as a lump sum? I am 53 at the moment. John from Aberdeen
A. You can actually do both. Under current legislation you eventually have to buy an annuity but the chancellor announced changes to this ruling in his recent Budget that should mean you won't have to "sell" your pension in exchange for an annuity but will be able to take an income from the fund. This is a really important change since it means the fund will stay under your control and you will be able to pass it on to your dependents on your death, although there may be some tax to pay. Again under current rules you can take up to 25% of your fund as a tax-free lump sum from age 55.