Should I top up NHS pension with savings?

Mel Kenny, and independent Financial planner with Radcliffe & Newlands in the City of London replies: It is a good deal, but whether it is right for you depends on your need for a certain income versus your need for capital in future.

Payable for the rest of your life, this pension translates to an index-linked annuity rate of 7.1%. This is roughly double what you can currently get on the open market.

However, you will need to live for about 12 years to break even, so if you are in poor health it might not be right for you.

Also, if you want access to or want to bequeath the capital, you will need to consider other options.

This Ask an Expert question originally appeared in Financial Mail

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They can't find my dad's pension

I tracked down the pension policies, which were finally transferred to Winterthur ltd. But Winterthur has now told me that it does not hold them. S.G., Hartlepool.

Margaret Stone, the Daily Mail's Money Doctor, replies: The pension Tracing Service (0845 6002 537) is the Government agency to help people who have lost track of pension schemes, both company and personal, and previous employers.

However, I had one more stab at Winterthur and asked them to double-check. And no prizes for guessing that, yes, your father's pension policy was held with them.

It seems your father withdrew from the scheme in 1981, and had the benefits transferred into Serps (the former State earnings Related pension Scheme).

There was a small balance (£166.69) which was refunded to the trustees of the pension scheme. So, there is no outstanding or 'lost' pension to come from Winterthur, but there is a widow's pension attached to Serps which, I expect, is being paid to your mother, although you should check.

Winterthur, part of Axa UK, regrets that you were misinformed and is sending £50 as an apology.

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Millions to lose Ј41K in two-tier pensions

Some of these pensioners will have retired as little as a day before the planned introduction of a new flat-rate basic state pension, which promises to pay £140 to everyone.

Almost one million workers are due to retire in the two years before the proposed changes are introduced in 2015.

Knowing they will be £41,600 worse off over 20 years than those who retire later, many could be forced to rethink their plans and postpone their retirement.

'This would be a disaster,' says Neil Duncan Jordan, from the National Pensioners Convention charity.

'It would create a new form of pensions apartheid, whereby those reaching state pension age before the changes are introduced will receive a fraction of the pension enjoyed by those retiring after.'

Earlier this week, the Daily Mail revealed that pensions minister Steve Webb wants Britain to have a flat rate £140 basic state pension. This would replace the current payout of £97.65 for single people and the complex system of benefits and credits for poorer pensioners.

The British state pension is one of the lowest in Europe. An estimated five million women pensioners are not even able to claim the full amount.

Even if the state pension rises with inflation, the difference between the old and new pension will be £40 a week. That amounts to £2,080 a year more for those with the new state pension - a total of £41,600 over the 20 years most pensioners will live for after retiring.

For couples, the difference could be even worse. They get £156.15 under the current system: but under the new regime they would get £280 between them - £123.85 a week more. If they were to both live until they were 85, this would mean they were £128,804 better off than those stuck in the old system.

Existing single pensioners would need to have saved £54,000 into a private pension to get a weekly payout of £140, according to the insurer Standard Life. Experts suggest that many of the one million workers set to hit state pension age in the two years before 2015 may consider postponing retirement in order to claim the higher handout.

Sheila Grant, 65, is one of the millions of women forced to rely on her husband for pension income.

Mrs Grant (pictured with her husband, Graham, at their home in ascot, Berkshire) cared for their two daughters and paid the married women's stamp when she returned to work.

This means she now receives a state pension of just £60 per week instead of the full amount at £97.65.

She says: 'It is really unfair that women like me should have to rely on their husband's pension provision just because they took time off work to care for children. Hopefully, the new rules will give women a bit more independence and not penalise carers in the same way.'

Unfortunately, Graham also bought a single-life annuity, which means their income from his private pension will stop entirely when he dies.

'I only have a tiny private pension, so I know my income will be drastically reduced if Graham dies first and that is a big worry,' she says.

They also fear the Government could put in place draconian measures to ensure savers can't do this. More than 1.2 million people have put off drawing their state pension. In return, they will get a higher state pension when they retire.

'I'm sure the Government will clamp down on those who delay their retirement to avoid the new rules,' says John Lawson, head of pensions policy at Standard Life.

Experts also fear another raid on Middle England to pay for the changes, with generous earningsrelated state pension top-ups, which push certain people over the £140 threshold, clawed back.

'we could well see many savers losing some of their entitlement to state pension top-ups, which would, effectively, be a form of tax,' says John Ralfe, an independent pensions consultant.

Ministers claim savings made from cutting means testing and increasing the state pension age will pay for the pension increases. pension credit, for example, costs £54 per person per year to administer, compared with just £5.40 for the basic state pension.

The full details of the reforms have yet to be unveiled, but the Government will still require savers to build up the minimum number of NI contributions to qualify for the full £140 a week.

'This could mean large numbers of women with several part-time jobs who don't pay NI could miss out,' says Dr Ros Altmann, director general of Saga.

A Department for Work and Pensions spokesperson says: 'Our aim will be a simple, decent state pension for future pensioners which is easy to understand, efficient to deliver and affordable.'

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National pension scheme to go ahead

It comes as part of measures that will see all UK employees automaticaly enrolled into a company pension in two years time.

Yesterday, the Government quashed speculation that it would scrap the nationwide scheme, which is expected to be worth £200bn in the next few decades.

The new auto-enrolment rules will see all UK workers have to opt out, rather than in to, a company pension scheme from 2012.

However, many smaller firms don't offer pensions for their employees all – and would have struggled to set one up in time.

To bridge the gap, Gordon Brown's Labour government had planned to introduce a national pension scheme called 'NEST'. Employers without a company scheme could enroll their employees into this 'low-cost' model, which was to be fully supported by the Government.

But NEST (full name, National Employment Savings Trust) was under threat when the coalition Government came to power. The new administration gave no indication that it supported the proposals.

In yesterday's Spending Review documents, though, the Treasury appeared to throw full backing behind NEST.

Hidden deep within its Spending Review documents, the Treasury confirmed: 'The Department for Work and Pensions settlement includes funding for the introduction of auto enrolment from 2012 and the establishment of the National Employment Savings Trust, to help individuals save for their retirement and encourage high quality pension provision by employers.'

In a separate statement, Nest chief executive Tim Jones said: 'The work we have been doing over the summer has ensured that NEST is now really taking shape and will be ready to launch in low volumes in 2011.'

Paul Macro, a pensions consultant at Towers Watson, said that talk of scrapping NEST was never very realistic.

He said: 'If the Government wants to require all employers to enrol staff into pension schemes, there has to be a pension scheme to enrol them into.

'If the Government had pulled the plug on NEST, it may have had to exempt small employers from the new laws, leaving a significant part of the workforce without a pension.'

Elsewhere in the pensions industry, the news was welcomed. Ian Naismith, of Scottish Widows, said: 'The insurance industry already provides high-quality pension arrangements for millions of people, but it is not commercially viable for it to serve small employers with lower-earning staff. NEST will provide simple, good value pensions for those who do not currently have easy access to pensions, and will complement existing provision.'

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Britons are 'illogical' as retirement nears

The main way savers access Money in a pension pot is by purchasing an annuity, which is like an insurance product in reverse – you pay a huge lump sum (your pension) and get regular monthly payouts in return.

But while the annuity rates provided by pension companies vary wildly, very few pre-retirees bother to shop around.

The difference between the best and worst annuities is currently 36% for men and 37% for women, according to annuity specialists MGM Advantage.

Yet, just four in ten Britons shop around when they get to retirement, the Association of British Insurers says.

It is strangely at odds with our modern tendency to compare the best deals on insurance, holidays, cars and electrical goods (where seven in ten of us shop around) before making a purchase.

Behaving so 'irrationally' as we approach retirement and is costing Britons dearly, says Clive Bolton of Aviva.

He says: 'shopping around for an annuity may not be as much fun as shopping around for a holiday, but the benefits will certainly last longer.'

'Our findings show that despite campaigns to educate consumers about the open Market option, around two fifths of the population still don't understand the potential rewards of using it.'

The annuities Market is big business in the UK. Last year around £12bn was spent on annuities, and just last week, Confused.com became the first major comparison site to launch an annuity tool. Others will no doubt follow.

For years, This is Money has been trying to point customers in the right direction with our own rates comparison tool, run by widely respected annuity expert Billy Burrows of Burrows & Cummins.

However, a major problem still exists: many people don't even realise they have the right to move their pension fund and get a better annuity rate. This right is called the 'Open Market Option' (OMO).

pension providers are supposed to tell their customers about the OMO, but many don't make this clear enough, says Darren Ashworth of Missoldannuity.com.

He says: 'It is a huge problem because retirement is one of the biggest financial decisions people make during their lifetimes and the numbers affected are increasing each year,' Ashworth says.

Laith Khalaf, of Hargreaves Lansdown, says shopping around should be made the default option at retirement.

'Hundreds of thousands of pension investors will retire this year without shopping around for an annuity. We estimate that 80,000 pension investors retiring this year would receive on average £169 more income every year for life if they shopped around'

Many of those will qualify for 'enhanced annuities', which offer larger payouts to those with a disability or long-term illness. Even smokers qualify because they are not expected to live as long.

Enhanced annuities currently pay an average of 23% more than the equivalent standard annuities, according to MGM Advantage.

Aston Goodey, of MGM Advantage, says: 'Too many people remain unaware that they could qualify for extra retirement income as a result of an existing medical condition. As a result, they take the first annuity offered to them by their existing pension provider and fail to shop around even though it is one of life's biggest financial decisions.'

'Our research shows that more than three quarters of British adults aged 55 and over are unaware that certain medical conditions (such as high blood pressure) could entitle them to an enhanced annuity and potentially higher levels of pension income.'

Consumer behaviorist Benjamin Fry, says: 'shopping around can give us a sense of control and achievement, but only if we really understand what we are trying to do. Unfortunately, for many, annuities are still a black-hole which they feel ill-equipped to venture into.'

Billy Burrows says that while shopping around is an essential part of preparing for retirement, it is important to do thorough research and talk to an expert before taking the plunge.

'Unfortunately there some people are rushing off buying purely on price, but then finding that those they're buying from don't understand the administration behind annuities - there is a lot of mis-information out there.'

'It's easy to think you can do this on your own, but the truth is most people need a trusted adviser to help them through the steps.'

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Q&A: State pension age to rise to 66

What's happening?

Millions of Britons will have to wait longer to receive their state pension, the Government announced today.

How long?

The state pension age will rise to 66 by 2020 for both men and women. The changes will start to take effect from 2018.

Who is affected?

All Britons under the age of 57 on 6 April this year will have to wait until they're 66 before they get their pension.

Is that the worst of it?

Not likely. Ministers are also understood to have examined the possibility of extending the pension age to 70 and even higher in the following decades.

Work and Pensions Secretary Iain Duncan Smith has suggested the age at which people can claim the state pension could be 'indexed' to increasing life expectancy, as in Denmark.

Why is all this happening?

To be blunt: our heavily indebted Government (which owes about £890bn) can no longer afford to support Britain's ageing population. UK life expectancy is rising rapidly as we live healthier lifestyles and enjoy better medical care.

The average British male now lives until 77 years, and female until 81. Back when the state pension age was set at its current 65 level in 1925, only a third of men and 40% of women were expected to live to see their 65th birthday.

It means our taxes are being used to fund an ever-growing population of older, retired Britons. Official statistics project that by 2034 the number of people aged 85 and over will be 2.5 times larger than in 2009, reaching 3.5m and accounting for 5% of the UK population.

In the Spending Review today, Chancellor George Obsorne said: 'Raising state pension age is what many countries are now doing. It will save over £5bn a year.'

Any positives to soften the blow?

Yes. One is that axeing of the Default Retirement Age (DRA). This allowed employers to force staff to retire when they hit 65.

A Government consultation is currently in-process, with the results set to be announced before Christmas. Expect the DRA to disappear completely, fostering an older working population and reducing the state benefit burden.

Free eye tests, prescriptions, the winter fuel allowance and bus passes will remain for pensioners. As well as free TV licences for over 75s, which were rumoured to be scrapped. George Osborne said: 'We believe in cold weather payments for life, not just general elections'

Anything else?

Here's the silver lining: the actual level of the state pension could increase. Currently the full basic state pension is £97.50. That can be topped up with pension credits to about £130. But many are still left in abject poverty. Currently, around 2m retired people live below the poverty line.

At last month's Lib Dem party conference, Steve Webb talked at length about the need for a 'decent and fair' state pension that doesn't leave any retired Britons desperately needy.

Potentially, the Government will increase the level of state pension provision so that it is more adequate for poorer Britons who have been unable to save. Numbers such as £8,000 a year and £11,000 a year have been bandied about, but no one knows yet.

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At age 45 how can I replace my lost state pension?

This is Money Editor Andrew Oxlade says: With yesterday's state pension age changes causing concern for the millions affected, we thought it useful to pose this hypothetical question on pension saving.

Now that retirement dates are being pushed back even further than outlined before, it's become even more important that people take control of their own finances.

People are worried. A This is Money/Prudential poll today found 51% are now worried that their current retirement plans won't be good enough.

The Spending Review set out yesterday that the state pension age will rise to 66 by 2020 for both men and women, instead of by 2026. The changes will start to take effect from 2018.

The bottom line is that all Britons under the age of 57 on 6 April this year will have to wait until at least 66 to start collecting their pension.

Chancellor George Osborne also revealed that the age for women will rise from 60 to 65 between 2016 and 2018, so that it matches the male retirement age before both move higher. That has thrown retirement plans for many women into disarray who were banking on supplementing their income with pension payments.

Before yesterday, the previous Labour government had already set out a roadmap for later retirement. In essence, anyone aged from 42 to 57 retires at 66, those aged 32 to 41 retire at 67 and those aged under 32 retire at 68.

But those dates are still under review - the changes may be accelerated or the end retirement age may be raised further, possible to 70. Work and Pensions Secretary Iain Duncan Smith has suggested the age at which people can claim the state pension could be 'indexed' to increasing life expectancy, as in Denmark.

›› Tables: Today's top-selling funds

›› Free guide: Top 10 early retirement tips

So what should our 45-year woman do to replace that lost income she would have had from age 60?

The simple answer is good old fashioned saving. Financial advisers recommend a mixture of assets for long-term saving but often recommend most of it is in stock market investments as, historically, shares deliver the highest returns - although as recent years have shown, that's not always the case.

But how much would she need to save?

Fund manager Fidelity has crunched the numbers and calculated that a 45-year-old woman turning 60 in 2025 will miss out on around £46,976 in basic State pension as a result of the changes. This is based on the current basic State pension, currently £97.65 per week, rising by 2.5% each year.

Based on this, she would need to save an extra £175 per month from now for the next 15 years to have a pot of £49,681, based on investment returns helping the money grow an average 5% a year.

Fidelity says: 'This gives her the flexibility to retire at the current State retirement age of 60 if she wants to. This is on top of any savings she might need to supplement the basic state pension.'

Fidelity also that for a 30-year-old facing a retirement date of 68 would need at the very least a pot of £93,048 to cover the state pension she will miss out on from age 60. However, because she has longer to save it, so she would need to save less - £115 a month - to achieve a pot of £97,649.

Try doing your our sums with our pensions pot calculator.

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